HOUSE SPECIAL COMMITTEE ON OIL AND GAS February 23, 1999 10:04 a.m. MEMBERS PRESENT Representative Jim Whitaker, Chairman Representative Fred Dyson Representative Gail Phillips Representative Scott Ogan Representative John Harris Representative Allen Kemplen Representative Tom Brice Representative Harold Smalley Representative Brian Porter MEMBERS ABSENT All members present. COMMITTEE CALENDAR Presentation by Alaska North Slope LNG Project (* First public hearing) PREVIOUS ACTION No previous action to record. WITNESS REGISTER JOHN MILLER, Engineering Manager Alaska North Slope LNG Project 700 6th Street Anchorage, Alaska 99510 Telephone: (907) 263-3726 POSITION STATEMENT: Bring North Slope LNG to market. STEPHEN ALLEMAN, Commercial Manager Alaska North Slope LNG Project 12800 Shelburne Rd. Anchorage, Alaska 99516 Telephone: (907) 265-6853 POSITION STATEMENT: Bring North Slope LNG to market. GEORGE FINDLING, Commercial Team Leader Alaska North Slope LNG Project Box 100360 Anchorage, Alaska 99510 Telephone: (907) 263-4174 POSITION STATEMENT: Bring North Slope LNG to market. ACTION NARRATIVE TAPE 99-8, SIDE A Number 0001 CHAIRMAN JIM WHITAKER called the House Special Committee on Oil and Gas meeting to order at 10:04 a.m. Members present at the call to order were Representatives Whitaker, Dyson, Phillips, Harris, Kemplen, Brice, Smalley and Porter. Representative Ogan arrived at 10:11 a.m. Presentation by Alaska North Slope LNG Project Number 0074 CHAIRMAN WHITAKER had an opening statement, which read: This committee will have no higher goal than to function as a catalyst for the continued and expanded utilization of Alaska's vast oil and gas resources. Alaska's oil industry is currently experiencing a near depression, because of extraordinarily depressed world oil prices. This is a situation, which we can do little or nothing to affect. Alaska's gas industry, on the other hand, provides an opportunity to serve as the important and necessary component for expansion of this vital economic sector. Alaska currently accounts for approximately one percent of world gas production; all of which is produced from Cook Inlet. This gas is utilized locally as an energy source, also a significant portion is exported to Japan. Alaska's North Slope is conservatively estimated to contain well over 100 trillion cubic feet of natural gas. Some of this gas is utilized to enhance oil recovery; none has been sent to market. This is a huge commodity resource; it is therefore our responsibility and duty to determine if this commodity can be feasibly taken to market. Number 0229 JOHN MILLER, Engineering Manager, Alaska North Slope LNG Project, introduced: David Lawrence, Chairman, Sponsor Group; Steve Alleman, Commercial Manager, Alaska North Slope LNG Project and George Findling, Commercial Team Leader, Alaska North Slope LNG Project. JOHN MILLER read his testimony titled "Alaska North Slope LNG Project, Presentation to the House Special Committee on Oil and Gas (February 23, 1999: Let me preview the main points we will be presenting. First, despite today's tough economic climate, we have a project team hard at work. Second, our innovative technical and commercial program will provide the best chance for success for an Alaska North Slope LNG [Liquefied Natural Gas] project. Finally, we don't foresee direct legislative action in 1999-but we are positioning for some potential actions in 2000. To be successful we must make this project competitive on a world scale. To make this project a reality, commercial "mind set" is a must. You will hear us stress the need to consider both technical and commercial issues in our work. Now I would like to describe a base case for the Alaska North Slope LNG Project. Later, I'll discuss how we are working to improve that base case. In our base case, produced gas from the North Slope is routed to a nearby gas conditioning facility where carbon dioxide and other impurities are removed. This upgraded gas is similar to the gas used in homes in Anchorage. The gas is then transported via a large diameter pipeline to an ice free port, such as Valdez. At the port, the gas is cooled in another facility to minus 260 degrees fairenhait. This reduces the volume by 600 times by forming a liquid, LNG. This inherently safe liquid is loaded onto low pressure, refrigerated, ocean tankers for transport to the East Asia market. After arrival and off loading, the LNG is allowed to warm for use as a gas for power generation and other direct heating uses. LNG technology is well established. After several years of production and deliveries to Japan beginning in 1969, the Phillips and Marathon Kenai LNG plant recently delivered their 1000th safe, on time cargo. Now, I'd like to briefly review the essentials of the Sponsor Group. During the first half of 1998, two parallel activities were underway. In the Alaska legislature, HB 393, the Stranded Gas Development Act, was working its way through the legislative process. Concurrently, ARCO was leading discussions among companies interested in moving an Alaskan LNG project forward. HB 393 provides a framework for the State to develop a new fiscal system for a gas project. Under this framework, a project can be made more competitive, yet still have checks and balances that protect the State's interests. The State, through HB 393, sent an essential signal to industry to continue efforts to make an LNG project commercial. This signal was clearly received by our sponsor companies. Discussions among sponsors intensified as prospects for the success of the legislation grew. By early August of 1998, the sponsor companies had announced the signing of an agreement. The five sponsor companies and their respective interests are as follows: ARCO Alaska, Inc., 37 percent; Foothills Pipelines Ltd., 22 percent; Marubeni Corporation, 17 percent; Phillips Petroleum Company, twelve percent and CSX Corporation, 12 percent through its Alaskan-based Yukon Pacific. These companies have the expertise and business interests to solve the problems facing this project. Represented are Alaska North Slope gas owners, companies with arctic construction and operations experience, a major international pipeline developer and operator, a current Alaskan LNG player that has been in the East Asian trade since the beginning, permit holders, and a major trading house in the East Asian market place. Together, there is combined knowledge and practical experience to assemble a large, international, venture to acquire North Slope gas and sell LNG in East Asia. The sponsor agreement also has the flexibility to allow other companies to participate now or in the future. The agreement is based on the sponsors' mutual desire to establish the basis for a viable project through innovative engineering and commercial initiatives. Please remember that the sponsor agreement only covers LNG. GTL or Gas-to-liquids is not part of this agreement. However, LNG and GTL are not mutually exclusive. There is enough gas on the North Slope for both technologies. Under the sponsor agreement, the work will be performed in stages. The first stage involves project definition, better definition of costs, identification of potential cost reductions, and significant advances to our commercial plans. We expect to complete Stage one in mid-2000 and to spend up to $20 million. The scope and budget for subsequent stages will be authorized as the project progresses. Expenditures for an entire program under the agreement could total up to $100 million and the work could last up to 45 months. A board with representatives from each of the five companies directs the project. Under this board are two steering committees, one technical and one commercial. All five companies are represented on the steering committees as well. I chair the technical steering committee and manage the technical work effort. Similarly on the commercial side, Steve Alleman chairs that steering committee and manages the commercial work. Steve and I have organized several teams engaged in various activities. In a moment, I will talk about an innovation we've made to the traditional concepts of project work teams. The primary work teams are now located in Alaska, at ARCO's office complex. The project is staffed with employees from the five companies. At latest count, we have approximately 50 people actively involved in the project, of which approximately 15 are full time. We have adopted the concept of virtual teams. The resources of each company are at our disposal on an "as needed" basis; but individuals are not necessarily employed full time. While we have not kept a precise count, we estimate that perhaps 75 to 100 people have already contributed to the work program in some form. Further, the sponsor companies have offered any other resources that Steve and I need to get work done. In addition to sponsor company personnel, we will be using contractors for some of the work efforts. Our philosophy in this area will be to use those contractors that are both competitive and give us the best chance of realizing the breakthroughs that are needed for this project to become viable. If the expertise is available and competitive in Alaska, we plan to use it. If not, we will search the world to find the special expertise needed to move this project forward. Let's now look closer to the challenges facing the Alaska North Slope LNG project and what is being done to meet them. In 1997, the State's consultant, Pedro Van Muers conducted a study of the relative economic attractiveness of various competing LNG projects. This work formed the foundation for the principles developed for HB 393. One of the key principals was the recognition that the Alaskan project needs to become competitive over a range of economic conditions with the best new LNG projects potentially supplying the same market. Mr. Van Muers' work showed that a combination of cost reductions, modifications to state and federal fiscal terms, other major risk reductions, and development of the market would be needed for the Alaska project to have a shot at commerciality. Both the technical and commercial work activities by our team go directly to the need to reduce the costs and produce innovative solutions to make the project competitive. Compared to other, competing LNG projects, Alaskan LNG has many positive attributes. It draws on known, developed, world class resources; it has state of the art, existing infrastructure, and it has all of the benefits of a stable government. But, an Alaskan project has one big disadvantage: its capital costs are relatively high. The cost of an 800 mile pipeline for Alaska puts us at a competitive disadvantage to other tidewater projects, even allowing for competitors' higher field development costs. Since there seems to be no way to eliminate a pipeline, the challenge is to find incremental improvements to overcome the disadvantage. A 1997 project cost review showed that the most reliable, unlikely to exceed, estimate for an Alaskan project is $15 billion. This work also increased our confidence that the costs could be $12 billion or lower. These estimates are for a gas conditioning plant on the North Slope, the pipeline system, an LNG plant and terminal in Valdez, and ships. Our sponsor technical effort is aiming to engineer a better project by reducing costs and defining an optimum configuration. Please keep in mind that the most meaningful cost reductions are those that are differential to other LNG projects. For example, a general reduction in the cost of materials would likely apply to all projects, not just Alaska. When the project team assembled in late fall, we immediately turned our attention to the question of how to differentially reduce costs. One of the first activities was to bring everyone together for a data exchange. For two weeks, the sponsors shared their knowledge and put new ideas out for consideration. As we started to sift through the ideas and focus on major work areas, we decided to challenge the traditional view of project organization. In the traditional view, teams would be organized along purely technical or discipline lines: for example, there might be civil team or a mechanical team. Rather we decided to organize along an issues focus. The catch phrase is a "bubble team", implying that the team only exists as long as the issue needs to be worked, and is staffed by those with the expertise needed to work the problem. Teams likely have representation from both technical and commercial experts. The technical work has initially been organized into three major areas, each dedicated to working a common set of cases. The first area is system integration, which is focussing on the integrated hydraulics for the pipeline and LNG terminal. Optimizing in this area requires the parallel consideration of at least 30 different design parameters related to the gas plant, pipeline and LNG plant. Next, is the plant area, which is focussing on LNG plant siting as well as optimization of the LNG plant process and physical design. Third, is the pipeline and compressor stations area, which is focussed on pipeline routing and key design and construction issues. It is in this area that we will be trying to find cost reductions that can significantly differentiate us from the competition. Finally, each of these three areas includes commercial efforts as appropriate. The size of the project is a major consideration and there are two factors that are driving project size in different directions. On one hand, from a technical viewpoint, we want the project to be large so that it can enjoy economies of scale. That is, costs per unit of gas sold go down as the project gets larger. On the other hand, the ability to place all the volumes of LNG in the market decreases as the project gets larger. The most critical joint technical and commercial optimization that we have identified to date is finding the minimum viable project size. As I indicated earlier, the gas pipeline is the critical negative element that distinguishes the Alaskan project from the competition. Naturally, a major focus of our work is to find ways to reduce the pipeline costs and risks. We are examining possibilities ranging from design improvements to construction methods. We are also considering alternative LNG plant sites and their impact on overall costs. For example, a pipeline routing to the Cook Inlet is being seriously considered to see if it provides any advantages over the base case routing to Valdez. Finally, a question that we often get is: "When will the project startup?" For most people, the answer seems to be an easy way to get a clear vision of the project. But there is a trap in this way of thinking that I would like to share with you. We see it as the "oil mind set" versus the "LNG mind set" and the problem makes sense when you think about it. The "oil mind set", with which most of us in Alaska are familiar, says that the resource developers can decide to move ahead and then make the investments. For oil projects, this works, because oil is a commodity that can basically always be sold. If you will, you don't need to know whom the buyers will be to commit to developing the project. Unlike oil, there are only a limited number of LNG buyers who can use LNG. LNG also has a limited "shelf life": it can not be stored indefinitely. Historically, LNG projects have been characterized by long term contracts and have typically moved ahead only when buyers were secured. With an LNG mind set, we soon realize that buyers actually determine when a project proceeds. This ties back to an earlier point I made about finding the minimum viable project. Clearly, the smaller the project, the easier it will be to get the necessary commitments for LNG purchase from the buyers. Finally, all of this is clouded by the current economic situation: reliable market projections are hard to make right now. With this perspective, and assuming that everything goes perfectly, including the market being ready, the first LNG deliveries could begin in late 2007. Please recognize that 2007 is a very aggressive goal. To realize this date, we must be successful in making the project competitive and in securing a market that is sufficient in both size and commitment. STEPHEN ALLEMAN, Commercial Manager, Alaska North Slope LNG Project, read his testimony titled "Alaska North Slope LNG Project, Presentation to the House Special Committee on Oil and Gas (February 23, 1999): The cornerstone of the commercial effort is the Marketing Team. The goal of the team is to develop a marketing strategy that positions the project, when adequately defined, to quickly and efficiently move forward in the marketplace. The key Stage one deliverables from this team will be the marketing plan and the market proposal, which from the basis for initiating serious discussions with the buyers. Another crucial activity is the collection of market intelligence. While the primary focus of the team is the East Asia market, the potential instate demand is also to be considered. Let me briefly offer our perspective on the market. The sponsor group does not subscribe to the concept of a market "window" that opens and then closes for an Alaskan LNG project. With all due respect to the other view, we are motivated to advance the project even it there is no "window". We anticipate that the market for expansion and Greenfield projects like Alaska will come from the demand growth expected in East Asia in a time frame beginning around 2007 and beyond. Naturally, the demand for Alaskan LNG can occur only if there is substantial economic prosperity and commensurate investment in the market for LNG utilization. Those LNG investments, in turn, will only be made if LNG is able to compete with other types of energy, such as oil, coal, and nuclear. Securing market is about being able to compete at all levels. As John indicated, our ability to compete in the market will be improved by finding the minimum viable project size. At the upstream end, several commercial issues are being addressed. For example, the project will need to obtain a supply of North Slope gas. The Gas Supply Team is charged with developing a basic strategy and sequencing for events leading up to a gas supply commitment. As another example, one area of potential cost savings could be the gas project's sharing of available, existing, oil-related infrastructure. The infrastructure Sharing Team works in close cooperation with the technical teams to determine which infrastructure sharing options may be optimally leveraged and how sharing arrangements might be formed. Infrastructure may be shared with North Slope facilities, TAPS, and possibly the Valdez Marine Terminal. As the project matures, the Project Structure and Financing Team activities will advance to the forefront. The appropriate project structure or legal entities that will effectively protect, share risks and advance the project must be anticipated. Clearly, the project can not be realized unless there is solid financing. Ultimately, some from of more creative financing may become essential toward enhancing project viability. In the past, some have questioned whether the state might have a role in helping finance the project. Prior studies of this topic have shown that the state may not be able to take the levels of risk that could make a real difference in the project economics. For example, it is difficult to visualize the state providing multi-billion dollar debt at below market rates. We certainly have not ruled out such options and will continue our investigations of the possibilities. It has been recognized for some time that state and federal fiscal modifications will be necessary for the Alaskan project to become competitive. The Fiscal Team is responsible for advancing, in a coordinated fashion, the state initiatives through the HB-393 process and the federal initiatives through federal legislation. With the passage of HB 393 last year , we do not see that any state legislative action is needed this year. Also, we are not anticipating federal legislation this year. Finally, I want to focus on one other important team. The Regulatory Team's goal is to advance a commercial/economic regulatory structure which prospectively protects both the initial throughput volumes of the project and the project cost structure. Previous work has shown that a project will not be viable if there is any realistic chance that government can order proration. Proration occurs when initially contracted volumes must be cut back to allow for new gas to be carried. Another form of this problem occurs if the project is mandated by government to carry this new gas, and yet, is not allowed to recover the fair costs of providing that service. This is true whether the mandate involves expanding the system or not. Yet another from of this problem is a government mandate to construct greater system capacity that is needed for the initially contracted volumes. We are just initiating our analysis of these regulatory issues; but two aspects are emerging. First, current federal and state statutes and regulation as well as conventional thinking go in the opposite direction as to what is needed. For example, federal and state law allowing the grants of right of way have not, in the past been interpreted to meet the objectives I just mentioned. Further, federal and state agencies generally do not regulate along these lines. The second aspect relates to a theme John mentioned earlier: that the pipeline is significantly detracting from the project's competitiveness. If there were no pipeline associated with this project, then this area of commercial regulation would not be as critical. To summarize this area, we will be working on commercial regulation this year. Currently, we expect that some federal and perhaps state legislative initiatives may be brought forward in the year 2000. Now, stepping back, there are major fiscal and risk improvements that are imperative in the commercial area for the project to become competitive. With this perspective, it becomes clear that the challenge for an Alaskan LNG project is to simultaneously make the project economically competitive while developing a market that is sufficient in both size and commitment. Frankly, this will require the type of innovative, hard work that is encompassed in the Alaska North Slope LNG program. Further, the better chances for an Alaskan project will come from accomplishing the tangible activities that can lead us to become more competitive. Even with the right work program in Alaska, we should recognize that we have a long journey ahead of us. The cost reductions, fiscal and regulatory modifications and other risk reductions needed to make the Alaskan project competitive will not come easily. Further, we need energy prices in general and LNG prices in particular to recover sooner rather than later from the historic lows that we are now experiencing. We will also need to see East Asia not only recover from its economic difficulties, but get back on the path of growth. In short, many positive outcomes are needed if we are to stay on track. In closing, I would like to summarize what we are trying to do. First, sustain the effort to creatively position now for recovery in East Asia. Second, be different by both establishing an identity and bringing real innovative thinking to bear. Third, look for every opportunity to make the project competitive. Fourth, overcome our bid difference from the competition: the pipeline. Fifth, continue to work cooperatively with government to advance the project. Number 1905 REPRESENTATIVE KEMPLEN stated, "Senator Murkowski, on Friday in his presentation to the legislature, brought up the issue of the natural gas pipeline, and specifically he was referring to Taiwan and a linkage being developed in national security and the natural gas pipeline project. He asked, "What is the current status of that discussion and how viable is that as a contributor to this project?" MR. ALLEMAN stated, "We have not specifically approached Taiwan or any of the other markets at this time directly. I've heard of this conversation that was had by Senator Murkowski, but at this time we're not ready to address that." GEORGE FINDLING, ARCO, stated, "The question of Taiwan, they're part of our target market, so we have seen them in that light. What he's saying though, is as a sponsor group we've not yet approached it, and in terms of the overall sponsor group, we are fully booked, we have all of the 100 percent interest that we need to proceed ahead. Our sponsor agreement certainly allows entry of others into the process later on, if that's what's required. I think for right now we're feeling comfortable, that's an engaged topic, but we can move ahead from where we stand right now." Number 1995 REPRESENTATIVE KEMPLEN stated, "The issue was really dealing with the market, and in the purchasing of the natural gas, particularly, at a higher price. The Taiwanese may be amenable to paying a higher price for natural gas, from Alaska, because of it's national security linkage. As a result, that does have direct impact on your--on the efforts of the sponsor group, as you were trying to place the market. He asked, "Is that correct?" MR. FINDLING stated, "I think is really two perspectives here; one is the Taiwan market is not large enough to really carry our whole project, we really do need market development in Japan, Korea, possibly in China as well, so that's not enough to really make or break the project just in Taiwan. The second thing is, if you think back to the testimony that was given, the focus here is to become competitive with all the best projects that in competition, and in that way, if there is a benefit down the road to some price basis in one particular market or one particular buyer, we can certainly enjoy those benefits. But to get this project off the ground, we've got to be competitive overall with our competition." Number 2060 REPRESENTATIVE KEMPLEN stated, "The other issue that I keep hearing about, is the pipeline itself. That it is a major cost factor in making this project viable. I guess one of the areas that seems to merit exploration, is the question of technological innovation in pipeline construction, and the foothills--They don't have a representative here today?" MR. FINDLING stated, "I'm there representative. I'm speaking on behalf of the sponsor group." REPRESENTATIVE KEMPLEN continued, "Well, I would be very interested in hearing about just how advanced that partner is, in terms of technology, and what type of new technologies are being explored for application in the trans-Alaska gas pipeline. Also, the issue of incentives for innovation and pipeline construction, whether those incentives being federal tax credits, that we're able to get through at the national level, or some partnership with state agencies, such as the Alaska Science and Technology Foundation. It seems to me that that is really--the pipeline is really where the biggest obstacle is, and it seems to me that's where we should be devoting significant attention to reducing those obstacles. I guess there are kind of three questions. He asked, " One, what are you currently doing in terms of technological innovation and pipeline construction, looking at Alaska's situation, two, the federal case for incentives for applying new technology to the pipeline, and three, a partnership with Alaska based organizations, such as Alaska Science and Technology Foundation?" Number 2167 MR. MILLER stated, I think that your point about the pipeline being the albatross, so to speak, you picked up a key point that we were trying to get across in the testimony. Foothills is part of our group, and I guess I want to stress, I think one of the strengths of the sponsor group is the diversity of the people we have on it, so we are represented by Foothills pipeline, which is an international pipeline operating in design company. They are in fact doing some of the analysis for us, directly out of Canada." MR. MILLER continued, "Let me just talk a little about some of the things we're doing to look at the pipeline, and I'll put it in the context of looking for this minimum viable case. So we're looking at pipeline sizes ranging from 24 inch to 36 inch, for example. We're also looking at everything from x80 type pipe, which is high yield strength pipe, and going higher to x100, which--simplifying, just basically lets you make the thickness thinner, but the pipe stronger, and that way it would be more economic to go to those higher yield strength ratings. Now x80 has been used in Canada, and that is a leap forward from the previous look at the project. We're kind of taking that as our base case and looking to see if we can go beyond that to x100. MR. MILLER further stated, "We're also looking at a variety of pressures--I guess I want to come back. You can't take the pipeline alone totally, you still have to look at the gas treatment plant, and the LNG plant, and the pipeline is kind of like the connector of the two. So, you've got pressure issues and temperature issues, and so we're looking at a wide range of pressures on the pipeline. We're looking at all the way from 2000 pounds per square inch to 3500 pounds per square inch, because we know that the higher the pressure is at the LNG plant, the more efficient an LNG train is. Now what can we do upstream to get that kind of gas, and where do we have to put compressor stations, and then how many do we need, and which way are we going; all that is tied together, it is a very complicated problem. Right now foothills is looking at analyzing compressor stations and pipeline size configurations, and to come back with maybe a set of curves that says, for a 24 inch pipeline you need this many compressor stations, for a 28 inch you need this many, and looking at both routes. Don't focus--the pipeline is a key part, but the pipeline is also affected by the other parts, but we are working a lot of issues around the pipeline." MR. MILLER continued, "In fact, one of the unique things we've just come up with is, in evaluating the routings--we actually have another company looking at cost estimates right now--we're evaluating different areas along the route as swampy, mountainous--most of the cost estimates that we see, in fact all of them just assume a cost per length of pipe--we're breaking it down by area of terrain to see if that gives us a clue as to where we might be able to do things like line-loop. There may be a real advantage to putting in a smaller pipeline and then having the ability to loop it later, and maybe in the real difficult parts put in the bigger pipeline to kind of minimize the up-front cost." Number 2355 CHAIRMAN WHITAKER followed up, "You mentioned x80 pipe; this pipeline has been kicked around for years and years and years, ten years ago x80 pipe was considered to be somewhat innovative and it was, if I'm not mistaken, part of an initial design concept." He asked, "Why are you still considering x80 pipe, as opposed to another type of pipe?" He said, "I don't presume to know your business, but I do presume to know that there is an urgency related to this project that I'm not seeing reflected in your design criteria at this point." MR. MILLER stated, "We are looking at x100 pipe as well. I guess the way that I look at it is, yes, x80, ten years ago was an innovation, but x80 has only recently been used, and I kind of look at technology--if you look--I go back to the space shuttle was designed in 1949 and we're still flying it. So, x80 pipe has just recently been used, for example, in Canada, and there's all kinds of strength of material issues around that as well. So, It was an innovation ten years ago and I guess my answer now is, x100 is an innovation that we may see ten years from now as well, and we are starting to see the higher strength pipes in use. So, we want to take advantage of that, I don't want to give the impression that we don't, but I think we also want to keep in mind that we want a safe system and we want proven technology, and so we're going to step out, but step out where we feel confident that we can..." Number 2439 CHAIRMAN WHITAKER stated, "My concern with that, to use your term, proven technology, and also to pick up on one of the terms that has been used continuously throughout your presentation, and that is viability. It seems to me that if you're looking for the most viable project, that indeed you will use proven technology and not strive for an optimal project, which may never be attainable in an environment in continuously changing technology. My concern is that while striving for perfection, if you recognize you will never attain it, but that you recognize that viability is your goal, not an optimal project." MR. MILLER replied, "I couldn't agree more; we just hit on the same spot. I think we're in total agreement." MR. FINDLING stated, "When it comes to federal tax issues, let me break it down to near-term and long-term. First, near-term we feel adequately funded to do the work that we're doing, so that we haven't really advanced any federal initiative to try to get some tax incentive to currently create..." TAPE 99-8, SIDE B Number 2466 MR. FINDLING continued, "...tax modifications in the viability of this project. I think everyone that remembers that report, will remember that the federal government actually has a larger tax take than the state under current tax law, so modifications to the federal tax would be real power-houses in making us become more competitive. That's an area that we're going to be pursuing with the federal delegation as we go along in this project." REPRESENTATIVE KEMPLEN followed up, "I guess I'm really interested to in incentives for--federal tax incentives for innovation. We are moving very rapidly in to a new economy, a knowledge based economy, driven by technological change and innovation, and it's certainly recognized at the federal level. So, incentives that--when you were talking before about differential, trying to make something in the Alaska case that differentiates itself in the international market place. It seems to me that being out with a new product, a new way of doing things, a new technique, the cause of our American ingenuity is a legitimate course of action for us to be seriously pursuing, particularly with the advances in material science that are going on." REPRESENTATIVE KEMPLEN continued, "That material science--and it comes right back to the question of the cost of the pipeline, the issue you brought up about the x80 pipe and x100 and that the pipeline itself is, again, the big cost item, and anything that we can do to reduce that really would make a substantial contribution to the viability of the project. The federal tax policy--tax incentives--that reward technological innovation in this project seems to merit certainly more serious and focused attention, particularly when some of these policies can take a while to germinate, and get them through at the federal level. As long as we have--we're fortunate to have at the federal level some very competent statesmen there, and it seems appropriate for us to be taking advantage of that leadership at the federal level, to be pushing for this type of changes that would make this project more viable." He asked, "Have you had any discussions with Senator Steven's office to date or are you planning to?" Number 2362 MR. FINDLING answered, "Yes. We've had discussions with their staff; we really have on going discussions with them about what are the--first, what are the needs of the project to become more competitive in terms of federal fiscal modifications, and then second, what's the viability of achieving those. The feedback we've gotten, and it was really reflected I think in Senator Murkowski's remarks to the legislature last week, was that we needed to get the state fiscal [system] a little more lined out before the federal side would be ready to act. I would just respond to one other thing you said, the work that we've seen, and in Pedro it was clear as well, that the kind of federal modifications that are going to really help this project be competitive are, basically capital based, they're based on the total amount of capital that's being spent, things like accelerated depreciation and so forth are the big drivers that make this project that make this project competitive. Certainly, modifications that try to encourage technology are always helpful, but I don't think that we should view those as the things that are really going to lift this project into the realm of being competitive..." Number 2308 CHAIRMAN WHITAKER stated, "A dramatic change in the federal tax regime would be beneficial to the project. It may even give it a quantum leap so to speak." He asked, "Is that a true statement?" MR. FINDLING replied, "That is true, but in keep in mind, though, as we said in the testimony, you have to have a combination of things going right; we have to have cost reductions, we have to have federal and state fiscal modifications, we need to see risk reductions in regulatory and other areas and we need to see a viable market with buyers that are willing to commit sufficiently for the required volumes." Number 2279 CHAIRMAN WHITAKER followed up, "There is still a sequence, and the first portion of the sequence is that, one, the project be identified, two, the project be costed, and, three, the market be approached. I don't think that there is really any argument with regard to that, and as part of that costing process, of course, and the overall viability of the project, we must determine what the cost of federal taxes is, that is a huge increment." He asked, "Is it not?" MR. FINDLING said, "Yes, federal taxes are a very important driver in this. I would say though that our view is that we think all of things we've mentioned need to advance simultaneously. That the way we view this project becoming viable, is if we get improvements in all, and that in all these areas the improvements are reflected crosswise. We see that the improvements happen in parallel, not in sequence." CHAIRMAN WHITAKER said, "I would respectfully disagree with you; there is a need for sequencing with regard to any endeavor. With that in mind, let's go back to federal tax regime, it is a given, it is a very large and important component relating to the viability of this project, to the magnitude of billions upon billions of dollars over the life of the project." He asked, "If there were no federal taxes adherent to this project, would it be significantly more viable?" MR. FINDLING answered, "Yes, Pedro Van Muers work showed that zero federal taxes would make a project significantly more viable, as would a significant cost reduction." MR. ALLEMAN commented, "That's one piece, it is a large piece, but it will take several pieces, and think that is where George is going with this. In certainly is a significant piece on the federal level to have this type of tax relief, but again it's one piece and we need several." CHAIRMAN WHITAKER followed up, "When you say it's one piece, relate it's significance with regard to the other pieces in magnitude of dollars." MR. ALLEMAN replied, "I don't know that we are in a position yet to relate that exactly, that's part of what we're reviewing right now in our overall look at this thing; how do these pieces fit exactly, what are the economics behind that, what type of relief do we think we could possibly see, what is the probability that we could go forward and get that from the federal government, but it certainly is a large piece and we haven't put a definition around exactly, percentage-wise, for instance, what that piece is." Number 2158 CHAIRMAN WHITAKER said, "We have, and it is a significant piece, in fact it could be termed indeed a quantum leap...Just be aware, that is a huge increment and indeed may be the dominant increment with regard to the viability of a project, with regard to the viability of attaining that there is a means, by which, it may be attained." REPRESENTATIVE BRICE asked, "How long is the sponsor group willing to follow this Andover under the current economic assumptions, number one, number two, is there a drop dead date that you guys have set to disband and move on?" MR. ALLEMAN replied, "We have staged this work and funded it through the stage one, which is 18 months, we will take a look at that point; do we have a viable project before we make the decision to move forward." Number 2102 REPRESENTATIVE BRICE followed up, "So, 18 months then. One other question on your remarks, Mr. Alleman, with regards to the regulatory team and the concerns about the mandates for proration or over-capacity production, was that in relation to providing access to the resource for the communities down the line or are you guys taking into account markets up and down the line, I know they're probably insignificant to the economics, but I do know folks in Fairbanks want to have access too." MR. ALLEMAN replied, "Certainly the in-state gas used will be addressed, in fact, we welcome the in-state gas use as a part of making this project viable, as we do with Greenfield in-state gas projects that may come along. The concern is that under proration that some large, other either producer or entity, would come in and say that they had some preferential right to ship on that pipe, but it's not a direct(indisc.). As you mentioned, the volume involved with the in-state gas use would be expected to be significantly smaller than the overall project." Number 2033 REPRESENTATIVE PHILLIPS asked Mr. Miller, "Thinking outside of the box, and looking at alternatives for moving the product to the market, what I'm wondering is if you folks have spent time looking at moving the product other than through a pipeline. Have you looked at moving the product through a rail line, or a truck line, or building a pipeline to Fairbanks and trucking or railing it from there. Did you consider all those different alternatives in moving the product, and not necessarily only looking at pipeline?" MR. MILLER said, "In my testimony I spoke about this big data exchange that we had at the beginning. What we did was we exchanged a lot of ideas and we've kind of had a rule that we follow; we don't want to reinvent the wheel, but we want to use the best answers that have been developed over time. We want the best product that is out there. So, we went back and looked at all those studies, we even went back to the blimps, and we think that after looking at all that again, that our best bet on this is to go on the technological improvements on the pipeline, look at those areas that I mentioned early and then also focus on this minimum viable case. Reviewing all the past studies, we think that's the right way to go. We did also look at up to 30 different pipeline routings, and we've relooked at all the studies that are out there that we could get our hands on...We've narrowed it down to five sites, and now we're in the evaluation phase of those five sites. Also in response to your question, we're taking some pieces of those studies, for example, how you use the right-of-way of a pipeline; can you save costs by going along a rail system and is there another optimum way to go. I guess my answer is to take all the best pieces and sift through them and get down to something that's really workable and viable, but not ignore any of the past. We are also documenting every reason we've eliminated something, so that as we go along we don't have to keep on going back..." Number 1887 REPRESENTATIVE PHILLIPS asked Mr. Alleman, "Would you please go into a little more detail on the proration aspect, and how it would affect, particularly, the Alaska in-state market and how they tie together, with the pipeline producing a product that could be used in-state, but where does proration come into play?" MR. FINDLING answered, "It's a good question. Let me just describe proration and then I'll go to the in-state gas. Proration, the notion there is that all of the--and I want to emphasize this--all of the export volumes for this project are going to be likely under some kind of contract, and the buyers are really going to want to know that we can always fulfill those contracted volumes...We don't want a situation where these volumes have basically been contracted and then suddenly someone else can so, well no, I want to send my gas and now everyone has to be cut back, and by proration that's typically meant in proportion to the volumes that are in tender. That's the fundamental notion, is that we need to secure and protect the volumes on the export side, so that the contracts--if there's a chance that they could be prorated, we're simply not going to be able to get buyers to commit, and that's the real test of whether we've done a good job." MR. FINDLING continued, "Now we've always--we've long been saying that we need to accommodate in-state gas usage, and that was part of HB 393; in the past we've testified that some kind of methodology has to be accommodated there, so that the in-state gas situation can be accommodated. There is going to be a struggle here to figure out--what I just described in prorating tends to say that on the state side, you need communities to commit early and for fairly long time periods for the gas that they want. They may not know that right away, and so the struggle is going to be can we devise a system where we can accommodate maybe some changes in local gas needs as time goes on...We have more questions than we have answers in this area. But there is the commitment to work the local gas issue." Number 1748 REPRESENTATIVE PHILLIPS followed up, "Is proration--In your industry, is proration a major consideration that's always taken into consideration with a gas pipeline?" MR. FINDLING said, "In the oil industry, proration is common, some regulated pipelines in the lower 48 for gas it's common, but what we're actually talking about here is a new industry, in that it is an LNG industry, with the complete export, and the United States really hasn't experienced it a project like that or an industry like that. So, we're plowing new ground here, and we don't have a lot of look-a-likes that we can say, oh, this is how this industry typically works." Number 1711 REPRESENTATIVE SMALLEY said, "In a conversation this summer down on the peninsula, the chamber meeting, Yukon Pacific gave a presentation; they talked in terms of the permitting processes and the permits that they had in hand." He asked, "Does the sponsor group have the permits at hand to go the Cook Inlet route, if they don't, what's the time frame that it would require to get those, and is that going to push the 2007 date possibility?" MR. MILLER responded, "Right now we're looking at trying to identify a viable project, and if there's economic advantage to go one way or the other, we want to identify that. We have permit holders on the team, Yukon Pacific has some permits, which we will evaluate as part of stage one, because we need to study what exactly they do for us, and we don't have that answer yet. Foothills also has some permits that we need to evaluate, but we've taken the approach that that's kind of a bird-in-the-hand, maybe, we don't know, but if there's advantage to go another way or by blimp or by train, we want to know it...Then it will be a decision as to what it takes to permit that other route. We have a group working in both the commercial and technical area that wants to persue ways to look at permitting, in case we have a different routing to go...The intent is not to look at another routing to go slower, the intent is to look at another routing to make it better, viably. We do have other permit holders, so we will evaluate all of those permits as part of stage one, and analyze as a group, because we have five sponsors from the Japanese to the Canadians to Phillips, ARCO, and Yukon, that not all have the same level of knowledge about the permitting process, and so one of our goals is to bring everyone together on this." Number 1579 REPRESENTATIVE SMALLEY said, "I guess specifically what I was looking for, was maybe the 'yes' or 'no' are there permits in hand, in review of a potential Cook Inlet route." MR. MILLER said, "That's part of the evaluation is to--I can't--we think we have permits, we just don't know what they're good for totally yet, but we want to study the problem first." Number 1542 CHAIRMAN WHITAKER followed up, "Is it fair to say that 'no' you do not have permits to Cook Inlet, 'yes' you do have permits to Valdez?" MR. MILLER answered, "That again is part of our study, we need to--we hope we have permits one way, and we think we might--we have people on our team that think they have the permits--excuse me, Mr. Chairman in response to your question, we just need to analyze it. I can't--I hope we do, but that is part of the work program for stage one, and one of the work products will be an analysis of what permits exist. I don't have that answer today, but we're working it in parallel with all the other studies." Number 1498 CHAIRMAN WHITAKER stated, "One of the frustrations that we feel, that the entire state feels, is that there is the perception that there are permits in hand from a specific place to a specific place. We have some need for an explaination as to why those permits are not taken as a baseline, a starting place. The question begs to be asked, if that is the starting place, after years of study, not only by Yukon Pacific Corporation, but also by ARCO, by BP, by EXXON, every entity on the North Slope, and from around the world has probably studied North Slope gas and the routing, and taking it to market." He asked, "Why in this period of need, why in this period of--this being the only viable market commodity that the state of Alaska has, are we continuing to deal with questions that have been answered years ago? If our goal is to achieve viability." MR. MILLER answered, "If you'll remember in my testimony I spoke about a minimum viable case, which would be, by definition, likely a smaller pipeline in parts. Some of the studies we're doing are looking at how that pipeline might be routed. I don't think we have permits for the minimum viable case, whether it goes to Cook Inlet or Valdez. I guess, my answer is, also that despite all those studies there is no viable project to date, so we are trying to identify what the minimum viable project is, and we feel that is the most--the quantum leap that we can make to this effort is to identify what that is, and then whether or not that can be permitted or if we have permits in hand that cover that." Number 1375 CHAIRMAN WHITAKER followed up, "The scale of the advantage that you are trying to achieve, in terms of dollars--that is a question, what is the scale of the advantage you are trying to achieve in terms of dollars with regard to your routing study?" MR. MILLER said, "I think we need to go back to the idea that this is not a purely technical study, and I think that is one of the reasons we feel that the other studies were lacking something, because they didn't tie in the commercial aspects. When we talk about minimum viable case, we're not talking about reducing technological costs just for the sake of reducing the cost, it's to match up with whatever we feel we can fit into a market. That is the way to make the project viable. So, I guess the answer to my question is, we think that there is a volume less than the total needed to get into the market, and that's the minimum viable case that we're trying to identify, so it's going to be a (indisc.) process as we go through to identify that." Number 1302 CHAIRMAN WHITAKER said, "I think we're on different plains. Let me re-phrase my question. The scale of the advantage of a routing study, is it in the range of $100 million, $50 million, $200 million, that is the question." MR. MILLER responded, "I guess if I knew the answer to that, I wouldn't have to do all the studies I'm doing. Remember we're looking at a wide range of pipelines, we're looking at a wide range of technology, we're looking at several routings, we're looking at what can an LNG train do, depending on how the pressure arrives. If I could add a little bit, I didn't talk to much about an LNG train, but if you take the LNG train, a real cost advantage is how you deliver the pressure, and so that requires location of compressor stations, not just the pipeline size itself. In other words, there might be an advantage to go with a smaller pipeline and more compressor stations to get pressure higher in a certain place, so it's very--it's hard to answer a question just specifically on the pipeline, because it may lead to something else that we're also studying concurrently, the operation of an LNG train. We might be able to add pieces to a train that would allow to have, what we call, 'turndown availability', where instead of putting two trains in, maybe we can design a train that's more expandable. That's how we then have to group compressor stations, pipeline sizing and all of that together. When all that is done, we'll have an idea of if it is viable, or if it is competitive with our base-case, which is the current base-case to Valdez, which we don't feel is marketable as a whole right now." Number 1184 CHAIRMAN WHITAKER said, "You more or less answered the question and that's fine. I guess I would relate to that there is a cost to a re-routing--a re-thinking of a routing--of a route, and that cost not only relates to dollars and cents, but also time, and gentlemen, again, there is some urgency with regard to this project, and I'll leave it at that." REPRESENTATIVE PORTER stated, "The discussion on proration, while I appreciate your recognition that there's some in-state usage needs around that, that should probably be considered, and I'm glad that you are, I don't think anybody in the legislature or the Administration is of the mind that we don't recognize the need to fulfill a contract that you would have to make this whole project work. The idea of stepping in the middle of that, and well, never mind that we want to do this, is not an option that I would guess would be available from the contract level of consideration given by anybody." He asked, "Did I understand you George to say that the market was generally 100 percent complete for the project? When we were discussing the Taiwanese enhanced cost potential, I thought I heard you something about the market's been taken care of." MR. FINDLING stated, "That wasn't what I was trying to say." REPRESENTATIVE PORTER asked, "Where are we with the market?" MR. ALLEMAN said, "With the market, we're now busily developing our strategy to approach the market. The market you do not want to approach until you have something solid to bring them, to be considered (indisc.) if you don't walk in with a fairly defined project to go forward. We have certainly identified the markets, we spent some time identifying what the drivers are to those markets as it relates to cold nuclear--the alternates. We've certainly taken a lot of time to identify who the other players are out in the world, we'll be competing against, and there's competition all over the world, and we're trying to match that up, but there'll be very little contact with the market until we have this project ready to go forward." Number 1020 REPRESENTATIVE OGAN stated, "I'd like to go back to the question of routing. I know we've been around this issue for probably 100's of committee hours, as we all have sat across the table from each other for a number of years. I recall very specifically the discussion of Yukon Pacific that they looked seriously at a Cook Inlet route at sometime and it was rejected by not only them, but the feds. I don't recall the specific reasons, but I'm concerned that if--as much--with all due respect to my friend from Valdez I'd like to see the pipeline end up going through my borough and maybe a terminal somewhere in the borough or close by. I'm concerned that that would delay the project for a number of years, I mean I think we all know that--I mean the hurdles that have already been cleared by Yukon Pacific in getting those permits out of the feds and the time line that would be involved to get additional permits for additional routes, I think would place a tremendous burden on trying this gas to market anytime soon..." MR. ALLEMAN replied, "We are certainly looking at all of these alternatives. We have not turned our backs at all on the--on any permitting at this point, and we are bringing them along in parallel, again, because we have to be able to go back and explain, to these individual corporations that are going to be investing these billions of dollars, that we have looked at all the possibilities and that, yes indeed, that is the appropriate route to go, whatever that route is, and--but is a parallel effort, we're not abandoning one and going to the other. We're bringing the five locations, if you will, simultaneously. Again, we have to come up with the right answer for Alaska, we have to come up with the right answer for the investors, and in our minds it's prudent that we, at least, look at these in parallel...so as to which direction we take this project." Number 0870 REPRESENTATIVE PHILLIPS followed up, "Mr. Alleman are you in a position to tells us what those five routes might be at this point in time?" MR. MILLER answered, "We're looking in the Valdez area at the Valdez marine terminal...The Valdez marine terminal may offer some infrastructure benefits, and that is not a current permitted way, but it goes to Valdez. Anderson Bay, which we may have permits for that area, but we don't know what they cover. In the Cook Inlet area we're looking at Tyonic, Boulder Point, and Nikiski. Now, there are synergies going that way within state gas sales that we want to evaluate, and there are also synergies with an existing LNG facility that we want to evaluate. So, if the answer--maybe I can say a few words about how we're--we're going to look at these sites and likely come back with an analysis of the pros and cons." Number 0765 REPRESENTATIVE HARRIS addressed Mr. Miller, "Obviously, my preference would be since I represent an area--I want to see this project go for the state of Alaska more than just for Valdez or any other place in particular. I recognize that the Kenai Peninsula has a tremendous amount of infrastructure already for gas, so there are certainly some positives there, and I hope no matter where the project goes that gas is put to that direction anyway. It would be a tremendous loss to the state if we ran out of gas there and we don't put other gas to it. A couple of things that you brought up earlier in your testimony, and maybe actually Mr. Alleman did, you said fiscal and regulatory modifications were needed." He asked, "Can you elaborate on that a little bit, what you meant by that?" MR. ALLEMAN responded, "Fiscal and regulatory will be--part of it is that the regulatory issue is the proration issue, part of the regulatory issue is legislative drafting, if you will, for the federal government. Part of the fiscal areas are going to be some form of tax modification within the state and within the federal to fit this project, to make this project go. Specifically, we don't know exactly what those are going to be, certainly you stop and think about investment--accelerated depreciation is one area, you talk about the different types of fiscal areas that you could attack in that regard, and certainly there's consideration on how the taxes structured within the state of Alaska. Pedro Van Muers study references front-end loading, back-end loading of taxes, and we will certainly look at that, as far as some way to still pay our fair share, but to structure it in a way, so that the project that has very high intense capital investment up front doesn't get taken under before it can start realizing some revenue." Number 0610 REPRESENTATIVE HARRIS addressed Mr. Miller, "Certainly, as a representative from the state of Alaska, it's my concern that we market our gas or our natural resources before anybody else in the world does. I think that should be our obligation as representatives of the state." He asked, "How can we be assured that this project is getting preferential treatment by companies, or at least a company, who has world wide interests--competing interests--how can we be assured as Alaskans that we're getting a first shot at this and not being put aside by other competitive, or say more competitive, as you said maybe there are some advantages to some of these other world wide projects from an economic point of view, which from Alaska's point of view we shouldn't be concerned about?" Number 0492 MR. MILLER responded, "I just want to say that I'm here on the capacity of speaking for the sponsor group, so I'm going to just say one thing and then pass it to George Findling to respond. We're looking for a competitive project world wide, so we're competing with lots of projects, and some are in ARCO and others are outside of ARCO, but there's a whole slate of projects that we're competing with..." MR. FINDLING said, "I hope the committee members all received a copy of a letter we sent to Chairman Whitaker..." CHAIRMAN WHITAKER said, "I have that here with some comments, George, I have not distributed it, but I will." MR. FINDLING continued, "The essence of that letter, and we wanted to keep the focus here on the sponsor work, we did address this issue last time and we've addressed it in the letter, but the essence of that is that our efforts on our other project, which is the Tangguh project in Indonesia, are not taking away from our efforts here in Alaska, that's really the bottom line. We want to see both of those advance, and we see that both of them advancing is an integral part of our strategy to become an LNG player in the East Asian marketplace..." Number 0418 CHAIRMAN WHITAKER said, "I had some concerns with the letter...In your letter you state: The question posed to us was whether ARCO's interest in the Tangguh project in Irian Jaya, Indonesia is detracting from our effort on the Alaska North Slope project. I don't think that's the question. I think those of you associated with this project are not in anyway, anything other than competitive with the Irian Jaya project, the Tangguh project. You want your project to succeed, I understand that, and that's a given. But I think the more telling question is, is Tangguh a competing project, with regard to market share, and I know George you have addressed that, but I would again question your answer in some regards. My point is this, there are different levels of competition. I think it's fair to say that, indeed, you feel that your project is omnipotent, the most important project, and you will advance that to the further extent that you can. Our concern is that, at the next level, that is the higher level of management within your corporate entity, the Tangguh project is also competing on an equal basis with Alaska North Slope gas. That being the case, ultimately a decision may be made within--at the highest level of your entity, your corporate entity, that may allow for the bringing to market out a different feel, a different source of gas. CHAIRMAN WHITAKER asked, "Percentage of ownership, Prudue Bay, ARCO, with regard to gas?" MR. FINDLING responded, "I'm struggling for that number, I think it's 37 percent overall as a gas owner..." CHAIRMAN WHITAKER asked, "Percentage of ownership with regard to Tangguh?" MR. FINDLING responded, "I don't have that number, I can get it for you." CHAIRMAN WHITAKER said, "That would be very, very beneficial to us." MR. FINDLING responded, "The vision you had of the higher levels of our corporation sort-of making this either or decision is not consistent with the strategy of our corporation, which I've outlined in this letter. The strategy of our corporation is to become a major player of LNG in the Far East, and in so doing we want to see both projects move ahead, as we've laid out in this letter, so that we don't share at all this vision of an either or choice being made at the higher levels of our corporation." Number 0191 CHAIRMAN WHITAKER said, "I understand your disagreement and it's taken respectfully and given back respectfully. I would ask further with regard to the letter, describe the geographic market that both Tangguh and Alaska North Slope gas are targeted for...where is it going." MR. FINDLING responded, "The market for LNG in East Asia is pretty well known, it's Japan, it's Korea, it's Taiwan, it's potentially China. I don't know how much more specific we can be, but those are the general markets. CHAIRMAN WHITAKER said, "You need be no more specific and it's a given that both projects have that as their ultimate explanation." He asked, "Describe the delivery and ramp up period for Tangguh as opposed to Alaska North Slope gas?" MR. FINDLING responded, "I think we have reached a point where I would like to either come back or we can provide these answers in some other forum, because basically now we're talking about the Tangguh project and we came here today to talk about are work activities on Alaska North Slope gas. So, with all respect, I wonder if we could arrange that for a separate venue." CHAIRMAN WHITAKER stated, "Your request for a separate venue is certainly is conceded to, in regard to time. Another time, no problem, I understand your desire to make sure that the information you provide is indeed that which is correct..." TAPE 99-9, SIDE A Number 0013 REPRESENTATIVE HARRIS asked, "What kind of vision did you have with the state's involvement--if the state owned the pipeline are there federal tax implications and various other things with the state owning the pipeline, and contracting to somebody to operate the type of a thing that would make this project more attractive earlier, or not?" MR. ALLEMAN responded, "We are looking into all financing opportunities--all financing--creative financing type of situations, certainly that would be one that we would consider. Do we have a response to that in terms of how we see that in terms of can we do it first, what would be the actual tax ramifications, we don't have that answer for you today, but certainly that is on our radar screen as something we will look at." Number 0123 REPRESENTATIVE BRICE said, "We talked a little bit about state fiscal regimes, federal fiscal regimes and the work your doing there, what about municipalities, what consideration have they been given in your discussions in development of the project, especially questions of accelerated depreciation on the actual infrastructure, which will have a dramatic impact on property taxes, that they collect...?" MR. ALLEMAN responded, "Certainly that is also something that we are looking at very closely within the framework of how we structure this entire deal; how are the municipalities involved, how's the state involved, how's the federal government involved..." Number 0224 REPRESENTATIVE KEMPLEN stated, "Just like to go in the area of the market, I know there has been significant discussion on the Asian flu and what's going on with the Asian economy, and since this project is geared specifically toward those economies, I guess I would be interested in hearing from you, since I'm sure you have the pulse..." He asked, "What are you hearing, in terms of those economies, and I hear some of them are planning a rebound, some of them will take longer time, what do you guys hear?" MR. ALLEMAN responded, "We see, for instance, that China hasn't suffered as much as some of the others have. Taiwan hasn't suffered as much as some of the other countries, like South Korea and Japan. The big question is will they recover and when will they recover. We totally believe that they will recover and grow, that is the impetus for us continuing forward on this project. The big issue always is when, and that's--again we think by the year 2007 and forward we will start to see growth again in those economies and it will turn around. Exactly when, we don't know that for sure..." REPRESENTATIVE KEMPLEN asked, "Do you see any--when you define Asian markets, does that include India as part of that boundary, or are you focused more on...the Pacific Asia?" MR. ALLEMAN responded, "India is certainly one of the emerging nations that we are looking very hard at, not necessarily for our gas, but as part of the market share that's going to be absorbed with competing project throughout the world. We will continue to look hard at India as a player, and see how they contribute to this, again, we believe they are an emerging market, certainly a potential growth market, probably slower than some of the others, but, again, it's about where does the rest of the world LNG business go, and part of it will have to go to fill that market. Again, our primary focus is South Korea, Japan, Taiwan, because of the distance." Number 0474 CHAIRMAN WHITAKER asked, "Has the sponsor group submitted an application to the State Department of Revenue?" MR. FINDLING answered, "No, we have not." CHAIRMAN WHITAKER said, "I understand why you have not at this point, and that's not to be held against you, there's a great deal of work that need be done before that can be done." CHAIRMAN WHITAKER asked, "It's an assumption on my part that the project plan is being developed, is that correct?" He said, "The project plan is related in HB 393--HB 393 requires a project plan with very specific steps related to that." MR. FINDLING responded, "The sequence here is identifying the viable project, then preparing the application that would go to the commissioner, and in the preparation of that application, yes, we would have to develop a project plan." Number 0558 CHAIRMAN WHITAKER said, "I'm glad you mentioned sequence, because as part and parcel to that there are the specific components to the project plan, and I just want to read through these and get a definitive answer as to where you are on them. These are stipulations as required by HB 393. Project plan must contain, one, a description of work to date." He asked, " I'm assuming you keep a running record of the work that you have done to date, it is that correct?" MR. ALLEMAN said, "Yes sir, we do." CHAIRMAN WHITAKER continued, "Schedule a project to completion, including commencement of commercial activities." He asked, "Has that been started?" MR. ALLEMAN said, "Yes sir." CHAIRMAN WHITAKER asked, "Is it completed?" MR. ALLEMAN said, "No sir." CHAIRMAN WHITAKER continued, "A description of the project activity, that is the project itself, not just the activity leading up to the project, but a description of project activity." He asked, "Has that been started?" Number 0630 MR. FINDLING said, "If we're trying to compile how close are we to an application, I guess what I'd have to go back and say is, the key...thing here is we have to develop a viable project before we can make an application. So, we haven't been focused on--I mean a viable project is all the necessary work that goes into the commercial and technical efforts that we've been describing. We haven't been separately accumulating the specific information for an application. Our presumption has been that in the normal course of work of developing the viable project, that we would naturally have that work ready to be summarized in an application." Number 0683 MR. ALLEMAN clarified, "Certainly, we are working towards the type of items you've asked me about, but not specifically towards preparing our documents to bring it forward. We're looking for the worthy project, that we realize we need to have a worthy project according to the 393, before we bring it forward. As we develop a worthy project, we are documenting as we go, was the point I was making." CHAIRMAN WHITAKER stated, "Your point is well taken. There are many of the items that are related in this particular section of 393 that should relate to, and are, basic components to the determination of a viable project, such as a project schedule, project activity. Item number 4, under that section of HB 393, a description of each lease, from which gas will be extracted." He asked, "Do you know from where you going to get the gas?" MR. FINDLING answered, "No, we have not secured the gas supply, so no we don't know the answer to that." CHAIRMAN WHITAKER said, "That's all the questions I have." He asked, "Are there other questions from the committee? Other comments from those who have made the presentation today?" Number 0758 REPRESENTATIVE KEMPLEN said, "Thank you for coming today. I think you guys are doing great work in moving forward with this initiative. I think it's going to be good for the state of Alaska, and I certainly appreciate all the hard work your putting into it." REPRESENTATIVE PHILLIPS said, "I'd like to express my appreciation for this update and certainly encourage both the technical and commercial teams to look very strongly at the Cook Inlet." CHAIRMAN WHITAKER said, "I too would add my thanks, gentlemen, although our questions have been difficult, and at times at odds with perhaps where you want to go. I hope you understand that it's done in the spirit of friendly dialogue, it's done in the spirit of we having a specific responsibility, and needing to have answers. Thank you very much for coming." ADJOURNMENT Number 0817 CHAIRMAN WHITAKER adjourned the House Special Committee on Oil & Gas meeting at 11:50 p.m.