SENATE RESOURCES COMMITTEE  March 8, 2000 3:12 p.m.   MEMBERS PRESENT Senator Rick Halford, Chairman Senator Robin Taylor, Vice Chairman Senator Pete Kelly Senator Lyda Green   MEMBERS ABSENT Senator Jerry Mackie Senator Sean Parnell Senator Georgianna Lincoln   COMMITTEE CALENDAR Briefing: Foothills Pipe Line Company SENATE BILL NO. 249 "An Act authorizing a land exchange between the Department of Natural Resources and Alaska Hardrock, Inc.; and providing for an effective date." -MOVED SB 249 OUT OF COMMITTEE   PREVIOUS SENATE COMMITTEE ACTION SB 249 - No previous action to consider.   WITNESS REGISTER Mr. Robert L. Pierce, Chairman Foothills Pipe Lines Ltd. 3100-707 Eighth Avenue, S.W., Suite 3100 Calgary, Alberta T2P 3W8, Canada POSITION STATEMENT: Testified for Foothills Pipe Lines Mr. John Ellwood, Vice President Engineering and Operations Foothills Pipe Lines Ltd. 3100-707 Eighth Avenue, S.W., Suite 3100 Calgary, Alberta T2P 3W8, Canada POSITION STATEMENT: Testified for Foothills Pipe Lines Mr. Harry Hobbs, Vice President Transportation and Corporate Secretary Foothills Pipe Lines Ltd. 3100-707 Eighth Avenue, S.W., Suite 3100 Calgary, Alberta T2P 3W8, Canada POSITION STATEMENT: Testified for Foothills Pipe Lines Mr. Jim Stratton, Director Division of Parks and Outdoor Recreation Department of Natural Resources 3601 C St., Suite 1200 Anchorage, AK 99503 POSITION STATEMENT: Supported SB 249.   ACTION NARRATIVE    TAPE 00-10, SIDE A Number 001 CHAIRMAN HALFORD called the Senate Resources Committee meeting to order at 3:12 p.m. and announced the first order of business would be a briefing by representatives from Foothills Pipe Line Ltd. MR. BOB PIERCE, Chairman and CEO of Foothills Pipe Line Ltd., introduced Mr. John Ellwood, Vice President of Engineering, and Mr. Harry Hobbs, Vice President of Transportation and Secretary of Foothills Pipe Lines Ltd. Mr. Pierce gave the following testimony. In short we are here because, as some of you know we've been here before and we have always said that the day would come when Alaska gas would go by pipeline to the Lower 48. We're here because we think that day is getting very imminent and we want to tell you why. We appeared yesterday before Mr. Whitaker's - Representative Whitaker's committee and said some of the same things and I don't think I'll say anything contrary today to what we said then. We have always believed the Alaska Highway Pipeline was not only cost effective, but it was environmentally sound and politically palatable. There is a great deal of history about this proposal. Some of you may recall there were originally three different proposals to move Alaska gas to market in the 1970's: the El Paso Project, which was LNG to California; theArctic Gas Project, which would   pipeline gas across the North Slope to the MacKenzie Valley and Canada and then through Canada to the U.S. market; and the Alaska Highway project, an overland pipeline along the Dalton and Alaska Highways through Alaska and Canada to the Lower 48. The history is that both the United States and Canada agreed that, when all things were considered, the Alaska Highway route was the best option. Accordingly, certificates were issued, international agreements were signed by the President and Prime Minister. The agreements were ratified by Congress in the U.S. and by Parliament in Canada and the decision, the agreement, and the legislation selecting the route have the force and effect of a treaty between our two countries. There is now a new proposal being floated whose central premise is to move Alaska gas east to the MacKenzie Delta and then down the valley to join the Canadian pipeline grid. This only differs from the earlier Arctic Gas project that was rejected in that the pipeline is going to be laid in the ocean under the ice. This is not a new concept. We and others selected similar options before and we predict this proposal will fail for the same reasons, namely economics, environment and politics. But, clearly, there is a renewed interest in building a pipeline from Alaska to the Lower 48 states. The U.S. demand and price for natural gas continues to escalate, driven primarily by the demand for new gas-fired electrical generation. Most analysts predict a 30 TCF U.S. market and up to a $3.00/MCF price by the second half of this decade. Indeed it could happen before the second half of this decade. There is a need to connect new sources of supply. Many believe that the U.S. demand will be met with increased exports of Canadian natural gas. We believe this assumption is too optimistic. Recently, the chairman of the National Energy Board warned about the potential of a $2/BCF per day shortfall in deliverability from Canada by 2001. This winter we are seeing surplus pipeline capacity and the 1.5BCF per day Alliance pipeline will be put in service later this fall. That capacity will be vacant when the new pipeline comes in because it won't be filled with Canadian gas. And finally, and the most important thing from your standpoint, is that the North Slope is the largest unconnected gas reserve in North America. It may basically be the largest gas reserve. We've been in the gas business for some time and, as an Albertan, we have a particular perspective on this issue because at one time, much of Alberta's natural gas was stranded, not unlike your current situation. Industry and government took up a challenge as to how they were going to put it to use and the strategy is not different from what we now understand Alaskans are now thinking of, namely you look for increased market opportunities in the Lower 48 but you must look for ways to use and further process the gas within the state. That provides the jobs that you need for your people. There was enough gas in Alberta for both purposes. The Alberta strategy was to process some of its gas within and find new markets for the rest and it succeeded, in part, because of the policies of government and the development plans of industry but also because Alberta was in the right place at the right time. We believe you are in the right place and that the right time is very near. Alberta's strategy was to develop a petrochemical industry in the province and aggressively pursue increased exports to the U.S., including new markets in the U.S. Northeast and it was very successful. Capital investments in the petrochemical industry in Alberta are approaching $7 billion Canadian. Over 400 construction jobs are created for each $1 billion investment and a single $200 million petrochemical derivative plant in Alberta pays cumulative taxes of $300 million Canadian over a 20-year period. At the same time, natural gas exports to the U.S. have increased dramatically in the past two decades. The question from here, of course, is can the distance factor be overcome. Will the Chicago gas price allow for the profitable movement of Alaska gas south? We believe that the answer is yes and we believe that the best way to transport your gas to market is along the Alaska Highway pipeline. The current projected capital cost for the pipeline is around U.S. $6 billion in order to get to what BP Amoco calls the Alberta gas hub, which would be the point at which Alaska gas would reach the various pipelines serving North America out of both Canada and the United States - out of Alberta. And you, in moving your gas, would have a choice as to which of those you use. It is necessary that there be spare pipeline capacity or otherwise your price goes down so you have to be able to move it on to the eventual market and therefore will have to connect into areas where you have more than one choice. We now believe that the appropriate design for the pipe would involve using a high-pressure pipe that has the capability of moving gas liquids that might otherwise be left stranded on the North Slope. We anticipate throughput volumes in the range of 2.5 to 3 BCF per day. The distance would be about 1,700 miles commencing at the North Slope with roughly one-half of the new pipeline being built in Alaska and the other half in Canada. MR. PIERCE continued. Because we have many of the key approvals in hand, we believe our pipeline could be in service by as early as 2006. This is an ambitious plan, but we believe it to be a realistic one. Some ask how is it that this pipeline is so much cheaper than previous estimates. There are several reasons. A sizeable section of the pipeline has been built but a higher strength steel exists, higher operating pressures enable us to use smaller diameter pipe to move the same volume of gas. New welding techniques enable us to achieve higher productivity in pipeline construction. And there are many other improvements, which were not there when we were originally certified 20 years ago. To give you an idea of how much things have changed, when we originally estimated this project we had in excess of $1 billion for northern communications and now you can get all the northern communications you want by renting a telephone today. We have done all kinds of studies on permafrost. We thought we would have to truck in gravel to make berms but we don't have to any more. We can electronically check what's happening to the pipe every hour of the day and if it is starting to move, we can go in and adjust it. So there have been many changes on the technical side. There are currently, of course, key sensitivities to this project. Two of the most important are the cost of gas in the market and the pipeline throughput volumes. Ultimately, for any project to succeed, there must be something in it for the producers, the pipelines, the major suppliers and unions, the in-state gas users and clearly the governments and people of the state where the gas originates. Naturally, the higher the price of gas in the Lower 48 states, the more money there will be to go around. We believe that a Chicago gas price in the range of $3.00/MCF could provide a sufficient profit margin for everyone to sign on. Number 529 Turning to the question of throughput, as a rule of thumb, larger pipeline capacities equal lower per mile transportation totals. But, of course, pipeline designs must also be cognizant of the Lower 48 marketplace. Overbuilding the pipeline in the beginning could defeat the purpose of the exercise. There are obvious synergies if we can harmonize pipeline designs so as to serve both the Lower 48 and the in-state growth in gas demand. This should be a win-win for Alaska economic development and the Alaska Highway pipeline, not to mention the consumer advantage for Alaskans that will result from the opportunity to use natural gas for home heating. Foothills is a partner in the ANS LNG project and is the second largest participant with ARCO. We have been actively investigating these synergies and believe that we could save several hundred million dollars if the two projects could be brought together. Let me now return to those three fundamental factors of any pipeline proposal: 1) economics, 2) environment, and 3) politics. Can an alternative proposal move the gas cheaper? One alternative currently being investigated in some circles is the proposal to build a pipeline under the ice of the Beaufort Sea. The promoters claim their pipeline is shorter, will encounter fewer construction obstacles, and, therefore, can deliver Alaskan gas into the Canadian grid cheaper than the Alaska Highway Pipeline. It is true that the pipeline through the ocean may be shorter by approximately 125 miles, about seven percent of the total project. However, distance alone will not make the proposal more cost efficient. Why? Because the Alaska Highway Pipeline will be built along an existing transportation corridor, the Dalton and the Alaska Highways. Easy access to the right-of-way is extremely important to low-cost, efficient pipeline construction. Without it, the movement of personnel, materials, and equipment would be a major undertaking in its own right. To build a pipeline where no road currently exists often means that the cost of a new road is included in the capital costs of the pipeline. And as you know as well as we, northern roads cost a lot of money to build and maintain. The terrain along the Alaska Highway route provides no greater construction challenges than those now faced in northern Canada and Alaska. Most of the geotechnical work has been completed along the right-of-way. The mountain pass in the Brooks Range is difficult construction, but not long and not extraordinary by any means. We have many of the necessary permits in hand and most rights-of-way have been secured. An alternative project must begin from scratch. That effort requires time and money and plenty of both, as we can attest. We believe that a pipeline under the ocean will cost more. The second fundamental factor relates to environmental issues. Would an offshore North Slope pipeline be more environmentally benign? We don't think so. In fact, environmental factors played a key role in the original decision when the Alaska Highway Pipeline route was chosen. Again, the fact that the pipeline follows an existing well-used transportation corridor means that it will be less environmentally disruptive, particularly when compared to a pipeline through a pristine undeveloped area. Some would scoff at such suggestions, but they'd be well advised to study some recent samplings of North American attitudes regarding energy issues. The most important energy industry issue is not cost but the effects on the environment. That is a marked change in public sentiment and perhaps a fundamental change. And since we live in a part of the country far from the centers of population, just like you do, we find that the people who live a long way away think that they know more about our environment than we do and, by and large, find ways to stop us from dealing with it. So, finally the political factor - and we say anything about politics with some trepidation because that's your business, not ours. But we think politics often boil down to a debate about what benefits will flow from any given public policy. This debate will be about two very different pipeline proposals: the one that we present will run through the length of your state. We can become a catalyst for trigger development and will provide jobs for your citizens and, in the long run, will generate maximum tax revenues. I began by speaking about Alberta - the jobs that were created, the business investment that has resulted and the taxes that have been generated. If maximizing benefits for Alaska is the goal of energy development, then our pipeline can help. Frequently, pipelines are instruments of national, regional, and state economic and social policy. They often present difficult choices about complex economic and long-term environmental priorities and, ultimately, they are about politics. Our project, we believe, is economically competitive with any alternative. Environmentally it is far superior. We will leave it to others to debate about the best public policy. Our project won the day once and it's time this issue was heard. We think we have a head start in winning this matter again, because we're there, we've been there, and there are a lot of things in place. Thank you and we'd welcome your questions. Number 850 CHAIRMAN HALFORD thanked Mr. Pierce for his testimony and asked what the current gas price is in the Chicago market. MR. HARRY HOBBS, Vice President, replied that the spot price today was $2.83 in Chicago and the 12-month strip price on NYNEX today was $2.93. CHAIRMAN HALFORD asked if it would be to Alaska's advantage to have the gas ownership in Prudhoe Bay in the hands of one company or split as it is. MR. PIERCE answered that more than one owner means more competition. From his standpoint, the gas could still emerge with the three companies that own it. If the merger between BP Amoco and ARCO goes through, there will be one less company and decisions would be made quickly. He would expect that if the gas went back to ARCO, now that BP understands the importance of it, things might move quickly too. He said if it was his money, he would want to find a way to get that money back as soon as possible. MR. PIERCE said Foothills thinks Alaska has a particular opportunity in time. Foothills believes the U.S. Department of Energy's job is not to estimate the supply; its job is to talk about the demand. With a 30 TCF per year demand, there isn't enough gas in the Lower 48 to serve that demand and the only way to serve it is with Alaska gas. The Department of Energy does not disagree about the supply. Decline rates are currently 20 percent and may be increasing. If 21 TCF of gas is the present amount and between 4 and 5 TCF per year has to be put back in to stay whole, a lot of new gas is needed. He indicated on a map that the gas has already been found here and it's recyclable. There is talk about drilling for more gas in the North. If more is found, the infrastructure will have to be put in. Then, the companies will have to go through all the environmental problems to get a permit to deal with it. MR. PIERCE added that a key point is that Congress agreed with the Canadian government to put a system in place to move Alaska gas to the Lower 48 and most of the permits are in place. Timing is important. Three years ago he told the committee the time was getting closer, but it's really close now. He and Mr. Ellwood have built pipelines all over the world. Mr. Ellwood believes this pipeline can be in place within five years; the construction time will take three years, which leaves only two years to do the other things that have to be done. SENATOR TAYLOR asked what impediments at the legislative level still stand in the way and what the legislature can do to expedite this project. MR. PIERCE answered that the legislature should allow all projects to compete on the same basis. The legislature shouldn't put an impediment in front of one that the others don't face, because the market will determine whether or not it makes sense. Their view of ARCO is that everyone in the world is trying to get into one market and that is the Lower 48 of the United States. It's the best market to sell the product to; it's a growing market. As the only one with the gas, Alaska should "own the market" - that is, set the price. No one else has that under their control. When you establish a way for a product to go the market, all of a sudden the place that originates the product finds more and more, because they look for it. MR. PIERCE explained that there are six pipelines going east out of Alberta that move about 8 BCF per day. The last line was a 48 inch line. They are not necessarily talking about just one. They put a petrochemical business in Red Deer, Alberta, which is the half way point of the province. The weather there is worse than Alaska's. Red Deer is now the largest ethane producer in North America and the lowest cost producer. It is exporting and is as far from tidewater as Fairbanks would be. He would think Alaska could put a petrochemical industry here by moving the gas to it so that it would be closer to tidewater. The industry is very competitive in nature. The gas is bound to be cheaper here than it is after you pay the cost of transportation to the Lower 48. SENATOR TAYLOR said he understood Mr. Pierce's comment about allowing all projects to compete equally. He wanted to know what the legislature needs to do now so that the Foothills project could move forward or so that a decision could be made on all projects. MR. PIERCE answered that Foothills really doesn't feel there is anything Alaska needs to do. Foothills needs the ability to sit down with a producer and work out the costs in final form. He thinks BP Amoco has been trying to do that and Foothills has been in discussions with BP. When that's done, the decision will be made on an economic basis. There may be something the legislature could do at that time. Clearly, they expect to receive the right- of-way permits without any difficulty because they have always had up-front experiences with the Alaskan government. The key at this point is to sit down with the people who own the gas and then proceed in a normal fashion. SENATOR TAYLOR said he thought Alaska owns about 27 percent of the gas. MR. PIERCE said that is correct, but he doesn't expect that the state would produce it separately from the other owners. He said Alaska could use that as a means to assist the project. There are ways the state could help the financing and, in the long run, not go short of money. When the first pipeline was built across Canada, the Canadian government owned, as a crown corporation, the particular portion of it across the head of a lake. In due course it was purchased back at full cost. The project has to be economical so it may need help in the beginning. Foothills has heard that BP Amoco intends to be an owner, a deliverer, and intends to play very big in the market. Amoco is the largest gas player in North America. Mr. Pierce said that Foothills does not think the problem will be with the State of Alaska, it believes the problem will be further east. SB 249-DEPT NAT RES & AK HARDROCK LAND EXCHANGE  CHAIRMAN HALFORD thanked Mr. Pierce for his presentation and announced SB 249 to be up for consideration. MR. JIM STRATTON, Director of the Division of Parks and Outdoor Recreation, said the Independent Mine State Historical Park is located about 90 minutes from Anchorage in the Hatcher Pass area. It's an historic mine operation that was closed down during WWII and it came to the division from those mining interests in 1980. Currently, about 52,000 visitors per year make their way there. It's very accessible and it is near the proposed new ski area in Hatcher Pass. It's a major tourist attraction in the Mat-Su Borough and it sits on one of the few roads off the major highway system. The main attractions are the historical mining structures and the beginning of one of the mine tunnels in the side of the mountain. Maintaining historical buildings is expensive. The division held a public meeting in March of 1997 to discuss options with the community about different ways to protect and sustain the buildings in the Park. Everyone at the meeting acknowledged that some kind of adaptive reuse of the structures was the only way to ensure the buildings would remain standing. MR. STRATTON said, in his mind, the only way to accomplish that is to work with a private partner to develop a visitor destination facility that would include overnight lodging, food service, a gift shop, and tours. This is compatible with the purposes for which the Park was established a couple of years ago but the division learned from prospective private partners there is not enough cash flow in lodging and food service alone to support the investment needed to adapt and reuse the buildings. MR. STRATTON told committee members the prospective private partners would need another attraction, such as underground mine tours. However, the division did not own beyond the first few hundred feet of the tunnel. The tunnel was owned by Alaska Hardrock, Inc., who is interested in pursuing an exchange for property the State owned on the Willow Creek side of Hatcher Pass that Alaska Hardrock is currently using for its mining operations. The division got together last year with Alaska Hardrock and signed a preliminary exchange agreement and split the costs of doing the surveys and appraisals. In the final analysis, they signed an agreement in which the State will receive 118 acres of underground mine tunnel valued at $87,000 and Alaska Hardrock will receive 107 acres of surface estate on the Willow Creek side of Hatcher Pass valued at $66,500. Because of the unequal values of the exchange, legislative approval is required, which is why SB 249 is before the committee today. SENATOR TAYLOR asked how much Alaska Hardrock will pay per acre for the State lands. He figured it to be a little over $500 per acre. MR. STRATTON said it calculated out to $620. Number 1811 SENATOR TAYLOR asked if the division had to survey that land, stake it and create a subdivision with a five-year plan before it could be conveyed. MR. STRATTON said the parcels had to be surveyed this summer and Alaska Hardrock paid for that. The survey for the acreage the State is receiving did not have to be redone. SENATOR TAYLOR asked if the State is just receiving tunnels. MR. STRATTON said that is correct. SENATOR TAYLOR asked if they wouldn't need legislation if the appraisal values had been the same. MR. STRATTON said that is true. SENATOR TAYLOR commented that he needs to talk to the Division of Lands because that might be the only way an Alaskan can acquire land in this state. MR. STRATTON replied they try to be creative at the Division of Parks. SENATOR TAYLOR said he didn't want to discourage them in any way. CHAIRMAN HALFORD asked if the division received any opposition to this proposal. MR. STRATTON replied that the division had a public comment period for the month of December and the first part January and received a couple of comments from folks, but essentially it's a non- controversial action. Number 1898 SENATOR TAYLOR moved SB 249 out of committee with individual recommendations. There were no objections and it was so ordered. With no further business to come before the committee, CHAIRMAN HALFORD adjourned the meeting at 4:55 p.m.