11/08: REPORT: Thursday the Alaska Legislature's Joint Gas Pipeline Committee  finished a two day meeting in Kenai. Thursday's report is immediately below; click here for Wednesday's report.

Chairman John Torgerson (Photo, left to right: Sen. Olsen, Reps. Ogan and Green, Sen. Torgerson, 7-1-01) welcomed Bill Van Dyke, Petroleum Manager of Alaska’s Oil and Gas Division, as the Alaska Legislature's Joint Gas Pipeline Committee embarked on the second of its two-day meeting in Kenai.  While the Committee is most concerned about Alaska North Slope (ANS) gas, its Chairman represents Kenai Peninsula voters, heavily dependent on Cook Inlet area oil and gas jobs while Vice Chairman Joe Green represents Anchorage constituents, dependent on Cook Inlet gas for heating and power generation.  Accordingly, concerns expressed in this AEDC report concern the committee.  Van Dyke’s presentation illustrated gas reserves in the Cook Inlet area and production numbers.  About 2Tcf of proven reserves remain, causing a concern for upcoming shortages highlighted in a recent AEDC report.  Most of the gas last year came from larger fields discovered in the 1960s, Van Dyke said.  “We haven’t added new reserves this year from new discoveries.  I expect that to change in the next decade,” he said.  He said Agrium’s large fertilizer operation processes 55Bcf per year and Phillips’ LNG operation consumes 80Bcf/y, with field operations using 15Bcf/y.  Most of the balance is left for utilities.  Van Dyke said that assuming a worst case of no new supply there were various scenarios for curtailed gas supply for industrial use.  One scenario could assume Agrium’s curtailed operation in 2005 with other industrial curtailment in 2009, leaving about a 20-year supply for priority utility use.  If Agrium continued to 2010, he said, an 11-year supply would remain for utility use.  If Agrium and LNG operations continued to 2015, there would be no gas left for utilities.  He said that if the last scenario were augmented by 1Tcf of new discoveries, development and production – though involving a ‘leap of faith’ in that rapid an execution of the process--) all industrial uses could continue to 2015, leaving a 20 year supply for utilities.

Tim Ryherd, also of the Oil and Gas Division addressed exploration.  Gas in the Cook Inlet was discovered in the process of looking for oil, he said.  Only one of the large gas fields was discovered while actually looking for gas.  From a historical perspective, exploration activity is now at a high level and he commented that this is, “…very positive for Cook Inlet gas exploration activities”.   He said gas is attracting more interest from existing operators and new players.  “I think additional gas will be the focus for the future…and drive exploration in the Cook Inlet,” he concluded. 

Will Nebesky, an Oil and Gas Division economist (and president of IAEE), spoke on the history of demand for Cook Inlet gas and the outlook.  He said that the priority gas utilities and power generation uses consume about 40% of total demand with the balance dedicated to industrial and field use.  He discussed historical prices and compared them with lower 48 benchmarks, reviewing two major measures of value: utilities prices and royalty value, involving a set of ‘higher of’ provisions and settlement agreements.  Around 2003-04, he affirmed, there is a disruption of supply balance assuming no new reserves.  He said that a recent contract between Unocal and Enstar using a pricing mechanism related to Henry Hub prices reflects the effect of gas scarcity in the Cook Inlet area.  He said that while the Cook Inlet supply is about .6Bcfd, a projected Fairbanks demand with a North Slope gas pipeline could be about .04Bcfd.

Senator Donny Olson was concerned about the volatility of residential prices resulting from the new Unocal/Enstar contract.  Nebesky pointed out that the various contracts and prices, blended together, provide a certain stability in pricing.  Olsen wondered about the effect on production of including Henry Hub numbers in calculations.  Nebesky emphasized that increased exploration in some ways can be traced to the expectation of higher prices.

In answer to further questioning by Representative Scott Ogan, Nebesky said that Phillips’ LNG export licenses for LNG terminate in 2009 and can be expected to be reviewed at that time.  In the event those licenses are not reviewed, more gas could be available for consumer use.  An upward price trend will put economic pressure on continuing industrial use of gas, affecting economics of both LNG and fertilizer production.   (Will Nebesky will be forwarding the presentation; when available it will be linked here.)

Chris Tworek, Vice President, Supply Management of Agrium, Inc. said his company would like to discuss solutions and seek a long term partnership with producers and the government. 

He said that Agrium is one of world’s largest fertilizer producers with 5,000 employees and 14 facilities producing 11 million tons/year.  It is the second largest retailer in North America, with 226 outlets and annual sales exceeding $2 billion. 

The Kenai plant’s 300 employees (30 contractors) produce 6% of all nitrogen made in Canada and the U.S. (Photo: Governor's Gas Pipeline Policy Council touring facility, 5-01)  Primary markets include: Korea, Mexico, South American and Taiwan.  Primary competitors are: Russia, Trinidad, Pacific Rim and South America, offering low prices and having access to inexpensive gas feedstock.  European competitors have offered higher prices, but as a result have lost industrial capacity and market share.  The company spends about $130 million/yr in Alaska, including $25 million in wages.  

Tworek pointed out that Nitrogen is one of the easiest ways to monetize gas anywhere in the world.  North America produces 14% of world’s production; much of that had to shut down with recent high prices and the market was replaced by offshore gas.  He said the company sees expansion possibility for the Kenai plant; it could easily increase gas use by 30Bcf/y…to 55Bcf/y…but needs long-term certainties to be in place. 

As to solutions, Tworek said that while a North slope gas pipeline is one possible solution, he’s reviewed encouraging estimates of more Cook Inlet gas and goal bed gas (i.e. as described in other presentations).  Agrium is willing to invest, he said, and “partner” with exploration companies and pipelines.  The company is open to purchasing state royalty gas for industrial use.  He added that successful partnering can continue Alaska’s success, and benefit its economy.

Torgerson asked how competitors price their royalty gas value.  Tworek described the $.90-1.00/Mcf Trinidad example as a bench price with escalators and a Malaysian example.  (Readers may obtain a copy of Chris Tworek’s presentation here.)

George Findling (Photo, 9-19), Manager, External Strategies for Phillips Alaska, Inc. introduced Scott Jepsen, Manager Cook Inlet Asset.  Jepsen first addressed the company’s field production activity then the company’s LNG activity, owned jointly with Marathon.  He said, “Total feed to the plant from Phillips and Marathon is approximately 77 BCF per year.  The plant produces on average about 1.5 million tons per annum of liquefied natural gas which is sold to Japanese utilities.  Our current plans do not envision any significant changes to the operation of the LNG facility.”  Continuing to answer written questions put to him earlier by the committee, Jepson said that on April 2, 1999, Phillips and Marathon were granted a renewal of the export license for the Kenai LNG plant for the period April, 2004 to March, 2009 by the U.S. Department of Energy, Office of Fossil Fuels.  For that renewal, a thorough analysis of reserve adequacy was conducted and substantial hearings were held.  “The results of that process demonstrated that reserve capacity was sufficient for LNG exports to continue through the approved period’” he said.  “It was also found that export was consistent with the public interest and would not result in a local or regional gas supply shortfall on an annual basis.”  He added that Phillips hopes to operate the Kenai LNG plant after 2009 but that it is too early to know whether the company will seek another extension.  He said that if an extension will only be requested if there are adequate gas reserves to provide for state needs.  On North Slope gas plans, Jepson said Phillips, as a member of the ‘Sponsor Group’ had last April reached a conclusion that the Nikiski area and a pipeline from Prudhoe Bay “…would provide a technically feasible and permittable LNG plant site/route configuration,” but it had not yet proven economically viable.  On Asian LNG demand, he observed that, “there is an over abundance of lower cost supply and in smaller increments compared to new LNG that would be delivered from Alaska.”  On the concern for increased Cook Inlet gas supply, he said “From an exploration and production point of view, this is really a time for optimism, not pessimism,” then provided supporting rationale.  When asked for recommendations on state support for enhancing gas exploration and discovery, Jepsen said, “Clearly, more frequent and wider lease sales and expedited permitting is an excellent policy.  In addition, State support of increased federal lease sales in the potentially gas prospective lower Cook Inlet would also be appropriate.”  (Readers may obtain a copy of Scott Jepsen’s presentation here.)

Dan Thomas, Unocal’s Land Advisor, said Cook Inlet producing assets are climbing rapidly.  “Unocal has aggressively obtained leasehold positions in a broad array of properties on public and private lands,” he said.  Historically, he said there has been an abundance of gas in the Cook Inlet and low prices; so, there was no need to explore.  He said a 5Tcf supply will be needed in next 20 years and that a large, “gaping” demand needing to be filled.  He said of coal bed gas potential that the coal and gas exist but that coal bed gas exploration had not been successful for Unocal.  Unocal sold its interests to Evergreen, he said, “and we wish them the best”. 

On Cook Inlet gas demand, Thomas said, “Today’s supply equals demand but known reserves cross gas demand at peak times in 2003.  In 2005-06 normal demand will outstrip supply even with storage.”  In 2000, he said, Unocal sold the Kenai fertilizer plant to Agrium as part of its world wide strategy to focus on oil and gas.  Had it not been for the recent contracts (reflecting higher prices) current exploration wells would not be underway, he noted. 

Thomas said that Unocal is very much dedicated to Alaska and to the Cook Inlet area.  The company will increase its annual spending with a 2003 target of $55 million for exploration.     

On Alaska’s royalty valuation method calling for producers to pay the state a royalty value based on a variety of price indicators, Thomas said that royalties should be based on actual sales, that it is “abundantly unfair to pay a higher royalty than the price actually paid”.   He cited several supporting examples.

Representative Mike Chenault asked Thomas about his chart showing a decline in gas demand in 2009-10 and was told it represented freed up supply occurring if the Phillips LNG export permit expired.  (Readers may obtain a copy of Dan Thomas’ presentation here, soon….  Check later.)

Scott Heyworth (Photo-5-24), Chairman, Citizens Initiative for the All-Alaska Pipeline, told Members that he was sponsoring, “a very popular initiative.”  He said his group has obtained: 37,500 signatures, over 50% of those required.  He reviewed provisions of the ‘authority’ the initiative and subsequent vote would create and emphasized that, “Creditors cannot access the general fund or the Alaska permanent fund.”   Heyworth went on to encourage legislators to pass ‘substantially similar’ bill this session to save the cost of placing the matter on the 2002 ballot.  He said the language which Senator Robin Taylor put forth last year in SB 221 “would suffice and be a sound piece of legislation.”  He said the legislature could ‘strengthen’ Senator Taylor’s bill with appropriations not permitted in the initiative language and recommended an amount: “$1 or 2 million.”

Torgerson asked about Heyworth’s coordination with Yukon Pacific Corporation (YPC) and the Alaska Gasline Port Authority advocates.  Heyworth said he had obtained his LNG education from Jeff Lowenfels, former YPC president.  He said he was working now with the Authority and YPC to develop coordination.  He opined that the initiative created authority could “…purchase the assets of YPC.”  He said the authority would have to obtain the YPC permits in any case.

Representative John Davies asked Heyworth’s view of counsel earlier offered the committee by a state oil and gas economist referring to “LNG project numbers being upside down, having negative value”.  Heyworth said, “I don’t agree … in any way, shape or form.  The numbers work for me.  We’re not upside down.”   (Readers may obtain a copy of Scott Heyworth’s presentation here.)

Chairman Torgerson invited John Ellwood (Photo, 5-17) to the microphone.  Ellwood, a frequent witness at Alaska gas pipeline tribunals, serves as Chief Operating Officer and Executive Vice President of Foothills Pipe Lines Ltd.  He last appeared before this committee with colleagues on July 18, August 15 and September 19.  He thanked Torgerson and the committee “…for your words and contribution to the US Senate Energy Committee hearings”.  Today, he addressed three issues:

1. The Alaska Northwest Natural Gas Transportation Company (ANNGTC) partnership.  He recalled October 2 Senate testimony on this issue: “In the initial stages of the Alaska Highway Project, numerous U.S. energy companies were partners in the Alaska Partnership. However, during the decade of the 1980s and the 1990s when the producers of Alaska natural gas were unwilling to commit that gas to Lower 48 markets because of low energy prices, all of the U.S. partners withdrew from the Alaska Partnership. Foothills and TransCanada, as the two remaining partners, have offered to the current holders of the withdrawn partner interests an opportunity to rejoin the Alaska Partnership. The negotiations with these companies have been productive and are ongoing”.  He said that, “We have already scheduled further meetings so that we can continue to work on the details for reconstituting the Alaska Partnership. It is anticipated that all parties will have signed a Memorandum of Understanding (MOU) within the next month. TransCanada, Foothills and the withdrawn partners are committed to eliminating commercial barriers to construction of the ANGTS and in so doing would be prepared to release contingent claims against the Alaska Partnership related to previous investments in the ANGTS as part of a commercial arrangement to ensure a market viable project.”  (Please note: Alaska Northwest Natural Gas Transportation Company (ANNGTC) Partners include (Successor or parent company shown in brackets): Active partners: TransCanada Pipelines USA (TransCanada Pipelines, Ltd.); United Alaska fuels (Foothills PipeLines, Ltd.) – Withdrawn partners: American Natural Alaskan Company (El Paso); Calaska energy Company (PG&E); Columbia Atlantic Trading Company (Williams); Northern Arctic Gas Company (Enron); Northwest Alaskan Pipeline Company (Williams); Pacific Interstate Transmission Company (Sempra); Pan Alaskan Gas Company (Duke); Tetco Four, Inc. (Duke); Texas Gas Alaska Corporation (Williams).

2.  Foothills commercial proposal.  He said, “A commercial agreement with the Alaska producers…has been delayed, in part, because of the withdrawn partnership issue overhanging the project, and because the Alaska North Slope (gas producers) are focused on completing their project feasibility study.  … we remain confident that we will reach a commercial arrangement to develop a viable project.”   

3.  Work on the pipeline right-of-way.  Ellwood said the transportation system from Prudhoe to Alberta is approximately 1,750 miles long.  “Foothills is well advanced along the road of securing the pipeline right-of-way,” he said. “More than 400 miles of right-of-way on federal lands has been acquired. Currently, we are making progress on securing the 200 miles of right-of-way on State lands with the Gas Pipeline Office. Work is under way to assess the information that was previously submitted in an earlier application, and a process to move forward has been identified. With the State right-of-way lease expected to in hand by 2003, over 90% of the right-of-way for the project will have been acquired or reserved.”

In a summary, he announced an outreach project, “to establish a consultation process that will enable interested Alaskans to become involved in the project.”  He also acknowledged the importance of producer involvement.  “We remain confident that the long-term demand for and the price of natural gas in the North American markets will support this project,” he said.  (Readers may obtain a copy of John Ellwood’s presentation here.)

Richard Peterson, president of ANGTL has long advocated gas-to-liquids technology (His assertions are gaining more credibility as industry fast-tracks GTL technology and efficiency and as government shows more signs of offering incentives for development of the ‘clean diesel’ fuel. -dh).  Today, as in recent communications to thought leaders, he says, “a North Slope gas to liquids (GTL) program followed by a lower 48 coal based gas to liquids program can work in 38 different states.” 

According to Peterson, “If the US wants a National Energy Policy to reduce its dependence on foreign crude oil it can to look to the example of the South African’s.  South Africa pioneered coal gasification - gas to liquids in the 50’s and expanded the program in the 70's when OPEC boycotted the US in order to reduce its imports of foreign crude.”  With modern technology, he says the U.S. could build more efficient plants at a lower cost than South Africa did.

Peterson’s thesis is to transform Alaska North Slope gas into about 1 million barrels per day of synthetic diesel, moving it down the Trans-Alaska Pipeline to Valdez for shipment to the lower 48 and replacing up to ¼ of the U.S. use of traditional “dirty” diesel fuel.

He said the Legislature should undertake ways to encourage gas production, assuring producers not discouraged from selling to his and other industrial operations (Referring, it seems, back to that royalty gas valuation issue. -dh).  (Find the ANGTL web page and GTL invormation here.)

Tony Izzo, President of Enstar (Photo-Anchorage headquarters), then took the floor.  He said the Southcentral Alaska gas distributor and its customers account for 13% of Cook Inlet gas consumption.  The company has the capacity to double the existing load of 128 Mcf/d, owning and operating about 2,700 miles of distribution and transmission pipelines.  Izzo discussed average and peak demands.  “By 2003,” he said, “we could have problems with peak demand and by 2006 average daily demand could be affected.”  He went on to express optimism for new discoveries.  Absent that, he said in agreement with earlier speakers, industrial use would be at risk and/or the requirement for peak storage facilities.  Izzo said his company supports “…an in-state route for North Slope Gas to ensure access to reliable low cost energy for future generations of Alaskans.” 

He said that while discontinuation of industrial use would not put Enstar supply at risk he would urge legislators to do “everything possible to avoid that”. (Readers may obtain a copy of Tony Izzo’s presentation here.)

Mark Sexton, President & CEO of Evergreen Resources appeared with his Operations Vice President,  Dennis Carlton, from their Denver offices via teleconference.  Evergreen extracts natural gas from coal seams primarily in the Raton Basin but is becoming increasingly interested in Alaska.  “Alaska has as much or more coal as the rest of the U.S.,” he said.  For Alaska’s Cook Inlet basin, he said, “We and others believe one of the very viable options for the future is coal bed methane, as much as 200 Tcf.  Enstar’s 20” pipeline intersects the Pioneer Unit where Evergreen plans to drill 6-12 wells next year.  “Natural gas in the Cook Inlet will provide a long term supply of natural gas,” he said.  “Our studies suggest coal bed methane has the potential of replacing the decline in gas, eliminating the need for bringing North Slope gas to Southcentral Alaska.”  Sexton’s Alaska budget, he said, is $5 million next year; accelerated prudently over time.  He recommended that the legislature consider streamlining the permitting and regulatory process for coal bed gas.  He said experience had taught that surface access may become THE major obstacle to exploration: legislation requiring surface owners go give access to subsurface leases is advisable.  On that subject he made several points:

1. The goal is to work for long term supply of gas for citizens of the state.
2. Coal bed methane is a long-lived resource providing security of supply and numerous jobs and long term economic prosperity.
3. He supports a North Slope natural gas pipeline, but more for the purpose of exporting Southcentral gas down the line than being dependent on it for Southcentral gas supply.

Ogan was concerned about conflicts between surface and subsurface owners.  Sexton said that his company’s approach was to have conversations with people and local communities and demonstrate how coal bed gas development might benefit people.  He gave examples of adjusting road routing; providing gas sales to landowners.  He said citizens are less concerned once they see the small impact (1-2% of the land is used).  In the Mat-Su area Sexton believes that small wells can be hidden easily inside a group of trees or with use of natural barriers.  His company goes to great lengths, he said, to minimize noise.

Olsen asked about the potential of coal bed gas for rural Alaskans.  Sexton said Evergreen had researched the Red Dog mine area.  “A coal bed methane play is frequently the way to supply natural gas to many such areas,” he said.  “Each community could be served with just a few wells.”  He also emphasized that while coal is accompanied by gas, the only way to determine economic feasibility was to drill and test the structures.  (Mark Sexton's presentation has been requested and will be linked here, when available.)

(While the author endeavors to produce accurate reports from meeting notes, he encourages all persons and offices named in this and other articles and readers-at-large to provide additions/corrections to ensure validity of the historical record.  -dh   ...Draft Revision: 11-10-01)

11-07: REPORT: The Alaska Legislature's Joint Gas Pipeline Committee  began a two day meeting in Kenai.  

The Chairman, Senator John Torgerson, introduced Kenai Mayor John Williams (Photo-with Betsy Arbelovsky, early 2001 Gas Policy Council meeting in Kenai) who cited the importance of long term gas supply for the Kenai Peninsula and welcomed the visitors to his town.  Torgerson said that the main focus of this meeting is gas resources available to the Kenai Peninsula and how additional supplies can best be brought to Southcentral Alaska.  (Note: Studies have shown that this most populated part of Alaska has only several years of proven gas reserves remaining; hence, one of the pressures for Alaska’s support of a southern route for North Slope gas.  –dh) 

Alaska’s Director of State/Federal Relations and Special Counsel to the Governor, John Katz, spoke first by teleconference from his Washington office.  He first addressed several factors relating to gas pipeline public policy development:

• On national energy legislation, Katz said, “…it is clear that we will not see it on the floor before the thanksgiving recess.  It seems,” he said, “increasingly likely though not certain that there will be a session in the Christmas timeframe and possible a bill will be brought to the Senate floor at that time.”
• He said the Senate majority leader in a rare parliamentary maneuver has brought energy under his personal aegis.  Senator Tom Daschle (Photo) and his staff have taken the responsibility of putting the various provisions together for debate on the floor, Katz said.  The Senate energy committee has discontinued its markup of gas pipeline provisions and will make recommendations to the majority leader, we believe, by this Friday.
• The Senate republicans have become increasingly impatient with the progress of energy legislation, Katz said, and may work on their own version to bring to the floor.  Another possibility might be for the republicans to take the house energy package, HR4, and propose is as an amendment to other fast moving vehicles.  He noted it prohibits the northern route and includes an ANWR provision.
• Katz spoke of the relationship between gas pipeline and ANWR issues.  In the Senate is broad support for developing North Slope gas, he told the committee.  “However, there are members of the senate (including the senate majority leader and committee chairman), who would like in essence to remove ANWR from the Senate debate and replace it with gas pipeline language and other provisions related to oil and gas.  Conversely, there are other members who don’t want that linkage to occur and want both ANWR and gas pipeline issues to come to a vote.  I think it is safe,” Katz said, “to say that the formal position of the Administration is to be project neutral and not propose legislation at this time.”  Katz said the Bush Administration also seems to show great deference to Alaska’s leadership.

Katz described what he believed to be 3 pivotal Senators, Jeff Bingaman (Photo), Daschle and Frank Murkowski.  Key issues they are now negotiating include:

·         Whether to include producer-recommended gas pipeline legislation in the final bill

·         Whether to simply rely on the ANGTA regime, recommended by Foothills Pipe Lines, Ltd.

·         Whether gas pipeline legislation should fall within context of energy legislation or stand alone

·         Whether the Senate should support prohibition of the northern route

·         Whether to include tax incentives in general, or incentives restricted to specific routes in order to influence the choice of routes. 

“Senator Murkowski is clearly looking at the advisability of gas legislation and it’s best to leave it at that juncture pending his decision,” Katz said. 

Senator Bingaman will make recommendations to Majority Leader Daschle, he said, by end of week.  “My guess is that that legislation will rely heavily on producer legislation and will not stipulate a particular route.” Katz said he thought Bingaman is reviewing a spectrum of ways to provide incentives for a gas project, including accelerated depreciation, tax credits,  price floor for gas. 

Katz said, the third pivotal member, Daschle, will control the Senate floor, decide when to introduce legislation and when the debate will occur.  He will also approve the substance of natural gas legislation and, according to Katz, “…has indicated his strong preference for the southern route.”  Daschle apparently wants to give deference to committee chairmen but has reserved for himself final decision on what will be put before the Senate and under what conditions. 

Katz then said he would characterize what he believed to be positions of the advocates.

• The Producers remain strong advocates of their legislation, which they believe to be route neutral and absolutely crucial to a project, he said.
• “Foothills and some of their partners have indicated their preference for the ANGTA regime, perhaps modified.  They believe that is the quickest way to commercialize gas and create jobs”, he said.
• “The state Administration continues to advocate the Governor’s 10 principles,” Katz said.  “We continue to place heavy emphasis on the ANTGA regime and the southern route.  He emphasized how close the Administration position is to, “…the position taken by Senator Torgerson’s committee”. 

Finally…situation if very fluid and could be influenced by external issues… 

Committee Vice Chairman, Joe Green (Photo-center, with Davies-l and Torgerson-r, 9-19-01 meeting) asked if moving control of the issue from the Senate Energy and Natural Resources Committee chairman to the Majority Leader were good news or bad news.  Katz said, “… in terms of the energy policy bill it might not be so bad from the gas line perspective since Senator Daschle is more inclined to the southern route.”  He said Daschle may feel the best way the process can be accelerated is to coordinate through his office.   From an ANWR perspective, Katz said, “it is a setback since the majority leader did not want to see a bill come out of the committee with ANWR included.” 

In answer to Torgerson’s question about direction of the environmental lobby, Katz said,   “They are very into the ANWR/gas pipeline dynamic.  They are devoting most of their time to ANWR.  We’re hopeful that in terms of the northern route/southern route dichotomy they will be increasing voice their support for the southern route.”  He also observed that he would not be surprised to see them focus on the expedited regulatory process. 

Chairman Torgerson introduced his committee’s legislative advisors, Duncan Smith and C. J. Zane with the firm, Dyer, Ellis and Joseph.  “From our perspective”, Zane said, “the leadership is trying to figure out how to deal with ANWR.”   He said efforts were underway to add ANWR to various other legislative vehicles involving defense, appropriations, homeland defense, etc.  Daschle will put some sort of energy bill on the calendar.  He said that doesn’t mean it will move quickly but that it is available to him should he wish to move it quickly. 

On the contingent liability issue, he said, “I believe Foothills and the withdrawn partners have been working diligently to resolve their issues.”   

Zane spoke more than Katz had about Murkowski’s draft legislation.  “It is not being officially put on the table,” he said.  “For now it is not in play but he is trying to have something available at the right time should the issue be moving on the floor.”  While having not reviewed the bill himself, Zane said the thought the draft would bar the northern route, give preference to the ANGTA regime for a period of time and if an application were not filed by that date, certain other provisions could take place including potential of filing for a second southern route. 

Duncan observed that the last time a majority leader removed a bill from committee and took control of it was in 1960, referring to future President, Senator Johnson.  “It is a rarified situation,” he said, “with everything being fluid and under control of the Majority Leader.” 

Green asked if Zane foresaw a quid pro quo “putting ANWR out of the loop”.  Zane said he could assure the committee that the Alaska Delegation position is, “you don’t get our gas and without ANWR”.   

The afternoon session began with a briefing from Roger Marks (Photo, below with Persily), State Department of Revenue Economist.  Marks briefed the committee on gas pipeline project economic feasibility.  He began with a review of how pricing is established.  “In a market for any commodity the price will equal the lowest cost to produce new supplies,” he said.  Discussing the risk factor of gas projects, he said that pipeline companies building a project are financed based on throughput guarantees.  He gave examples of the enormity of the risk.  Marks briefed members on the function of a ‘discount rate’, and defined components of the ‘hurtle rate’ (the rate of return a company requires to invest).  “A successful project needs to be economically feasible to merit producer support,” he said. 

Marks stated that a pipeline is not riskless.  “It would be foolish for me to try to define a discount rate acceptable to producers” he said but did provide the committee with economic models applying to the northern and southern routes, an LNG project and a GTL project.   

Green asked if the true value of liquids was considered in the models.  He said the producers had told him composition of gas will be about 1080Btu/mcf, but upper Midwest pipelines can accommodate only about 1040Btu/Mcf.  According to the producers, he said, “extracting the residue gas makes the increased value somewhat a wash, according to the best information we have.” 

Representative Hugh Fate (Photo, 9-19-01 meeting) asked if gas eliminating or reducing the price risk would that increase the rate of return and Marks verified that it would but that such scenarios were not included in his models. 

Representative Scott Ogan inquired about extrapolating future prices of gas based on population, power generation, etc.  Marks said there were many variables and much uncertainty.  “As you go from a $2 to a $2.50 well, all the gas between $2-2.50 that was uneconomic before is now economic and it is difficult to forecast that volume or what would happen 10 years from now.”  He said Alaska’s will be “about the most expensive gas on the market when it comes in; if any more gas comes to the market, Alaska’s price could come down.”  He then spoke of “significant competition to Alaska gas”, posed by LNG imports from Asia, Australia, the Middle East and elsewhere.   

On the LNG model, Marks said that traditionally, gas prices in Asia have been based on oil prices.  “The whole gas structure in Asia is being decentralized, deregulated, and becoming much more competitive,” he said.  That puts Alaska at a tremendous disadvantage with gas (from competing areas), he said because it is produced at tidewater without incurring the cost of a pipeline.  “Asia’s contracting needs through the end of the decade have for the most part been met,” he said.   

Torgerson asked about validity of the Port Authority LNG proposal.  Marks said it is based on 6 Bcf/d which represents more North Slope gas reserves than have been discovered.  That line of questioning was brief. 

Regarding a GTL project, Marks said that since the oil pipeline is present and operating, one could begin with a small GTL project and build up.  In Canadian pipeline and LNG project options, he said, “transportation chews up the value”.  For an Alaska GTL project, the variable costs range only from 20-40 cents/barrel, meaning it could have relatively equal footing with competing projects.    

Green asked if the GTL model accounted for a lower oil tariff due to GTL contribution to operation of the pipeline and Marks said it did.  He said for that model he used ExxonMobil’s 1999 technology and that GTL technology has improved even more since then. 

Ed Small (Photo-l, with Revenue Commissioner Wil Condon, 7-01), of Cambridge Energy Research Associates (CERA), retained by the Department of Revenue, spoke by teleconference of the world economy’s “dampening impact on prices going forward”.  He said current US gas storage capacity of 3.1Tcf was within .1Tcf of being full.  He said inventory could be drawn down if we encounter another extremely cold winter but that with such high inventories even less production will be required next year to maintain levels.  He said we may expect a decline in production next year, but that it will be more than offset by the high storage levels.  Small said CERA expected price recovery beginning in 2002 which should result in more production again in 2003. 

Small said Canada was experiencing the same, record storage levels.  Canada has deep drilling rigs that have been contracted over a 3-year period.  So, he said, drilling may be off next year, but not as levels as low as in the lower 48.  Because of the decline in Canadian demand, he said, supply growth in Canada and abundant storage, more gas will be going to U.S. export markets this year and next.  The decline in lower 48 storage will be more than made up for by Canadian imports. 

Recent prices to $3.25 are a little exuberant, he said.  Prices close to $3 would cause conversion to oil when that is an option.  Spring and early summer price levels could move to $2-2.25, Small said.  Assuming economic recovery, we should expect to see prices strengthening to the high $2 level by 3^rd quarter of next year with $3-3.25 in winter period.  “That benchmark should encourage fairly robust drilling in 2003”, he said. 

Small then observed that longer term, there are, “adequate drivers to keep prices above $2.00, but equally important, there are drivers in place to keep prices below $3.00.”  He expects that through 2005, prices are expected to fall in the $2.50-3.00 range. 

Torgerson asked about “windows for sale of Alaska gas”.  Small said, “I think the window has shifted in time by about a year.”  He said the window for frontier gas is in the 2009-10 timeframe, with another opening again in the 2010-12 timeframe.  He said that the term ‘frontier’ applied to gas from the North Slope, Mackenzie Delta, Offshore East Coast, and LNG from many points of origin.  (Note: Small had clearly demonstrated that while there are windows for frontier gas, Alaska must within those windows compete with other frontier sources. –dh)

Torgerson opined that LNG was Alaska’s greatest competitor.  Small gave no comfort, pointing out that virtually all the lower 48 expansion projects would be coming on stream from 2003-05 and that planned Greenfield projects would materialize toward end of the decade.  He pointed out that world instability ushered in after 9-11 could have impact on oil and LNG imports, perhaps affecting the balance of LNG imports later in the decade. 

Torgerson asked for a review of Alaska’s petrochemical potential.  Small said it is a “question of how an Alaskan development can compete globally.  In our opinion Alaska is at a disadvantage because there are other sources of stranded gas which are cheaper, located at tidewater.”   

Torgerson then asked if Small were familiar with GASPEC, an organization rumored to be in process of organizing a gas producer group modeled after OPEC.  Small was not prepared to speak on the subject but agreed to provide the committee with research into the subject. 

Representative John Davies wondered about a scenario in which there were not an economic recovery from recession.  Small said that difficult to predict components of Alaska’s timing window included consumer confidence, consumer spending, corporate earnings, stock prices, housing starts, etc.  He said a scenario for recession through 2004  would push Alaska’s window of opportunity well past 2010. 

Department of Revenue Deputy Commissioner, Larry Persily (Photo, with Marks-right, 10-1-01)  spoke on status of his department’s study conforming to the requirements of SB 158.  While findings are not complete, he did make observations.   He and department consultants have interviewed numerous oil industry executives, individuals, Alaska leaders, bankers, etc.  With those meetings, he said, there is much enthusiasm for the benefits a gas pipeline project will bring the state.  There are also benefits of pipeline ownership.  But the risks, too, are great.  He listed some of the potential risks of state equity involvement, including: cost overruns, FERC may not allow recovery of overrun costs, unanticipated risks, risk of investing when Alaska has limited funds (The Constitutional Budget Reserve Fund and Permanent Fund Earnings Reserve Account are falling precipitously due to both stock market losses and the State’s deficit spending practices).  Then he spoke of price risks; how small swings in market prices could make the tariff insufficient to pay for transporting the gas.  “The decision whether to build the gasline, and who will build it, will come down to a deal over who is willing to share how much of the price risk”, he said.  “Also thinking about risk, does it make sense for the state, which is already heavily dependent on oil revenues, to take a large investment in gas?  Should we instead diversify from the oil and gas sector in generating state revenues?  It’s one thing for a corporation to take a risk that could mean no dividends to shareholders if it goes sour one year.  It’s another thing for a state to take a risk with providing essential public services.  Remember, we expect the Budget Reserve to hit empty in the second half of 2005, and the Permanent Fund earnings reserve has taken a major hit in the stock market.”  Then, he posed the question, “Would the state be better off letting someone else take all the risk, and we then would do what we do best – and that is tax the profits?”   Obtain Persily's complete presentation here.

Torgerson said the committee had similar concerns with state ownership and was looking forward to Persily’s report on other information asked for in 158 as well.

State Pipeline Coordinator, Bill Britt (Photo, Spring-01), updated the committee on progress of Joint Pipeline Office (JPO) operations, staffing and projects.  Primary current work focuses on Foothills Pipe Lines, Ltd. Right of way activity supported by regular meetings.  His office is also coordinating with the Alaska Gas Producers Pipeline Team as they reach the conclusion of their $100 million feasibility study.  Britt has reimbursement agreements with both parties this year and is working with them to define the scope of any work which may be scheduled next year.  He discussed the complex and elaborate coordination efforts with state and Federal agencies.  The JPO is developing a permit directory and flow charts in an effort to organize the huge volume of data.  Next year, he plans to focus on developing similar coordinating relationships with Canadian agencies and hopes to initiate “a reasonably large outreach program”. 

Torgerson asked about Yukon Pacific Corporation and Britt said they had submitted a request for several alignments of the pipeline routing, relatively minor issues.   

Torgerson asked about Foothills’ status.  Britt said the JPO was reviewing many present and earlier filed documents concerning engineering, federal grants of rights of way and other submissions:  JPO was critiquing theses, determining their adequacy, identifying changes needed in response to a changing world and locating gaps in information. 

Torgerson asked why JPO had more attorneys than engineers; Britt said that attorneys were easier to find.  

U.S. Minerals Management Service geologist, John Larson, discussed resource management and minerals leasing in Cook Inlet OCS areas.  He said 2004 & 2006 lease sales are being prepared in federal areas in which there is greatest interest expressed by companies.  He discussed Cook Inlet proven and estimated reserves in Federally controlled areas and the need for new supplies of gas in Southcentral Alaska for residential and industrial use. 

Please see the Committee’s news account of the 11/7 meeting here.

(While the author endeavors to produce accurate reports from meeting notes, he encourages all persons and offices named in this and other articles and readers-at-large to provide additions/corrections to ensure validity of the historical record.  -dh   ...Draft Revision: 11-08-01)

After taking testimony from several witnesses, the Joint Committee moved passage of amendments to gas pipeline legislation (Alaska Natural Gas Pipeline Act of 2001, {ANGPA} the measure recommended by Alaska gas producers) for U.S. Senate Energy Committee consideration (More on these later).  This follows a recent announcement Governor Tony Knowles made concerning amendments he is proposing for U.S. Senate Consideration (See our  9-12-01 story).  Committee Chairman John Torgerson noted that Legislative opinion was necessary insofar as he may provide testimony to the Senate Energy Committee, tentatively on October 2.  He commented on the lack of coordination between the Legislature and Governor’s office on this matter.  In later testimony, Alaska’s Washington representative John Katz offered a “personal observation” that during Congressional action on the Alaska National Interest Lands Conservation Act, state interests were not uniform at first and that as the state became more unified the state’s influence grew.  He said he would do his best to assist in coordinating the Administration’s position with the Legislature’s in this case.  Committee consultant, Patrick Coughlin (Photo-right, with Rep. Mike Chenault listening) provided a section analysis of the proposed ANGPA, explaining relevance of the sections and points where it deviates from the Alaska Natural Gas Pipeline Act of 1976 {ANGTA; Click here for the analysis}.  Rep. Scott Ogan observed that passage of the act could supercede the Alaska legislature’s passage of SB 164 that banned the Northern Route.  Chairman Torgerson noted that when Alaska SB 164 was passed, prohibiting the northern route, it was not in conflict with Federal legislation in that ANGTA had proscribed the highway route in 1976.  Rep. John Davies observed that the ‘benefits’ of the proposed ANGPA would not apply to a tidewater LNG project as written.  The Committee welcomed Joe Marushack (Photo-left) and Ken Konrad (Photo-right) representing the Alaska Gas Producers Pipeline Team.  In their overview, they reviewed cost, price, financial and regulatory risks.  They reviewed the proposed ANGPA, emphasizing that it provides an expedited regulatory process for any viable gas pipeline project and does not preclude a project proceeding under ANGTA.  They argued that the competing projects and market structures were different in ANGTA’s 1976 era than today, justifying the updated ANGPA of 2001.  Marushack said that the, “…main point of the enabling legislation is to make sure the lowest cost, lowest tariff project can be approved.  Intense questioning followed.  Ogan, Davies and other members questioned the witnesses on earlier statements to the effect that if government banned an optional route the study effort could cease.  Konrad referred to ‘miscommunication’ with a reporter, saying that, “We’re not going to do a project in Alaska or Canada that Alaska or Canada does not want.”  Marushack responded that the producers couldn’t justify spending money on a project, “…we can’t see an end to,” and that the producers don’t think now is the right time to make a decision, since all the information is not in.   It is worth noting that in previous presentations provided various state officials, the producers have said since August that, “No route decisions have been made; options must not be mandated,” and governments can help with such issues as fiscal certainty, being supportive and not foreclosing on options.  The presentations point out that continued work by the joint producer group can only be justified with Federal enabling legislation, progress toward fiscal certainty in Alaska, and if a route is not mandated.   Rep. Hugh Fate asked why passage of ANGPA would not affect marketing of state royalty gas (Photo, left-right: Fate, Porter, Chenault).  Konrad noted that when ANGTA was passed there were regulated bundling provisions in law which no longer exist and that today any shippers, including the state, are free to market their gas.  House Speaker Brian Porter observed and Marushack verified that  ANGPA  doesn’t exclude other projects and allows anyone to file a project application.  In response to questioning by Vice Chairman Joe Green, Marushack said that if ANGPA is not passed the joint team effort would not continue.  Chairman Torgerson then welcomed Foothills Pipe Lines, Ltd.’s John Ellwood, who testified via telephone that ANGPA would “…raise new and perhaps unforeseen difficulties”, that it is unnecessary and that Foothills is “…ready to work with all stakeholders to modify ANGTA…,” to meet current needs.  Torgerson asked Ellwood if he would like to comment on producer testimony and if he believed ANGTA had given his company an exclusive franchise to build the gas pipeline.  Ellwood said he believed ANGTA’s intent was for his project to be the first project.  Torgerson expressed concern about unresolved “withdrawn partner” issues and costs which have been rumored to be as much as $4 billion, potentially rendering a project uneconomic.  Ellwood said that he was expecting “…in the very near future to have the issue of withdrawn partners completely off the table.”   Ellwood said he was “moving expeditiously to deal with that….  There will be no $4 billion charge to anybody.”  Torgerson continued, asking if the $4 billion will not be built into the tariff.  Ellwood said, “We are not in this project to recover historic costs…  We will seek to negotiate some fair value for…goodwill.”  Foothills attorney, J. Curtis Moffatt (Photo-right, see 9-10-01 report), added that, “We find the legislation proposed by the producers to be absolutely unnecessary.”   Davies wondered when Foothills would produce offers to the producers for gas purchase.  Ellwood said Foothills is a transportation company and would see the producers or others as contracting with Foothills to transport the gas to the gas purchasers.  The Chairman welcomed Mark Hanley of Anadarko to the witness chair (Report in yesterday’s news, below).  Chairman Torgerson called on Alaska Port Authority attorney, Bill Walker (Photo-left),  who reported that, “Our economic model shows there is a fantastic economic opportunity in using the ‘Y’ line approach.”  He also discussed his project's “concerns” for the northern route and proposed ANGPA legislation.  In public testimony, LNG advocate, Scott Heyworth reported that the Lieutenant Governor had certified his petition (See our report, here).  He spoke enthusiastically about public response to the petition.  “Some of my petitions have received 600 names in the last four days.  None of these other projects advocates gas to other Cook Inlet areas,” he said.  “I’m not opposed to the ‘Y’ line through Canada, but that should come after we build the LNG line to Valdez.”  Ogan observed that the “number 1” comment he hears on the streets and in the grocery store, is “Lets build an all Alaska line.”  Heyworth agreed that his reception was similar, that he had obtained 140 signatures and only one refusal the other day in one hour.  Former Arco Alaska, Inc. president, Harold Heinze (Photo-right), counseled the Committee that if a new project were built not under ANGTA, it would require a new treaty, and new protections of Alaska interests already a part of ANGTA.  He said he has heard much from the producers about “lowest costs”, but that the State’s interests are broader.  He offered an argument whereby Alaska’s interests could be maintained by moving Mackenzie Delta gas westward and down the southern route from Prudhoe Bay.  Katz, on the line from Washington, reviewed the accelerated depreciation, construction tax credit and gas price floor, which the Governor suggests as incentives for building the southern route.  Green expressed some concern that if the state asked for Federal concessions, the Congress might in return ask for Alaska to offer financial incentives.  Katz replied that a Senate Energy Committee Member had already said there could be some interest in knowing of the state’s interest in changing the fiscal regime.  He concluded that he’s not gotten the impression Congress will ask the state for quid pro quos in return for any incentives it might offer.  The Chairman asked Konrad and Marushack to return to discuss a question regarding producer ownership of a gas pipeline.  Under a change to ANGTA the producers were allowed a 30% equity interest with more possible following Federal approval.  But today’s open access procedures do not require the same ownership limitations.  Torgerson observed that, similarly, under an ANGTA built project today, there would be no limitation on producer ownership.  The Chairman then provided the committee with his suggested responses to the producer-supplied draft of the ANGPA, as follows:

• ANGTA 1, would proclaim that ANGTA is the prevailing law with respect to a gas transportation system.
• ANGTA 2 would prohibit the northern route.
• ANGTA 3 would not require downstream producers to have Prudhoe Bay conditioning plant costs included in their tariffs.
• ANGTA 4 would eliminate the ANGTA-required Dempster Lateral route to tap Mackenzie Delta gas, arguing that the route is obsolete by virtue of the Mackenzie Valley Pipeline project now being considered in Canada.
• ANGTA 5 suggests a process for limiting funds that the withdrawn partners of the approved transportation system can collect in a tariff.

Torgerson provided other proposed committee recommendations that he could present to the Senate Energy Committee in early October with Joint Committee approval. 

• Proposal #1 assured state access for royalty gas under joint FERC/Regulatory Commission of Alaska oversight.
• Proposal #2 requests Congressional authority for a gas pipeline to move through Denali national Park along an Alaska Railroad easement.
• Proposal #3 asks for development of a formula for setting different tariffs applying to natural gas distribution points along the route.
• Proposal #4 responds to the Anadarko concern by asking that, “gas producers that do not have an ownership interest in the pipeline have fair and reasonable access to space on the pipeline and the ability to obtain expansion of the pipeline".

In an intense discussion period, Sen. Donny Olson (Photo-left) suggested that the name of the Alaska Eskimo Whaling Commission be used in language prohibiting the northern route.  After a series of fairly minor amendments, not without debate, the vote was taken and the suggestions for Congressional action passed unanimously.

The Committee has provided Northern Gas Pipelines with its final recommendations to Congress, which we offer for your review here.  -dh