Legislature(2003 - 2004)

01/21/2004 03:35 PM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
        SB 241-APPROP: NATURAL GAS DEVELOPMENT AUTHORITY                                                                    
                                                                                                                                
SENATOR  GENE THERRIAULT,  sponsor  of SB  241, informed  members                                                               
that SB 241 would appropriate  the remaining $2.15 million of the                                                               
Alaska Natural Gas Development  Authority (ANGDA) board's request                                                               
for $2.5 million made last year.  He told the ANGDA board members                                                               
to be prepared  to justify the need for the  appropriation to the                                                               
legislative committees.  He noted  that [after ANGDA  was created                                                               
by initiative]  last year, the Legislature  appropriated $150,000                                                               
to the ANGDA  board to pull the organization together  and make a                                                               
proposal  for additional  money. He  worked with  members of  the                                                               
board and the administration to  secure another $200,000 from the                                                               
Legislative  Budget and  Audit Committee  to undertake  a benefit                                                               
analysis of  in-state use.  His primary  interest is  to quantify                                                               
the economic  benefit to Alaska  citizens if North  Slope natural                                                               
gas is  made available through  any delivery system.  He believes                                                               
that information  would be useful  to the  Legislature regardless                                                               
of  the entity  involved  in  a natural  gas  project. ANGDA  has                                                               
entered into a contract to  gather that information with Northern                                                               
Economics, Inc.                                                                                                                 
                                                                                                                                
SENATOR THERRIAULT told members that  if the Legislature is asked                                                               
to enact tax deferrals or relief  of any kind that would cost the                                                               
citizens  of the  state, the  Legislature should  know the  value                                                               
that will  accrue to the state  to offset that cost.  He believes                                                               
the Legislature should ask ANGDA  board members to be prepared to                                                               
determine  how it  can partner  with any  project to  improve the                                                               
project's  economics through  ANGDA's  tax exempt  status if  the                                                               
state  receives  a  proposal  to  take  the  resource  to  market                                                               
overland through Canada. He would  like to know whether ANGDA can                                                               
help  with the  economics of  an overland  project. He  suggested                                                               
that ANGDA  might own the line  from the North Slope  to Delta to                                                               
tidewater, thereby  lowering the  cost of the  infrastructure. He                                                               
said several legislators from the  Southcentral area of the state                                                               
are  interested  in  accessing natural  gas,  which  ANGDA  board                                                               
members have  discussed. That question  could also be part  of an                                                               
in-state benefits analysis.                                                                                                     
                                                                                                                                
SENATOR  THERRIAULT  told  the committee  that  the  ANGDA  board                                                               
provided a  spreadsheet, with a  timeline, that describes  how it                                                               
proposes to use the appropriation.   He said as Senate President,                                                               
he  referred  the  bill  to  the  Senate  Resources  and  Finance                                                               
Committees. He expects  the Senate Finance Committee  to focus on                                                               
the  cost  justification.  He asked  that  the  Senate  Resources                                                               
Committee focus on how the ANGDA  entity can be used to help with                                                               
the economics of  any proposal, how it can work  as a stand-alone                                                               
project and  how much that  will cost. He informed  the committee                                                               
that  he  and  ANGDA  board  members  were  available  to  answer                                                               
questions.                                                                                                                      
                                                                                                                                
CHAIR OGAN announced that Senator  Seekins joined the committee a                                                               
while ago. He then noted  that committee members had no questions                                                               
of the sponsor and asked Mr. Heinze to testify.                                                                                 
                                                                                                                                
MR.  HAROLD  HEINZE,  Chief  Executive   Officer  of  ANGDA,  was                                                               
testifying   before  the   committee   via  teleconference   from                                                               
Anchorage. He  told members he  has been employed by  ANGDA since                                                               
July of  2003. He  introduced ANGDA  board members  Bob Favretto,                                                               
Dan Sullivan, John  Kelsey, Scott Heyworth and  Andy Warwick (who                                                               
was   participating  via   teleconference  from   Fairbanks).  He                                                               
explained  that  ANGDA is  a  public  corporation of  the  state,                                                               
meaning it functions in some ways  as a state agency and in other                                                               
ways  as  a  private  agency.  He  referred  to  a  handout  that                                                               
justifies ANGDA's $2.15 million request and made the following                                                                  
comments about its three main points:                                                                                           
                                                                                                                                
     ...the benefits  to the State  of Alaska  and basically                                                                    
     the ballot  initiative that set  up the  Alaska Natural                                                                    
     Gas  Development  Authority  passed  by  a  very  large                                                                    
     percentage. If you  ask people what they  voted for and                                                                    
     why  they voted  so strongly  for  it, one  of the  two                                                                    
     answers you get is that  the people lack the confidence                                                                    
     that whatever is  done with the North Slope  gas - that                                                                    
     it would derive direct benefits to Alaska.                                                                                 
                                                                                                                                
     So,  one of  the  first  focuses of  the  board was  to                                                                    
     identify those  potential benefits and you  should have                                                                    
     in  front  of  you   somewhere  an  exhibit  that  says                                                                    
     'Benefits  to Alaskans'  and ...  if you  look at  that                                                                    
     chart  in  some detail,  you  will  find that  we  have                                                                    
     identified  ways  that  Alaska gas  could  be  directly                                                                    
     impacting probably 99 percent  of the population of the                                                                    
     state. We  think that  is an  extraordinarily important                                                                    
     focus for whatever we do.                                                                                                  
                                                                                                                                
     What we found is that,  as we looked at those potential                                                                    
     uses of  gas in  the state, that  there was  not enough                                                                    
     opportunity in terms of that  volume to assure that the                                                                    
     project   or   delivering   that  gas   was   economic.                                                                    
     Basically, while  Alaska uses  are important,  they are                                                                    
     so  small  in volume  you  cannot  construct any  major                                                                    
     project that delivers them because of the small size.                                                                      
                                                                                                                                
     We were  able then  to kind  of look  at how  a project                                                                    
     like this,  in terms of  an export project,  would work                                                                    
     with  those Alaska  benefits and  that synergy  is very                                                                    
     important  and that  was  what  led us  to  look at  an                                                                    
     export project as our focus.  Once you start to look at                                                                    
     that export project, then a  lot of the benefits became                                                                    
     easy  to identify  and frankly  become  fairly easy  to                                                                    
     deliver.                                                                                                                   
                                                                                                                                
     The second  thing we did  in the benefits area  is that                                                                    
     we  realized   that  the  current  analysis   of  major                                                                    
     projects,  in particular  the gas  projects in  Alaska,                                                                    
     was very limited. Generally people  have talked only in                                                                    
     terms of  investor type  measures -  rate of  return or                                                                    
     return on  investment or even present  worth. And those                                                                    
     are fine for the people  that are actually investors in                                                                    
     the  project but  they  do not  portray  in anyway  the                                                                    
     value to Alaska of a project.                                                                                              
                                                                                                                                
     So people then turned around  and they started to add a                                                                    
     measure of wellhead value or  basically revenues to the                                                                    
     state as  a measure of  the benefit. And what  we found                                                                    
     was that that really  is a very unsophisticated measure                                                                    
     of  the total  impact  on Alaskans  of  these kinds  of                                                                    
     major  projects.  So  we  have  contracted  for  -  and                                                                    
     working  away  already -  is  a  contractor building  a                                                                    
     transparent  publicly  usable  spreadsheet  model  that                                                                    
     will  integrate  all  of the  benefits,  including  the                                                                    
     economic impacts, the job impacts,  the reduced cost of                                                                    
     heating homes and  so on, etcetera -  everything we can                                                                    
     think of  that is a  potential benefit of one  of these                                                                    
     projects and  integrate it into one  measure. When that                                                                    
     project is finished  in the middle of  March, then that                                                                    
     result will  become available for use  in analyzing any                                                                    
     and all projects.                                                                                                          
                                                                                                                                
     We will certainly  continue on to do  further work with                                                                    
     the model  to input,  in particular,  specific benefits                                                                    
     we  think  we  can  attribute   to  a  group  like  the                                                                    
     Authority. For instance, the  Authority has the ability                                                                    
     through  contracting,  through  work  rules  and  other                                                                    
     things  to  cause things  to  be  built with  a  higher                                                                    
     Alaska hire percentage than  maybe some other entities.                                                                    
     And we  want to understand  what the impact of  that is                                                                    
     in terms  of total  benefits to  Alaska. We  have every                                                                    
     reason  to believe  it will  be significant  but as  we                                                                    
     finish our work  in June, that full  result will become                                                                    
     available.                                                                                                                 
                                                                                                                                
     The second  basic area that ANGDA  makes a contribution                                                                    
     in  has to  do with  what I  call broadly  the business                                                                    
     structure issues. This is to  recognize that one of the                                                                    
     very powerful things we discovered  very quickly, as we                                                                    
     started  to look  at  how the  Authority  could do  its                                                                    
     business  and  what  powers and  opportunities  it  was                                                                    
     given, was  we realized in performing  a public service                                                                    
     of transporting a public resource,  was tax exempt. And                                                                    
     we then  have looked  at business structures  that will                                                                    
     allow us to pass that  tax avoidance on to lowering the                                                                    
     cost   of  service   of   delivering   the  gas.   That                                                                    
     contribution  is  probably  more significant  than  any                                                                    
     other  single factor  that has  ever been  discussed in                                                                    
     terms of making  these projects work and  I'll show you                                                                    
     some  numbers   in  a  little   bit  that   maybe  will                                                                    
     illustrate  how much  that is  but I  would ask  you to                                                                    
     realize  that  is   an  extraordinarily  important  and                                                                    
     powerful tool.  It is  a tool that  can be  applied not                                                                    
     only to  the LNG  project, but  it is  a tool  that can                                                                    
     influence the  marketability of North Slope  gas to any                                                                    
     market under any circumstance.                                                                                             
                                                                                                                                
     Now there is a lot we  have to understand about the dos                                                                    
     and don'ts  of how  to keep that  tax advantage.  But I                                                                    
     assure you it is  extraordinarily important in terms of                                                                    
     the  totality  of  what the  state  has  to  contribute                                                                    
     towards bringing that public resource to market.                                                                           
                                                                                                                                
     We also  obviously, as part  of that, will look  at the                                                                    
     funding and  a large number  of other issues of  who we                                                                    
     can relate to, how we can  relate to them, and how best                                                                    
     to structure  our business. These  are issues  that are                                                                    
     of billion dollar impact so  we have tried to hire some                                                                    
     of the  best people we  can find anywhere to  advise us                                                                    
     on the structure issues.                                                                                                   
                                                                                                                                
     And  then finally,  we  talked  specifically about  the                                                                    
     project  that we  are working  on, which  is an  export                                                                    
     project. I have provided in  the information I gave you                                                                    
     a  table  that  shows  the ANGDA  project  concept  and                                                                    
     costs,  which shows  basically  four different  project                                                                    
     elements:  a  treatment plant  on  the  North Slope,  a                                                                    
     pipeline, a  liquefaction plant,  and the  LNG tankers.                                                                    
     The  total  cost  of those  elements  is  $12  billion.                                                                    
     Again, this is  based upon fortunately a  lot of public                                                                    
     work that is  available as a result  of Yukon Pacific's                                                                    
     efforts and  frankly because of some  results that have                                                                    
     been released  by other people. It  does not represent,                                                                    
     at this  point, any  detailed engineering. There  are a                                                                    
     lot of  improvements, we believe,  that can be  made in                                                                    
     the  quality  of  that   cost  estimate.  However,  our                                                                    
     opinion at this point is  that the estimate is probably                                                                    
     high  rather   than  low  and,   again,  each   of  the                                                                    
     individual  elements  there  is  part  of  our  funding                                                                    
     requirement to  refine the  quality of  those estimates                                                                    
     and,  in particular,  look  for  the opportunities  for                                                                    
     cost savings.                                                                                                              
                                                                                                                                
     In this  case, the  money you'll see  is barely  over a                                                                    
     million dollars to accomplish that.  You all are aware,                                                                    
     for  instance,  the  producers  have  recently  done  a                                                                    
     study. They spent  over $100 million to look  at a high                                                                    
     quality  cost estimate  for their  project. To  even do                                                                    
     this estimate in  a feasibility phase if I  was back in                                                                    
     [the] private sector,  I would estimate the  cost to do                                                                    
     this  at 10  or  20 or  30 times  more  than what  I've                                                                    
     allowed for  here. One  of the reasons  we can  do this                                                                    
     for a  lesser cost frankly  is that  there is a  lot of                                                                    
     information  available to  us. Yukon  Pacific has  been                                                                    
     more  than willing  to share  information  with us.  We                                                                    
     also get  some very free  expert advice from  a company                                                                    
     called  Mitsubishi   and  that   allows  us   to  place                                                                    
     confidence  in some  of  these  numbers without  having                                                                    
     spent a lot of money.                                                                                                      
                                                                                                                                
3:55 p.m.                                                                                                                       
                                                                                                                                
     If you  take the $12  billion as a starting  point, and                                                                    
     you start to look at  the economics of the project, the                                                                    
     first calculations I made are  illustrations on a table                                                                    
     called 'NOTIONAL Cost of  Service Comparison' and these                                                                    
     numbers are  a single value  expression of the  cost of                                                                    
     moving North Slope gas ... to  a port in, say, the West                                                                    
     Coast. The first  entry in the table is  $2.90. That is                                                                    
     the  number I  would calculate  if I  was a  commercial                                                                    
     business investing in a high  risk project such as this                                                                    
     kind of a transportation  project and expecting to earn                                                                    
     a  fairly high  rate  of  return. And  what  I got  was                                                                    
     $2.90.                                                                                                                     
                                                                                                                                
     Now the way you use these  kinds of numbers is - to get                                                                    
     you  a rough  feel of  where you  are in  terms of  the                                                                    
     market and  everything else -  if, for instance,  I was                                                                    
     to assume  the market at  the wellhead price was  $1, I                                                                    
     would add $1 to the $2.90  and that would say the value                                                                    
     delivered  or the  value I've  invested in  getting the                                                                    
     gas to  market in,  say, Long Beach,  is $3.90  - $2.90                                                                    
     plus  $1. Well,  if you  looked at  the marketplace  in                                                                    
     Long Beach today, it would  be something over $5. Well,                                                                    
     you  yell Hallelujah  at that  point  because that's  a                                                                    
     good  deal  because  you're getting  $5  for  something                                                                    
     that,  including your  return  on  your investment  and                                                                    
     everything, you spent  $3.90. Unfortunately the problem                                                                    
     is that  people don't  project that  the price  in Long                                                                    
     Beach will  be $5 for  an extended period of  time. The                                                                    
     price they do  project is much more in the  range of $3                                                                    
     to $3.50. And,  again, if you ask a lot  of experts and                                                                    
     poll a  lot of  folks, very  few people  predict prices                                                                    
     below $3 but  most would not predict  prices over $3.50                                                                    
     in the long term.                                                                                                          
                                                                                                                                
     So if  I was  a commercial  company, I  would conclude,                                                                    
     based  on [those]  kinds of  numbers and  that kind  of                                                                    
     thinking,  that the  project is  not economic.  That is                                                                    
     what basically  ConocoPhillips told us in  July of last                                                                    
     year and that's what led  to this calculation because I                                                                    
     said somehow  that isn't reflecting what  the Authority                                                                    
     would do.                                                                                                                  
                                                                                                                                
     That leads  to the second  column. As a  public service                                                                    
     transporting  the  gas,  we are  not  taxable.  If  you                                                                    
     eliminate  the tax,  the number  $2.90 drops  to $2.20.                                                                    
     And now  if you  add a  $1 wellhead  value to  that and                                                                    
     it's  $3.20   sitting  in  the  port   of  Long  Beach,                                                                    
     [indisc.]  I'd be  very happy  today with  $5 but  I am                                                                    
     very  resilient  even  in  a  world  where  prices  are                                                                    
     ranging between $3  and $3.50. And then I  did one more                                                                    
     calculation to try  and test what at the  extreme - and                                                                    
     I say  at the extreme  the Authority  could do -  if it                                                                    
     wanted  to lower  its cost  structure  to the  absolute                                                                    
     lowest  number  it  could visualize.  And  I  made  the                                                                    
     assumption that  instead of building a  pipeline, we're                                                                    
     building a  highway for  gas, because  when we  build a                                                                    
     highway in the state of  Alaska, we don't ask ourselves                                                                    
     the  rate  of  return.  We believe  that  the  economic                                                                    
     activities we generate by connecting  A and B is worthy                                                                    
     of  the investment  and all  we require  is that  we be                                                                    
     able to service the debt of  the bond that we built the                                                                    
     highway  with. And  if  we took  that  approach on  the                                                                    
     pipeline,  now  our cost  of  service  number drops  to                                                                    
     $1.65. And  that is important  because when we  look at                                                                    
     all the  other projects that  we would have  to compete                                                                    
     with, $1.65 is superior to all those projects.                                                                             
                                                                                                                                
     So that  says, at  the extreme,  the Authority  has the                                                                    
     ability to compete even in  a highly competitive world,                                                                    
     even in a world where  we have some disadvantages. But,                                                                    
     the tremendous advantage  of an infrastructure approach                                                                    
     or approach  that could not  pay federal income  tax is                                                                    
     very significant.                                                                                                          
                                                                                                                                
4:00 p.m.                                                                                                                       
                                                                                                                                
CHAIR OGAN  said he has listened  to a lot of  energy analysts at                                                               
Energy Conference meetings this year and  heard that a lot of gas                                                               
is closer  to tidewater  with a much  cheaper wellhead  price. He                                                               
asked about the cost of building a liquefaction plant.                                                                          
                                                                                                                                
MR.  HEINZE said  in  this  case, ANGDA  included  a  cost of  $4                                                               
billion. However, a modern-designed plant would cost less.                                                                      
                                                                                                                                
CHAIR OGAN said  he was told the cost was  about $1.5 billion but                                                               
suggested  the  cost  may  be   cheaper  in  some  other  foreign                                                               
countries. He then  stated, "The overriding consensus  of all the                                                               
talking heads  in the oil industry  and the analysts is  that the                                                               
world is  awash in LNG  right now."  He expressed concern  that a                                                               
stand-alone  project might  not  be as  economical  as a  project                                                               
designed around the  hub concept. He said what  is most important                                                               
now is that ANGDA justify why it needs the money.                                                                               
                                                                                                                                
MR. HEINZE stated  that ANGDA is very sensitive to  the fact that                                                               
the LNG project is one that  would have to compete in the market.                                                               
However, that  can be  said about any  project that  moves Alaska                                                               
gas to market.  The [state] has not had  any extensive discussion                                                               
about  the  market  penetration  issues related  to  any  of  the                                                               
projects. He  pointed to  two key slides  he included  in ANGDA's                                                               
briefing package.  One shows the Asia-Pacific  key LNG suppliers,                                                               
which proves Chair  Ogan's point that a lot of  gas is available.                                                               
That gas  is controlled  by entities  such as  Shell, ExxonMobil,                                                               
BP, Chevron Texaco  and ConocoPhillips. He told  members the five                                                               
"mega-majors" have, by merger, made  it clear that they intend to                                                               
be  very  dominant  factors  in   LNG.  Within  the  last  month,                                                               
ExxonMobil  and  ConocoPhillips  announced major  investments  in                                                               
Qatar.  In  addition,  BP  has   announced  major  supplies  from                                                               
Indonesia  to the  West Coast.  The  market is  very dynamic  and                                                               
competitive.                                                                                                                    
                                                                                                                                
MR. HEINZE  said the basic fundamentals  of what he is  trying to                                                               
describe are  illustrated on the next  table, entitled 'Estimated                                                               
Cost of Service  Comparison to the West Coast  of North America,'                                                               
produced by ConocoPhillips.  ConocoPhillips broadly explained how                                                               
it calculated the  numbers. The table shows  the prices delivered                                                               
from various countries  to the West Coast vary from  $2.20 at the                                                               
low end to $2.90  at the high end for Alaska LNG.  He said he has                                                               
already discussed  how ANGDA can  very successfully  compete with                                                               
any of  those prices. He said  he is not prepared  at this moment                                                               
to  prove  that but  the  information  available provides  enough                                                               
insight with  which to determine  that ANGDA has  the opportunity                                                               
to compete.  The people  who will  ultimately make  that judgment                                                               
are not  in Alaska;  they are  most likely  the bankers  who will                                                               
decide whether to loan the state  the money and they will provide                                                               
the test of whether the project economics are there.                                                                            
                                                                                                                                
4:05 p.m.                                                                                                                       
                                                                                                                                
SENATOR  DYSON   asked  Mr.  Heinze   to  address   the  problems                                                               
associated with  the Jones Act and  the ability to build,  buy or                                                               
rent tankers in this world market.                                                                                              
                                                                                                                                
MR. HEINZE said that ANGDA has  taken the view that the Jones Act                                                               
is an  issue that  must be  dealt with. It  creates a  problem in                                                               
that the  portion of gas shipped  to the West Coast  must move in                                                               
more expensive tankers.  The question of how  much more expensive                                                               
those tankers  will be  is open. The  Jones Act  clearly mandates                                                               
that the tanker  hulls must be U.S. built; it  is also clear that                                                               
the tankers' interiors could be  installed at a foreign shipyard.                                                               
ANGDA has looked  at ways to reflag some of  the older U.S. built                                                               
tankers and  at other  logistical approaches  to the  problem. He                                                               
offered to  furnish the committee  with papers made  available to                                                               
ANGDA by the Attorney General's  Office that illustrate the range                                                               
of  solutions  available. He  said  he  has not  concluded  which                                                               
solution is best. He pointed out:                                                                                               
                                                                                                                                
     In any  case, the Jones  Act impacts $2 billion  of the                                                                    
     $12 billion investment and even  when I paint the worst                                                                    
     case of the Jones Act, it  won't add but a half billion                                                                    
     dollars to the cost estimate  ... We don't have to have                                                                    
     all the tankers be from American shipyards.                                                                                
                                                                                                                                
He said  he does not see  the Jones Act issue  as threatening the                                                               
economic viability of the project.                                                                                              
                                                                                                                                
CHAIR OGAN  asked Mr. Heinze if  his assumption of $1  is a price                                                               
the gas producers would be willing to accept.                                                                                   
                                                                                                                                
MR. HEINZE said  he would not negotiate price in  public for many                                                               
reasons. In  addition, ANGDA was  given the authority to  buy and                                                               
sell  gas if  that is  necessary. At  this point,  ANGDA has  not                                                               
determined, as a  matter of business structure,  whether it would                                                               
be  a  transporter of  gas  or  a buyer  and  seller  of gas.  He                                                               
referred to the  conceptual schedule and pointed out  that one of                                                               
the first things  to happen when ANGDA  determines feasibility is                                                               
that  an open  season  would be  declared.  ANGDA will  determine                                                               
whether it needs to be a buyer  and seller of gas only after that                                                               
occurs.  It is  possible that  ANGDA could  propose such  a great                                                               
project that all  gas owners would rush  forward, requiring ANGDA                                                               
to consider  expanding the gas line.  He said he used  $1 because                                                               
of the  ease of the arithmetic  but he has reason  to believe the                                                               
producers turned  down an  offer of 75  cents and,  because $1.35                                                               
showed up  in the national  energy legislation, he  believes that                                                               
is  the  high  number  an  investor would  consider  in  a  risky                                                               
project. If  ANGDA were to offer  a price for a  no-risk project,                                                               
he  suspects it  would be  lower than  $1. That  is how  he would                                                               
approach the problem if ANGDA were the buyer.                                                                                   
                                                                                                                                
CHAIR OGAN said  he has been hearing, "Build it  and they'll sell                                                               
you the gas."                                                                                                                   
                                                                                                                                
MR.  HEINZE said  the project  schedule illustrates  some of  the                                                               
more  project-oriented   steps  necessary   to  move   through  a                                                               
feasibility phase  that allows one  to obtain funding.  The first                                                               
step involves  the $2.5 million  appropriation that will  pay for                                                               
the  feasibility study  to be  completed  by June  of 2004.  That                                                               
study  will  provide  enough   information  from  which  Governor                                                               
Murkowski, the  Legislature and the public  can determine whether                                                               
this project is  worthwhile. If the project is deemed  as such, a                                                               
series  of things  will  happen over  the  subsequent 24  months.                                                               
ANGDA would sell  $200 million worth of  financial instruments to                                                               
investors  who are  willing to  accept a  lot of  risk. The  $200                                                               
million would be  used to determine who wants to  ship on the gas                                                               
line,  the  details  of  the   design,  the  necessary  financial                                                               
arrangements,  the  required  permits and  other  information  to                                                               
present to the investment banks who  do not want to take risk and                                                               
would sell $10 million worth of bonds.                                                                                          
                                                                                                                                
MR.  HEINZE  said  if  ANGDA  receives  this  appropriation,  its                                                               
milestone will be the June  report because unless ANGDA, Governor                                                               
Murkowski, the  Legislature, and  the public  see the  project as                                                               
feasible and  want to go forward,  there will be no  way to raise                                                               
money.                                                                                                                          
                                                                                                                                
SENATOR  LINCOLN asked  Mr.  Heinze if  ANGDA  has developed  any                                                               
criteria  to  be  used  by  the  four  groups  to  determine  the                                                               
feasibility of the project. She  also asked whether his reference                                                               
to the  public means  he is  proposing that  the question  be put                                                               
before the voters.                                                                                                              
                                                                                                                                
MR. HEINZE  said the bill contains  a list of 11  requirements to                                                               
be  addressed  in the  development  plan.  He believes  the  list                                                               
contains  the kinds  of things  necessary to  use as  a decision-                                                               
making tool. Regarding feedback from  the public, he believes the                                                               
governor   and  Legislature   will  seek   feedback  from   their                                                               
constituents. In  addition, any broad consensus  shows up quickly                                                               
through the  media. In addition,  ANGDA has considered  issuing a                                                               
grubstake bond certificate and  offering Alaskans the opportunity                                                               
to  participate in  the  high-risk investment  group.  He said  a                                                               
recent  poll conducted  by a  local  television station  revealed                                                               
that 40 percent of those polled  believe the gas line is the most                                                               
important issue before the Legislature this session.                                                                            
                                                                                                                                
SENATOR LINCOLN asked  how ANGDA proposes to get  the approval of                                                               
the Legislature.                                                                                                                
                                                                                                                                
MR.  HEINZE  said  if  Governor  Murkowski  and  the  Legislature                                                               
believe this to  be a very important topic, they  might convene a                                                               
special session. He  then said the last part  of his presentation                                                               
involves  the funding  plan,  which is  broken  into three  major                                                               
categories.  The  ANGDA  category  represents  the  cost  of  the                                                               
Authority itself. The business contract  category is comprised of                                                               
contractors  who  will  answer  the  business  related  questions                                                               
regarding taxation,  marketing, financing and the  economics. The                                                               
last category represents those contractors  that would be looking                                                               
at project related  issues. He noted ANGDA has  already spent the                                                               
$350,000  it was  authorized  to spend  on  contracts. A  minimal                                                               
amount of the additional $2.15  million would go to ANGDA itself;                                                               
the  vast majority  will  be spent  on  contracts, primarily  for                                                               
engineering design. He said the  contract money would be spent by                                                               
June of this  year. The business contractors  will provide advice                                                               
that is relevant to any  project, any structure, and any business                                                               
aspect  of ANGDA.  The project  contracts will  be a  little more                                                               
specific and  will focus on  the design  aspect and the  route to                                                               
Valdez.                                                                                                                         
                                                                                                                                
4:20 p.m.                                                                                                                       
                                                                                                                                
SENATOR  LINCOLN  said  she  was   just  notified  that  Governor                                                               
Murkowski  will be  holding a  press conference  tomorrow on  the                                                               
natural gas  pipeline. She asked  if that press conference  is in                                                               
conjunction with what ANGDA is doing.                                                                                           
                                                                                                                                
MR.  HEINZE  said he  knows  no  more  than Senator  Lincoln  and                                                               
presumes  the press  conference  is about  potential sponsors  of                                                               
another  gas  pipeline.  He  emphasized  that  ANGDA,  since  its                                                               
inception, has  looked at  ways to  make its  project fit  with a                                                               
highway  project;  it  sees  itself  as  compatible  and  not  in                                                               
competition with a gas line that follows the highway route.                                                                     
                                                                                                                                
TAPE 04-1, SIDE B                                                                                                             
                                                                                                                                
CHAIR OGAN announced that he  expects to receive information from                                                               
the Alaska Oil and Gas  Conservation Commission (AOGCC) next week                                                               
on the effect  of the drawdown on gas from  the Prudhoe Bay unit.                                                               
He asked  committee members to  review that information.  He then                                                               
noted that Senator  Elton joined the committee some  time ago and                                                               
asked Mr. Anderson to testify.                                                                                                  
                                                                                                                                
MR. NELS  ANDERSON, Jr., thanked Senators  Therriault and Wagoner                                                               
for  introducing  SB 241  and  SB  247.  As  a supporter  of  the                                                               
initiative that created  ANGDA, he appreciates the  fact that the                                                               
Legislature  is   following  through   on  that   initiative.  He                                                               
expressed  confidence  in  Mr.  Heinze's  ability  to  move  this                                                               
project forward; he  has diligently moved ahead  despite the fact                                                               
that ANGDA  has not been adequately  funded.  ANGDA needs  all of                                                               
the support  it can  get as  it presents  an opportunity  for all                                                               
Alaskans  to lower  their costs  of  energy and  it will  provide                                                               
jobs, especially in  Bristol Bay. In addition, it  will bring new                                                               
revenue   to  the   state   treasury,   benefiting  schools   and                                                               
communities.                                                                                                                    
                                                                                                                                
MR.  PAUL  FUHS,  representing  Backbone  2,  told  members  that                                                               
Backbone   2  is   a  citizen   organization  dedicated   to  the                                                               
expeditious development  of Alaska's North Slope  gas reserves in                                                               
a way that  would provide maximum benefits  to Alaskans. Backbone                                                               
2 is  made up of  past and  current political leaders,  union and                                                               
municipal   representatives   and  ordinary   Alaskan   citizens.                                                               
Backbone 2 will be publishing a  series of full-page ads and will                                                               
be launching a website.                                                                                                         
                                                                                                                                
MR. FUHS said  that Backbone 2 sees potential  benefits to public                                                               
ownership of the project. Almost  every other jurisdiction in the                                                               
world  that  controls  its   resources  participates  in  similar                                                               
projects in an ownership fashion  to provide more benefits to its                                                               
citizens. In  Qatar, ConocoPhillips agreed  to a 30  percent take                                                               
while  Qatar will  receive  70 percent.  He said  it  is hard  to                                                               
imagine that  ConocoPhillips would not be  willing to participate                                                               
in  some way  with  one  of the  states  in  America. Backbone  2                                                               
believes one  of the main benefits  of the ANGDA project  is that                                                               
it could actually  be built. The heads of  ConocoPhillips, BP and                                                               
ExxonMobil  have  recently  stated   that  the  Canadian  highway                                                               
project is not economically feasible  without price subsidies. He                                                               
asked members  to take  that into  consideration when  it decides                                                               
whether to take the stranded gas applications seriously.                                                                        
                                                                                                                                
MR. FUHS said  a few companies have shown that  the ANGDA project                                                               
could generate  $1 billion  per year  for Alaska,  based on  a 12                                                               
percent  rate  of return.  The  oil  companies  say that  is  not                                                               
enough, they want a 15 to  20 percent return. He said legislators                                                               
need to decide  whether $1 billion per year is  enough for Alaska                                                               
in  its current  fiscal environment.  The choices,  if the  state                                                               
cannot raise  revenues through  resource development,  are taxes,                                                               
loss  of  permanent funds  and  further  reduction of  government                                                               
services.  He said  if LNG  can be  transported to  tidewater, it                                                               
could  be moved  around the  state. At  a recent  presentation in                                                               
Anchorage, Enstar said the last  contract it signed resulted in a                                                               
14  percent increase  in gas  in  Southcentral and  that in  five                                                               
years it  will be cheaper  to import  LNG from Indonesia  to Cook                                                               
Inlet than to buy from the producers in Cook Inlet.                                                                             
                                                                                                                                
MR. FUHS  said it is not  unusual for governments to  be involved                                                               
in gas projects  these days. Several countries and  the states of                                                               
Wyoming and Georgia formed authorities  similar to ANGDA to build                                                               
projects that the  private sector would not  build, especially in                                                               
the area of  transportation. He said the funding  for ANGDA could                                                               
also  help  provide  some  of  the  analysis  that  Senator  Ogan                                                               
included in  his bill,  SB 271, in  terms of  potential financing                                                               
for a  portion of the Canadian  line. He pointed out  ANGDA's tax                                                               
exempt status will provide a  30 percent reduction in income tax.                                                               
The ANGDA  initiative was written  to give ANGDA  the flexibility                                                               
to partner with  the private sector. He said  he provided members                                                               
with the  results of Proposition  3 by election district  to show                                                               
how their constituents voted on  the initiative. He asked members                                                               
to  respect  the will  of  their  constituents and  support  this                                                               
legislation.   He  added   that  the   highest  wellhead   price,                                                               
worldwide, that Backbone  2 has been able to find  is 85 cents in                                                               
Trinidad so $1.35 is outrageously  high. He repeated that ANGDA's                                                               
model is based on $1.                                                                                                           
                                                                                                                                
CHAIR OGAN commented the wellhead  price contracts are not public                                                               
information.                                                                                                                    
                                                                                                                                
MR. FUHS  agreed and told  members that BP complained  because it                                                               
had  to pay  too much  at  the wellhead  for its  LNG project  in                                                               
Trinidad   so  the   information   was  published   in  a   trade                                                               
publication, which is where Backbone 2 found it.                                                                                
                                                                                                                                
CHAIR OGAN  questioned how Backbone  2 would know that  the price                                                               
isn't higher elsewhere.                                                                                                         
                                                                                                                                
MR. FUHS said  at the Asia Pacific Conference  held in Anchorage,                                                               
a few  different analysts  from Asia  posted wellhead  prices. He                                                               
said it  is his understanding  that Mr. Heinze plans  to contract                                                               
with Wood-Mackenzie for information on international projects.                                                                  
                                                                                                                                
MR.  GEORGE  BRIGGS,  Director   of  the  Dillingham  Chamber  of                                                               
Commerce,  said   the  Dillingham  business  community   is  very                                                               
concerned  about  the  cost of  energy.  West  coast  communities                                                               
experience a very high cost  of energy, which translates to added                                                               
expenses  to  citizens  and  high   energy  costs  make  it  very                                                               
difficult to  attract new  business. If ANGDA  is funded,  it can                                                               
provide  information about  a better  energy  delivery system  to                                                               
communities.  The Dillingham  Chamber of  Commerce supports  this                                                               
legislation.                                                                                                                    
                                                                                                                                
CHAIR OGAN  asked Mr.  Griggs if Dillingham  is planning  to ship                                                               
LNG in.                                                                                                                         
                                                                                                                                
MR. BRIGGS said that would be the ultimate goal.                                                                                
                                                                                                                                
MR. SPUD WILLIAMS, testifying on  his own behalf, told members he                                                               
believes SB  241 is appropriate  in that  it shows BP  is serious                                                               
about  developing  the gas.  He  believes  BP  has held  the  gas                                                               
hostage so  that it would  not compete while it  developed fields                                                               
all over  the world and  solidified markets in  overseas markets.                                                               
He noted when ARCO began  talking about developing Alaska gas, it                                                               
was taken out  of the picture and all of  a sudden ConocoPhillips                                                               
became  a partner  in  the  gas fields  on  the  North Slope.  He                                                               
pointed out  the study  ConocoPhillips did  was based  on natural                                                               
gas only,  not on  natural gas  liquids. That  study showed  a 10                                                               
percent margin, which  is considerable on a project  of that size                                                               
and excluded  a large  potential profit  margin from  natural gas                                                               
liquids. The  original gas line feasibility  studies from Prudhoe                                                               
Bay to  the coast showed that  natural gas liquids and  the other                                                               
resources  listed  by  Mr.  Heinze,  such  as  the  petrochemical                                                               
industry,  in  large  part  made   the  project  feasible.  Other                                                               
governments  involved in  a  gas  line would  want  to strip  the                                                               
natural gas liquids because they know its worth.                                                                                
                                                                                                                                
MR. WILLIAMS  indicated the  petrochemical industry  will provide                                                               
long-term  employment. He  said the  state  must tax  the gas  in                                                               
place so  that it is a  liability to the [producers]  before they                                                               
let that gas free.                                                                                                              
                                                                                                                                
CHAIR  OGAN stated,  for the  record, that  he told  the Canadian                                                               
energy minister that Canada couldn't have all of the liquids.                                                                   
                                                                                                                                
MR. RAY SCANDURA, representing RPC  Energy Services, told members                                                               
the cost of the infrastructure for  a gas line is substantial and                                                               
the  marketability  of the  liquefied  natural  gas will  be  the                                                               
deciding factor. Alaskans pay the  highest prices for their daily                                                               
energy use because Alaska is at  the end of the run. This project                                                               
will  give Alaskans  a  reliable fuel  supply.  He believes  that                                                               
although  the  cost  savings  are  difficult  to  calculate,  the                                                               
marketability will  pay for the infrastructure  and the long-term                                                               
benefits to rural Alaska will be immense.                                                                                       
                                                                                                                                
4:41 p.m.                                                                                                                       
                                                                                                                                
SENATOR LINCOLN  asked Deputy Commissioner  Porter to  respond to                                                               
Mr. Heinze's  comment regarding  the Governor's  press conference                                                               
tomorrow  that the  ANGDA  project will  go  hand-in-hand with  a                                                               
highway route gas line.                                                                                                         
                                                                                                                                
MR.  STEVE  PORTER,  Deputy Commissioner  of  the  Department  of                                                               
Revenue (DOR), said  the state's position is  consistent with Mr.                                                               
Heinze's  response.  DOR  believes  that  ANGDA  can  bring  many                                                               
benefits  to  the  state,  whether   building  the  gas  line  or                                                               
complementing it with a spur line or another form of support.                                                                   
                                                                                                                                
SENATOR  LINCOLN  asked  Deputy  Commissioner Porter  if  he  has                                                               
worked with  the cost figures  provided by Mr. Heinze  on ANGDA's                                                               
conceptual schedule.                                                                                                            
                                                                                                                                
DEPUTY COMMISSIONER PORTER said the  $200 million and $10 billion                                                               
estimates are  reasonable for  those stages  of the  project. DOR                                                               
has not  concluded whether $2.5  million is necessary  to fulfill                                                               
ANGDA's   statutory   responsibility.   However,   DOR   supports                                                               
providing  the  Authority  with the  funds  necessary  to  answer                                                               
questions on  this or  any other  project so  that the  state can                                                               
make good decisions.                                                                                                            
                                                                                                                                
SENATOR  ELTON asked  Mr.  Porter  if he  believes  the role  Mr.                                                               
Heinze  plays would  cost  the amount  being  requested from  the                                                               
general fund as a supplemental to the FY04 budget.                                                                              
                                                                                                                                
DEPUTY COMMISSIONER PORTER said  DOR is currently evaluating that                                                               
amount and does  not have a specific amount to  recommend at this                                                               
time.                                                                                                                           
                                                                                                                                
SENATOR ELTON stated:                                                                                                           
                                                                                                                                
     Clearly, this isn't  a surprise - I  mean [ANGDA] began                                                                    
     speaking months  ago about the  need for  an additional                                                                    
     amount  of  money.  When do  you  anticipate  that  the                                                                    
     administration  will be  done with  the review  to make                                                                    
     the recommendation, whether it's  less or more than the                                                                    
     amount requested?                                                                                                          
                                                                                                                                
DEPUTY COMMISSIONER  PORTER replied  DOR began  to work  with the                                                               
Authority  last summer  to get  the additional  $200,000 to  make                                                               
sure that  ANGDA maximizes what that  money is used for.  He said                                                               
DOR  is now  moving  into  the next  phase;  it  would have  been                                                               
helpful to  have the information  the Authority will  collect but                                                               
DOR is going to have to  make some decisions prior to getting it.                                                               
DOR will  have to sit  down, look  at each element,  identify the                                                               
cost associated with each element and make recommendations.                                                                     
                                                                                                                                
SENATOR ELTON  said the  committee is now  talking about  a four-                                                               
month  window instead  of a  six-month window  and noted  one can                                                               
make a decision by not making a decision.                                                                                       
                                                                                                                                
CHAIR OGAN told members he does  not intend to move the bill from                                                               
committee today  and asked Mr.  Porter to  let him know  when the                                                               
administration will have a recommendation.                                                                                      
                                                                                                                                
SENATOR BEN  STEVENS asked if  the committee should  expect ANGDA                                                               
to ask  for more  money if  tomorrow's press  conference delivers                                                               
news  that  would lead  ANGDA  to  look  at alternative  ways  to                                                               
participate.                                                                                                                    
                                                                                                                                
DEPUTY COMMISSIONER  PORTER said  DOR's goal,  over the  next few                                                               
weeks, is to look at the plan to  move forward on gas and the gas                                                               
line and  the associated costs in  2004 and 2005 and  come to the                                                               
legislature with a package, whether  that is the ANGDA project or                                                               
any other option. DOR needs a  little time to evaluate the future                                                               
of the state and make a determination on the cost.                                                                              
                                                                                                                                
SENATOR BEN STEVENS  commented the request in SB 241  is for $2.1                                                               
million  for  due  diligence  on  the  North  Slope  liquefaction                                                               
facility, to transport and to build the ships. He asked:                                                                        
                                                                                                                                
     But  what  happens  if there's  another  proposal  that                                                                    
     comes in?  Are we going to  look at ANGDA doing  two or                                                                    
     three different diligence exercises  or are we going to                                                                    
     ... how are we going to interface with a proposal that                                                                     
        comes forward? If that interface is perhaps at a                                                                        
     lesser extent, are you going to readjust that request?                                                                     
                                                                                                                                
MR. HEINZE told  Senator Stevens the money requested  by ANGDA is                                                               
to  finish the  charge provided  for  in Ballot  Measure 3.  That                                                               
charge is  very project specific. If  ANGDA were asked to  be the                                                               
sponsor of an entirely different  project, ANGDA would have to go                                                               
out and contract  for answers to new design  questions. ANGDA has                                                               
a great deal  of information about the route from  Prudhoe Bay to                                                               
Valdez from  Yukon Pacific  and others,  so it  has been  able to                                                               
minimize the engineering cost. However,  if ANGDA was asked to be                                                               
the project sponsor  and had to design a pipeline  from the North                                                               
Slope to the Canadian border,  that would take a considerable sum                                                               
of money.  One group in  the state has  already done that;  if it                                                               
made that  design available, ANGDA could  do a good job  at a low                                                               
cost. ANGDA does not know what  the governor is going to announce                                                               
at this  time. If the  governor announces that another  entity is                                                               
going  to do  the  design  work, he  would  not  expect ANGDA  to                                                               
require much, if any, additional money.                                                                                         
                                                                                                                                
DEPUTY COMMISSIONER  PORTER said  he believes Senator  Stevens is                                                               
asking if DOR  is going to require ANGDA to  do additional things                                                               
for other issues  if the state receives  other project proposals.                                                               
ANGDA will  comply only with  that charge unless  the Legislature                                                               
changes  that charge.  The Legislature  passed  another piece  of                                                               
legislation   known  as   the  Stranded   Gas  Development   Act.                                                               
Negotiations  for financial  incentives with  an applicant  under                                                               
that Act would not involve ANGDA.                                                                                               
                                                                                                                                
SENATOR BEN  STEVENS pointed  out that [SB  247] does  change the                                                               
statute  and again  asked if  the  legislature should  anticipate                                                               
another funding request from ANGDA if it passes SB 247.                                                                         
                                                                                                                                
DEPUTY  COMMISSIONER PORTER  said it  should. If  the Legislature                                                               
asks ANGDA  to do more  work, ANGDA  would require more  cash for                                                               
additional contractors.                                                                                                         
                                                                                                                                
SENATOR ELTON  commented that  he is ready  to vote  for anything                                                               
but  he  believes the  problem  is  that  this and  the  previous                                                               
administration  have  talked  about  only one  way  to  get  this                                                               
project done. He  thinks the time has come for  the state to give                                                               
the  resources to  those who  are  thinking outside  of the  box,                                                               
whether that is an LNG  to tidewater project or pipeline builders                                                               
instead of  producers. He  said he  is tired  of waiting  for the                                                               
producers to  get this project  going. He is  somewhat distressed                                                               
that  the  [administration]  does  not have  a  response  to  the                                                               
appropriation  bill  before   the  committee.  The  appropriation                                                               
request  comes  as  no  surprise  to anyone.  He  added  that  he                                                               
believes  the  committee  should  move  the  legislation  quickly                                                               
before the four-month window becomes even shorter.                                                                              
                                                                                                                                
CHAIR  OGAN  said  he  concurs   with  some  of  Senator  Elton's                                                               
comments; he is also tired of  talking about this issue and wants                                                               
to see action. He announced the committee would take up SB 247.                                                                 

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