Legislature(2009 - 2010)BUTROVICH 205

03/22/2010 03:30 PM RESOURCES

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved CSSB 287(RES) Out of Committee
Scheduled But Not Heard
Scheduled But Not Heard
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSSB 228(RES) Out of Committee
            SB 228-TAX INCENTIVES FOR GAS-TO-LIQUID                                                                         
3:40:15 PM                                                                                                                    
CO-CHAIR MCGUIRE  announced SB  228 to  be up  for consideration.                                                               
[CSSB 228(RES), 26-LS1324\P, was  before the committee.] She said                                                               
in preparation of SB 228 they would hear first from Paul Metz.                                                                  
3:40:22 PM                                                                                                                    
PAUL  METZ,  Director,   Mineral  Industry  Research  Laboratory,                                                               
University  of  Alaska,  Fairbanks, Alaska,  did  a  presentation                                                               
called "The  Key to  Energy Security: Converting  Coal to  Gas to                                                               
Synthetic  Fuels  to More  Petroleum  Production."  He said  this                                                               
presentation  was not  on behalf  of  the Laboratory  but it  was                                                               
approved by  the University.  He said he  would look  at Alaska's                                                               
energy  challenges, look  at the  alternatives for  developing an                                                               
energy plan,  discuss the  subject of coal  to synthetic  gas and                                                               
converting it  to liquid fuels,  discuss carbon  dioxide enhanced                                                               
oil recovery,  and present some alternatives  for financing these                                                               
megaprojects,  discuss  how  to   get  these  products  of  these                                                               
resources to markets  via the Alaska Railroad,  and summarize the                                                               
synergistic effects of these major energy projects.                                                                             
He began  with Alaska's Energy Challenges.  Alaska has decreasing                                                               
oil  production and  revenues from  the  North Slope,  decreasing                                                               
natural gas production in Cook  Inlet, and increasing federal and                                                               
state regulations  that increase  incentives to find  and develop                                                               
more  natural  oil, natural  gas  and  coal, in  particular,  the                                                               
increasing federal  and state regulations that  increase the cost                                                               
of petroleum refining  and will increase with  climate change and                                                               
carbon capture and  storage, alternate and lower  cost sources of                                                               
supply of  natural gas  to the contiguous  states that  place the                                                               
large  diameter  natural gas  pipeline  in  question, and  highly                                                               
fluctuating energy  cost as a  function of the  world-wide demand                                                               
for petroleum  - natural gas  being priced  as a function  of the                                                               
market  price of  petroleum. Finally,  the combined  and negative                                                               
effects  of these  costs and  limited  fuel supplies  on the  air                                                               
cargo   industry   in   Anchorage,   in   particular,   and   the                                                               
transportation and tourist industries in general.                                                                               
3:43:21 PM                                                                                                                    
MR. METZ  said the key  to developing  a plan that  provides cost                                                               
effective  and stable  energy supplies  and  energy security  for                                                               
Alaska  and  the nation  includes  a  public private  partnership                                                               
between  the  state,  the  federal  government  and  the  various                                                               
industries  that  facilitate the  full  utilization  of our  coal                                                               
natural gas  and petroleum  resources. Our  fossil fuels  are and                                                               
will remain major sources of energy for the foreseeable future.                                                                 
3:43:57 PM                                                                                                                    
The resources are: natural gas -  about 26 tcf of proven reserves                                                               
on Kuparek  and Prudhoe Bay fields,  about 9 tcf at  Pt. Thomson;                                                               
for a total of 35 tcf that  will provide about 23 years of supply                                                               
for a  4.5 bcf/day natural  gas pipeline. Most gas  pipelines are                                                               
designed for a  30-year life or longer.  So, additional resources                                                               
would have to be  found on the North Slope to  support even a 4.5                                                               
bcf/day pipeline.                                                                                                               
CO-CHAIR  MCGUIRE asked  if the  state has  data on  gas hydrates                                                               
MR. METZ replied no; these  are reserve estimates. Resources such                                                               
as gas  hydrates, coal bed  methane, synthetic gas from  coal are                                                               
potentially  useful to  humans,  but  aren't measured  quantities                                                               
under  current  economic  conditions.  The  gross  value  of  the                                                               
measured reserves  at various  prices of  natural gas  range from                                                               
$200 billion $500 billion.                                                                                                      
3:45:33 PM                                                                                                                    
By  comparison, he  said, about  67 billion  barrels (BB)  of oil                                                               
were in  place on  the North  Slope when  the TAPS  pipeline came                                                               
into production;  an expected total recovery  without enhancement                                                               
is about 22 BB. That leaves about  45 BB of oil in place when and                                                               
if the pipeline is shut down  before enhanced oil recovery is put                                                               
into action.  The gross  value of recovering  8 BB  of additional                                                               
oil through enhanced oil recovery  methods is $1.1 trillion, much                                                               
larger  values than  the proven  reserves of  natural gas  on the                                                               
North Slope.                                                                                                                    
3:46:52 PM                                                                                                                    
MR. METZ said  by comparison, the coal resources  that are widely                                                               
distributed in Alaska,  are immense. The USGS  estimates that the                                                               
western end of  Arctic Slope of the Brooks Range  the North Slope                                                               
contains an estimated 5.5 trillion  tons of high unit value coal.                                                               
The  magnitude  of this  resource  is  if  we could  convert  our                                                               
domestic  requirements  for  electricity into  100  percent-coal,                                                               
Alaska  could  generate  the electrical  demand  for  the  United                                                               
States for  about 2500 years. If  we converted all of  our liquid                                                               
fuel demand  (23-million barrel/day  consumption) of oil  to coal                                                               
as  well as  generated  all  of our  electricity  with coal,  the                                                               
western Arctic  would still have  enough coal to supply  the U.S.                                                               
for about 1000  years. In addition to the  western Arctic another                                                               
estimated  3 trillion  tons of  deep coal  is in  the Cook  Inlet                                                               
Basin and smaller coal resources  in the Upper Susitna Valley and                                                               
the  north flank  of  the  Alaska Range.  The  values at  various                                                               
prices per  ton of coal  dwarf the estimated resource  values for                                                               
the oil and gas measured in thousands of trillions of dollars.                                                                  
Mr. Metz said  the gas reserves on the North  Slope contain about                                                               
3X10   btus,  oil in  place  contains 4X10   btus,  and the  coal                                                               
resources  have  2X10    btus,  ten-thousand   times  the  energy                                                               
contained in natural gas.                                                                                                       
3:49:12 PM                                                                                                                    
He  posed  the  question  of whether  these  energy  sources  are                                                               
competing or  have synergisms in  looking at some aspects  of the                                                               
instate  gasline -  a coal-to-liquids  plant,  for instance  (the                                                               
Fairbanks  example has  some  conceptual  engineering design  and                                                               
numbers  for  a  project  that was  advocated  by  the  Fairbanks                                                               
Economic  Development  Corporation)  and  enhanced  oil  recovery                                                               
through  the  use of  the  CO2  that  would  be produced  from  a                                                               
synthetic fuels plant.                                                                                                          
3:50:22 PM                                                                                                                    
He stated that  the Cook Inlet Basin has  supplied Anchorage with                                                               
electrical  generation and  domestic and  commercial heating  for                                                               
three-plus decades.  Shortages are  expected by 2015  during peak                                                               
demand periods. The Department of  Energy estimates it would take                                                               
capital investment of $5-6 billion  to replace the original 3 tcf                                                               
in  Cook Inlet.  But the  difficulty with  the whole  natural gas                                                               
market in  the state  is the low  quantities that  both Fairbanks                                                               
and Anchorage would  actually require and the  fact that bringing                                                               
it from the North Slope is a large capital investment.                                                                          
3:51:19 PM                                                                                                                    
For the sake of having numbers,  Mr. Metz said, the Enstar bullet                                                               
line  (bringing gas  to Fairbanks,  Anchorage and  potentially to                                                               
export from  is estimated  to cost  $3.8 billion  for 24  in. 0.5                                                               
bcf/d from  either the Gubik field  (dry gas) on the  North flank                                                               
of the Brooks  Range or alternatively from the  Prudhoe Bay field                                                               
that has wet  gas that would require investing  in a conditioning                                                               
plant.  Anadarko's  estimated  it   would  cost  $1  billion  for                                                               
delineating sufficient  resources in the Gubik  field. Taking the                                                               
large   diameter  gas   line  and   scaling  a   $6-plus  billion                                                               
conditioning plant to  a size to handle 0.5/day  would cost about                                                               
$1 billion.  Because of the  limited market and the  high capital                                                               
cost  he  thought it  would  cost  significantly more  than  $3.8                                                               
billion  to  build.  There  needs  to  be  a  large  domestic  or                                                               
international industrial  user of the  excess gas from  0.5 bcf/d                                                               
line.  A  coal-to-liquids  plant  as envisioned  by  Fedco  could                                                               
actually  use all  of  the gas  in  an instate  gas  line if  the                                                               
project were up-scaled.                                                                                                         
CO-CHAIR  WIELECHOWSKI asked  how much  it would  cost to  expand                                                               
that to 1 full  bcf/d and if it is better to build  a 500 mcf now                                                               
and expand it later or is it better to build bigger now.                                                                        
MR. METZ replied that there  is insufficient market today for the                                                               
0.5 bcf/d and to build a larger  plant than that and have it idle                                                               
for a considerable  period of time is not a  good return. He said                                                               
the  Fedco project  looked at  a 40,000  barrel/day plant  with a                                                               
capital cost of $4.6 billion. That  has been revised down to $3.2                                                               
billion. The products in that plant  would be Jet A and diesel at                                                               
a  production cost  of  about $2.60/gallon.  That  plant at  that                                                               
scale was  estimated to return  about 12 percent on  the capital,                                                               
but in 2008 prices of diesel went up to $5/gallon.                                                                              
CO-CHAIR WIELECHOWSKI  asked where  they projected  building this                                                               
MR.  METZ   replied  somewhere  in   the  Interior.  This   is  a                                                               
preliminary design  only. The money  that was  provided initially                                                               
for the  Air Force  was to  site the plant  at Eielson  Air Force                                                               
Base, but for a number of reasons that won't happen.                                                                            
3:56:38 PM                                                                                                                    
SENATOR WAGONER asked what they would do with the CO2 emissions.                                                                
MR. METZ  replied that he is  proposing to use that  for enhanced                                                               
oil recovery on the North Slope.                                                                                                
SENATOR WAGONER said  for that to happen the plant  would have to                                                               
be closer to the North Slope.                                                                                                   
3:57:12 PM                                                                                                                    
MR.  METZ replied  no; a  pipeline would  be built  to the  North                                                               
Slope. He said for  every ton of coal you burn  you get about 3.5                                                               
tons of CO2 and  that could be considered a bad  thing, but it is                                                               
good in  terms of enhanced  oil recovery. In 2005  the Department                                                               
of Energy did  an analysis of enhanced oil  recovery potential on                                                               
the North  Slope as well as  the potential in the  Gulf of Mexico                                                               
and  found  about   8000  kilometers  of  CO2   pipeline  to  the                                                               
Mississippi Valley  bring CO2 to  the offshore oil fields  in the                                                               
Gulf. Some  of the fields  in the Gulf of  Mexico as well  as the                                                               
North Slope are  amenable to miscible CO2  injection and enhanced                                                               
oil recovery.  Cook Inlet is not,  but the resource on  the North                                                               
Slope at 45 billion barrels is very large.                                                                                      
CO-CHAIR MCGUIRE  asked the difference in  recovery rates between                                                               
CO2 and gas as a mechanism for lifting up the oil.                                                                              
MR.  METZ  replied  injecting  CO2 or  natural  gas  changes  the                                                               
physical and  chemical characters of  the oil. The  CO2 decreases                                                               
the  viscosity,  increases  the  volume of  the  fluid  and  adds                                                               
pressure  to the  reservoir before  it becomes  miscible. Methane                                                               
injection  reduces viscosity,  too,  but the  CO2 enhancement  is                                                               
much more effective.                                                                                                            
3:59:51 PM                                                                                                                    
CO-CHAIR  MCGUIRE asked  why  injecting CO2  as  an enhanced  oil                                                               
recovery technique is not possible in Cook Inlet.                                                                               
MR.  METZ  responded  that  oil   is  not  amenable  to  miscible                                                               
injection of  CO2. The CO2  will not form  a single phase  in the                                                               
oil when  it's injected  at high  pressures, therefore  you don't                                                               
get the  reduction in viscosity  or the increases in  volume that                                                               
you do on the North Slope or in the Gulf of Mexico.                                                                             
4:01:10 PM                                                                                                                    
(Slide  9)  He  said  the  operators  on  the  North  Slope  have                                                               
experimented with  this, but the  problem is it  has insufficient                                                               
CO2  at about  10 percent.  That is  part of  the reason  for the                                                               
conditioning plant - to remove the  water as well as the CO2 from                                                               
the natural  gas. But even  if they  were producing at  4.5 bcf/d                                                               
they would  still have 1/10  of the  CO2 that would  be necessary                                                               
for enhanced  oil recovery.   That  is where  the coal-to-liquids                                                               
plant comes  in. Scaling the  40,000 barrel/day plant up  to what                                                               
the  oil industry  feels is  a minimum  plant size  for synthetic                                                               
fuels of 200  barrels/day would produce about 1  tcf/year of CO2.                                                               
That  is what  the DOE  estimated would  be the  requirements for                                                               
recovery of  8-12 BB of oil.  The DOE estimated that  in addition                                                               
to  the large  volume  of CO2  you  would  had to  have  it at  a                                                               
reasonable  price, and  it  was  estimated at  5  percent of  the                                                               
wellhead  price  of  oil.  At  that time  they  were  looking  at                                                               
4:02:12 PM                                                                                                                    
He provided  an extract  of the  rates of  return (ROR)  from the                                                               
sale of  CO2 from a  200,000 barrel/d plant  at 5 percent  of the                                                               
wellhead price of  oil at various prices. Adding this  to the 1/8                                                               
royalty  resulted  in  very large  numbers.  Nothing  else  would                                                               
generate this kind of income and return for the state.                                                                          
4:03:12 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI asked if these  figures include the cost of                                                               
piping it to North Slope.                                                                                                       
MR. METZ  replied it is  just from the  direct sale by  the plant                                                               
assuming that a prudent North  Slope producer would engage in the                                                               
capital  investment to  build  a pipeline  that  could deliver  1                                                               
tcf/yr.  to  the   North  Slope.  He  added  that   CO2  is  very                                                               
compressible compared to methane  and he estimated $2.5-3 billion                                                               
for  that. The  price of  CO2 within  5 percent  of the  wellhead                                                               
price  would make  that  investment very  attractive  to the  oil                                                               
4:04:20 PM                                                                                                                    
Slide  12  showed  the  financing  for  a  coal-to-liquids  plant                                                               
anywhere in Alaska. The plant would  use about 17 million tons of                                                               
coal a  year or  10 times  what the  Usibelli Coal  Mine produces                                                               
today. Delivering  the 1 tcf  of CO2 to  the North Slope  and the                                                               
recovery of additional oil at  simply a 1/8 royalty at $80/barrel                                                               
oil  would  bring   $100  billion  to  the   state  in  royalties                                                               
(equivalent to  the amount of taxes  in total that the  state has                                                               
recovered from North  Slope oil production since 1977).  At 12 BB                                                               
that  increases to  $120 billion.  In addition,  the state  would                                                               
receive royalties  on the coal  that is produced whether  it goes                                                               
into gasification or into a plant.                                                                                              
MR. METZ  said an added  synergism for the Susitna  hydro project                                                               
is  adding the  ability for  it to  generate hydrogen  and oxygen                                                               
from  the  electrolysis  of  water rather  than  using  steam  to                                                               
convert  the  coal to  methane  which  would greatly  reduce  the                                                               
capital   cost  of   the   coal-to-liquids   plant.  At   200,000                                                               
barrels/day, Hatch  proposed a  coal-to-liquids plant  that would                                                               
use 2000  mgw (120 mgw  more power  than Susitna). The  beauty of                                                               
this  alternative is  that once  the need  for CO2  on the  North                                                               
Slope was achieved  oil production would taper off  and the coal-                                                               
to-liquids plant could be operated  with hydrogen and oxygen from                                                               
the  electrolysis  of water.  The  result  would  be a  zero  CO2                                                               
emission coal-to-liquids  plant, which would then  produce liquid                                                               
fuels with  lower total carbon emissions  than refined petroleum.                                                               
"So, there is a great  synergism between having a low-cost source                                                               
of electrical energy and liquids fuels production."                                                                             
4:07:22 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI asked if he  envisioned mining the coal and                                                               
then converting it or doing underground coal gasification.                                                                      
MR.  METZ  replied  that  underground   combustion  is  far  more                                                               
attractive. It would lower the  capital and operating cost of the                                                               
coal-to-liquids plant - producing  coal gas and then conditioning                                                               
that and transporting it to a plant at some location.                                                                           
CO-CHAIR WIELECHOWSKI asked  how much CO2 could  be captured with                                                               
this process.                                                                                                                   
MR.  METZ replied  that they  would be  looking at  70-80 percent                                                               
recoveries,  but  the  existing technologies  are  expensive  and                                                               
capital intensive  and he didn't  know the exact answer.  The DOE                                                               
is spending  a lot  of money  on research in  that area  and that                                                               
technology is changing very quickly, however.                                                                                   
4:09:32 PM                                                                                                                    
He  summarized  that  the synergisms  between  a  coal-to-liquids                                                               
plant and  enhanced oil recovery  has the potential  of extending                                                               
the life  of the  North Slope  oil fields  for another  30 years,                                                               
replacing Cook  Inlet natural  gas with North  Slope gas  to both                                                               
Anchorage   and  Fairbanks,   and  supplementing   the  petroleum                                                               
production  from  North Pole  with  low  sulfur synthetic  fuels.                                                               
Availability of markets  outside of Alaska would not  be an issue                                                               
with respect to an instate gas line.                                                                                            
The price of  coal is not tied  to the price of  petroleum, so it                                                               
would have  less fluctuation  than the price  of synthetic  Jet A                                                               
and  diesel  as compared  to  petroleum  derived products.  There                                                               
would be long term stable fuel  supplies for the military both in                                                               
state and  in the Pacific Rim,  there would be stable  prices for                                                               
the  air cargo  and  other transportation  industries in  Alaska,                                                               
which would anchor those industries here.                                                                                       
MR.  METZ  said  that  last  Friday  the  Department  of  Defense                                                               
announced  that the  Defense  Energy Supply  Center  and the  Air                                                               
Transportation Association  of America  had signed  a cooperative                                                               
agreement for  a public private partnership  to develop synthetic                                                               
fuels, which  they have been  saying for  the past year  needs to                                                               
4:11:46 PM                                                                                                                    
CO-CHAIR  MCGUIRE said  that this  presentation pertained  to two                                                               
bills,  SB 228  and  SB  287, which  incentivize  these kinds  of                                                               
plants through  two different  methods. The first  is SB  228 the                                                               
Special Investment tax  credit and the other is  the amendment to                                                               
ACES clarifying  that gas  used in  the state as  a fuel  or feed                                                               
stock in  the manufacturing  process creating  an end  product in                                                               
the state shall  be considered as instate gas at  the instate gas                                                               
rate. And there is  the potential for ARRC bonds to  be used as a                                                               
part of the financing for a project like this.                                                                                  
Finding  no  further  comments, Co-Chair  McGuire  closed  public                                                               
CO-CHAIR WIELECHOWSKI stated that the  more he learns the more he                                                               
thinks  a  gas-to-liquids plant  or  a  coal-to-liquids plant  or                                                               
several of  them are  critical for  Alaska's future;  they create                                                               
anchors  for the  bullet  line and  provide  the opportunity  for                                                               
enhanced oil recovery and creating  whole new industries. Experts                                                               
have estimated that creating one  plant could create 650 new full                                                               
time jobs, not  to mention 10-15,000 construction  jobs. It would                                                               
help  protect our  military bases  and provide  heat sources  for                                                               
generating  350  mgw  power  plants.  He  moved  to  report  CSSB
228(RES),   version    P,   from   committee    with   individual                                                               
recommendations  and  attached  fiscal  note(s).  There  were  no                                                               
objections and it was so ordered.                                                                                               
CO-CHAIR   MCGUIRE   noted   that   she  talked   to   a   Sassol                                                               
representative  in  Houston  who  confirmed they  had  looked  at                                                               
Alaska for  two decades  and sadly, the  reason they  hadn't done                                                               
more  here  is  they  consider Alaska  to  have  an  unattractive                                                               
business climate.                                                                                                               

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