Legislature(2015 - 2016)FAHRENKAMP 203

04/14/2015 03:30 PM RESOURCES

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Audio Topic
03:30:22 PM Start
03:30:50 PM SB50
05:04:44 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Location Change --
+= SB 50 AIDEA: BONDS;PROGRAMS;LOANS;LNG PROJECT TELECONFERENCED
Heard & Held
-- Public Testimony --
Bills Previously Heard/Scheduled
         SB  50-AIDEA: BONDS;PROGRAMS;LOANS;LNG PROJECT                                                                     
                                                                                                                                
3:31:50 PM                                                                                                                    
CHAIR GIESSEL announced the consideration  of SB 50 [CSSB 50(NRG)                                                               
was before the committee]. She  invited Mr. Barron to discuss how                                                               
this legislation could potentially affect the Cook Inlet Basin.                                                                 
                                                                                                                                
3:33:03 PM                                                                                                                    
SENATOR WIELECHOWSKI joined the committee.                                                                                      
                                                                                                                                
3:33:31 PM                                                                                                                    
WILLIAM  BARRON [former  director  for the  Division  of Oil  and                                                               
Gas], representing himself, Eagle  River, Alaska, said delivering                                                               
energy to the Interior is  important but complicated. He said the                                                               
general   market   is   relatively    small   and   natural   gas                                                               
infrastructure  is immature  or non-existent.  These two  factors                                                               
combine an  exasperatingly difficult business model  by combining                                                               
elevated up front capital costs  and unknown operating costs, all                                                               
to  be covered  by a  small  yet undetermined  customer base  and                                                               
still allowing a  reasonable rate of return for  a utility. These                                                               
market  entry   barriers  must   be  thoroughly   understood  and                                                               
addressed before any project will be successful.                                                                                
                                                                                                                                
He said his comments would cover three primary areas:                                                                           
1. AIDEA's role                                                                                                                 
2. Unintended consequences associated with broad AIDEA roles                                                                    
3. The complicated Cook Inlet market                                                                                            
                                                                                                                                
3:34:49 PM                                                                                                                    
What is  the role  of AIDEA  in the quest  to deliver  lower cost                                                               
energy?  Is  it a  financial  institution  which can  supply  low                                                               
interest  loans  and  creative  repayment  schedules  to  enhance                                                               
project  economics   or  is  it   a  facilitator   of  commercial                                                               
agreements between producers and utilities?  Can it be used as an                                                               
owner in part or all of the  supply chain or is it some entangled                                                               
blend of all three?                                                                                                             
                                                                                                                                
This leads to  the second issue: Has there been  an assessment of                                                               
cause  and  effect  or unintended  consequences  associated  with                                                               
AIDEA  involvement beyond  the role  of  a funding  source?   For                                                               
example,  how  will  the  producers  and  utilities  react?  Will                                                               
government entities  be advocating  for a  city utility  the same                                                               
product needed by others? How  will the consumers be protected if                                                               
the "government utility" isn't a  regulated utility? How will the                                                               
gas  industry  respond  if  AIDEA is  a  working  interest  owner                                                               
competing to  sell into the  same closed  market? If AIDEA  is an                                                               
owner,  is  the state  prepared  to  assume ongoing  capital  and                                                               
operating   costs   and    obligations,   including   abandonment                                                               
liabilities?  Fundamentally, is  the state  by coincidence  or by                                                               
design  becoming an  oil and  gas  transmission and  distribution                                                               
company  to be  in  competition  with the  private  sector? If  a                                                               
private  company is  a producer  and owner  in the  manufacturing                                                               
plant, the  transmission system  and/or the  distribution system,                                                               
what action would the Department of  Law take, and if AIDEA is in                                                               
the same position, couldn't the action be the same?                                                                             
                                                                                                                                
3:36:38 PM                                                                                                                    
Third, the  Cook Inlet  supply and  demand model  is complicated.                                                               
The  recent  balance   is  a  result  of   capital  infusion  and                                                               
negotiation between  producers and utilities with  RCA oversight.                                                               
The  supply  is  not  just  about  reserves;  it  is  also  about                                                               
sustained  deliverability. As  current  supply contracts  sunset,                                                               
people should expect another perceived shortfall.                                                                               
                                                                                                                                
The  Hilcorp consent  agreement  expires  in a  few  years as  do                                                               
several  of the  tax credits  targeting the  Cook Inlet  and it's                                                               
difficult to  predict the  combined impact  of those  events. New                                                               
markets for  gas can  spur new  exploration and  development, but                                                               
those  developments will  be challenged.  They  will probably  be                                                               
smaller and more  costly and will press  any predetermined market                                                               
threshold.                                                                                                                      
                                                                                                                                
3:38:09 PM                                                                                                                    
MR. BARRON  said they know the  goal, but what is  the project? A                                                               
thorough assessment  of all potential  options -  their schedule,                                                               
their  scope, budgets  and  the  cost to  consumers  - should  be                                                               
completed  before  making  any  determination  of  final  project                                                               
selection. The state  has already spent over [$12]  million on an                                                               
aborted North Slope project; it can't afford to repeat that.                                                                    
                                                                                                                                
SENATOR  COSTELLO said  she also  was  concerned about  inserting                                                               
government into a  private solution and asked what  it would look                                                               
like with more private sector participation.                                                                                    
                                                                                                                                
3:39:32 PM                                                                                                                    
MR. BARRON explained that he  was trying to articulate that there                                                               
are a  lot of options,  but his main thrust  is what the  role of                                                               
AIDEA is in  any of these ventures. AIDEA is  a state financially                                                               
backed institution  that can create loan  opportunities, creative                                                               
financing and payback of those  loans to private sector companies                                                               
that will enhance the net  present value of those projects simply                                                               
because they have ways of  creating new financial returns. To him                                                               
that is a  very positive role for a  state-funded organization to                                                               
maintain.                                                                                                                       
                                                                                                                                
Once AIDEA  steps out  of that role  as a  financial institution,                                                               
the role  becomes very complicated and  has significant "knock-on                                                               
effects" to the private sector, which  would be noted if and when                                                               
a  state-funded  agency  becomes  more  involved  beyond  just  a                                                               
financial institution. His question is:  Is the state prepared to                                                               
become  an  owner of  physical  assets  rather than  a  financial                                                               
organization supporting the acquisition  and development of those                                                               
activities?                                                                                                                     
                                                                                                                                
3:41:19 PM                                                                                                                    
SENATOR  COGHILL asked  him  to expound  on  the difficulties  of                                                               
getting a gas contract for the Interior.                                                                                        
                                                                                                                                
3:41:48 PM                                                                                                                    
MR.  BARRON responded  that  there are  a  couple of  differences                                                               
between  the   North  Slope   activities  that   were  originally                                                               
sponsored by SB 23 and going  into the Cook Inlet. The difference                                                               
is  commercially  that  there was  no  fore-thought  of  bringing                                                               
natural gas from  the North Slope to Fairbanks area  and the Cook                                                               
Inlet producers  were willing  to try to  get gas  into Fairbanks                                                               
and have sent supplies to FNG.  The problem is that the market of                                                               
Fairbanks is so  small that there wasn't enough  critical mass to                                                               
be  signed  up  to  really drive  the  commercial  business  into                                                               
Fairbanks.                                                                                                                      
                                                                                                                                
When the  Kenai gas field was  brought on in the  1960s right off                                                               
the heels of the Swanson River  discovery in 1957, that created a                                                               
huge supply  with a  very small  demand, and  as the  reserves of                                                               
Kenai, Beaver  Creek, Beluga River,  North Cook and  utilities in                                                               
Anchorage have  been supplied over  time, those major  big fields                                                               
are  beginning  to  wain  and  the  smaller  fields  now  require                                                               
increased capital,  and are much more  technically complicated to                                                               
advance.                                                                                                                        
                                                                                                                                
3:44:43 PM                                                                                                                    
The  Cook Inlet  Basin consists  of disconnected  sands that  are                                                               
hard  to trace  and identify  their overall  capacity. Even  if a                                                               
well  is drilled,  its capacity  is not  known until  a long-term                                                               
production test is conducted. On  the market side, utilities need                                                               
to  have something  that  is robust  and  deliverability of  high                                                               
volumes over a short period of time as well as having longevity.                                                                
                                                                                                                                
The problem on the reservoir side  is that one won't know how big                                                               
some of these are or how much  they can deliver when they need to                                                               
be delivered until a contract  is secured that is price sensitive                                                               
to those developments. As the  bigger fields wane, smaller fields                                                               
will have to  be brought to bear. This is  what is happening with                                                               
the Hilcorp investments  in the Cook Inlet. This is  not usual as                                                               
every major sunset  of major contracts in Southcentral  has had a                                                               
surge of  activity to bring  new reserves and  new deliverability                                                               
to the market to satisfy those  contracts. Part of the problem is                                                               
being  able to  satisfy  both the  near term  and  the long  term                                                               
requirements of  Southcentral Alaska; the needs  of the utilities                                                               
and  Fairbanks   and  future  markets   are  going  to   be  more                                                               
technically  complicated and  higher priced.  The development  of                                                               
these  smaller  gas  fields  is  going to  be  greater  than  the                                                               
historic costs  of the  major gas  fields. If  the cost  of those                                                               
developments  are  elevated over  what  has  been the  historical                                                               
basis, it  is almost  a business  conundrum of  how to  bring gas                                                               
into a new market that  has immature distribution systems without                                                               
creating   a  subsidized   environment  for   that  market,   and                                                               
therefore, possibly a subsidized industry  in the Cook Inlet. So,                                                               
the independents and  the new producers are trying  to figure out                                                               
how to deal with the state-subsidized organization.                                                                             
                                                                                                                                
SENATOR COGHILL agreed that the  market is complex and would have                                                               
to  be subsidized  and stated  that is  why Fairbanks  needs this                                                               
project. Fairbanks would  have been the first to get  gas off the                                                               
North Slope  and probably the last  one to get out  of a contract                                                               
like that, but for gas  from Southcentral, Fairbanks would be the                                                               
last ones into  a contract and the  first ones to be  left out of                                                               
one.                                                                                                                            
                                                                                                                                
Along the  way, he  hears that a  subsidized market  is something                                                               
that is  going to  have to  happen; AIDEA's  role, for  example -                                                               
whether it's the Red Dog mine or  a jack-up rig in the Kenai - is                                                               
to help industry with ways to  get a head start. The Kenai area's                                                               
storage facilities  allowed for ways  to get the  industry revved                                                               
back up  again, which  worked pretty well.  So, they  are looking                                                               
for ways  to make sure that  this little project, even  if it has                                                               
some subsidy  level to  it, is  equitable to  what has  been done                                                               
before in Alaska and still  does not have unintended consequences                                                               
of leaving people high and dry.  He sees this as a bridge project                                                               
before North Slope gas arrives.                                                                                                 
                                                                                                                                
SENATOR COGHILL  said he understood  that a lot of  contracts are                                                               
coming up in the basin in 2018 and  asked if that is a barrier or                                                               
a positive.                                                                                                                     
                                                                                                                                
MR. BARRON  answered that he  wasn't aware of how  many contracts                                                               
are  coming up,  but the  contracts Hilcorp  signed were  through                                                               
2018, primarily  with Enstar. A  lot of contracts will  sunset in                                                               
and  around that  timeframe. Furie,  BlueCrest Energy  and a  few                                                               
other new  players have some  potential reserves that  they would                                                               
like to bring to market and they  have yet to be fully proven and                                                               
developed, but  those will  be at an  elevated cost.  He supports                                                               
getting  lower  cost  energy  to  Fairbanks,  but  he  wanted  to                                                               
encourage  AIDEA to  look at  all the  possibilities, recognizing                                                               
that if there  are going to be subsidies, they  need to make sure                                                               
that  those  don't create  an  unfair  business model  that  will                                                               
preclude  the private  sector from  engaging  in exploration  and                                                               
development  and building  or  owning the  assets  to supply  the                                                               
customers.                                                                                                                      
                                                                                                                                
SENATOR COGHILL said  his point is well taken and  he will try to                                                               
make  sure  that  language  stays  open to  industry  -  even  in                                                               
Fairbanks.                                                                                                                      
                                                                                                                                
3:52:05 PM                                                                                                                    
GENE THERRIAULT,  Deputy Director,  Energy Policy,  Alaska Energy                                                               
Authority (AEA),  Fairbanks, Alaska,  said it  would be  best for                                                               
Commissioner Myers  to start  by responding to  the issue  of the                                                               
ability  of  the  Cook  Inlet Basin  to  eventually  produce  the                                                               
molecules in a  volume that could satisfy not only  the demand in                                                               
Cook Inlet  but also the  small quantity  it would take  to serve                                                               
the  Interior.  He  said  the  existing  utility  demand  in  the                                                               
Interior is  less than  1 bcf/yr. As  the distribution  system is                                                               
built  out and  three  utilities -  Fairbanks  Natural Gas  (FNG)                                                               
Distribution,  Interior  Gas  Utilities  (IGU)  Distribution  for                                                               
space heat  and Golden Valley  Electric Association (GVEA)  - are                                                               
brought on,  it is anticipated  that demand would increase  to 10                                                               
bcf/yr. in 10  years. Cook Inlet demand now is  90-100 bcf/yr., a                                                               
relatively small amount.                                                                                                        
                                                                                                                                
3:53:52 PM                                                                                                                    
MARK MYERS, Commissioner, Department  of Natural Resources (DNR),                                                               
Anchorage, Alaska,  thanked Mr.  Barron for  his past  service as                                                               
director of the Division of Oil and  Gas. "He is a real expert on                                                               
Cook Inlet," Commissioner Myers said.  He stated that they really                                                               
want to get gas to Fairbanks  at affordable prices, but also make                                                               
sure  that  Anchorage is  adequately  supplied.  He said  he  had                                                               
provided  advice to  various legislators  on  various Cook  Inlet                                                               
Senate bills.                                                                                                                   
                                                                                                                                
He related  that Cook Inlet's  undiscovered resource, based  on a                                                               
2011  assessment, showed  19  tcf of  gas, 14  tcf  of which  are                                                               
conventional, non-coal, non-other sources of  gas. That is a very                                                               
large volume of  natural gas, but it's not behind  a pipe. In the                                                               
28 fields that produce  oil and gas in the Cook  Inlet only 1 tcf                                                               
of  proven reserves  is economic  and  available for  production.                                                               
About 355 bcf of additional gas  is a resource in later and lower                                                               
reserve categories.                                                                                                             
                                                                                                                                
COMMISSIONER MYERS stated that as  Mr. Barron said, people do not                                                               
produce reserves until  there is a known  market, and exploration                                                               
isn't  typically done  until there  is  a market,  either.   Cook                                                               
Inlet has  a small market, the  major uses being for  utility gas                                                               
and LNG export.  Traditionally, the state has  viewed that supply                                                               
as: more demand  is better for the basin given  the resource base                                                               
that  is  there  and  the   companies  that  are  exploring.  For                                                               
instance, the  LNG export license  was renewed  for 40 bcf  for a                                                               
two-year period; last year about 17  bcf were exported out of the                                                               
basin.  That is  a  good  thing, because  it  will  lead to  more                                                               
market, more exploration and more development.                                                                                  
                                                                                                                                
He  explained that  pricing for  LNG is  very different  than the                                                               
pricing that is  regulated by the Regulator  Commission of Alaska                                                               
(RCA) for  utilities. So, there  is already a  significant amount                                                               
of  non-regulated  gas  that is  leaving  the  basin.  Generally,                                                               
support  for export  has come  from the  Department of  Energy in                                                               
approving  that  export license,  the  state  in supporting  that                                                               
license and from the producers generally in the Cook Inlet.                                                                     
                                                                                                                                
The Fairbanks  market is about  1 percent of the  current instate                                                               
demand.  To  the question  of:  Is  the  supply adequate  and  is                                                               
additional  demand a  good thing  in the  basin or  a bad  thing?                                                               
Generally and  historically, the  state has viewed  it as  a good                                                               
thing,  because they  believe the  resource assessments  show the                                                               
gas  is there.  How  much it  will cost  to  develop and  produce                                                               
economically will depend on the  market. Therefore, AIDEA's going                                                               
with an  RFI request  for competitive  solicitation to  gauge the                                                               
market price that  would take gas to Fairbanks is  a very prudent                                                               
approach. The  drilling is only  to keep up with  the contractual                                                               
obligations  of the  companies with  the  exception of  exporting                                                               
gas.                                                                                                                            
                                                                                                                                
3:59:56 PM                                                                                                                    
COMMISSIONER MYERS said the other  body is considering supporting                                                               
more fertilizer production  from the Agrium plant  under the same                                                               
theory that  more demand  equals a  better commercial  market for                                                               
folks. This  has been the  historical viewpoint, and  again, this                                                               
amount of  gas to Fairbanks  would probably  be a good  thing for                                                               
the market  provided that the market  is able to deliver  it at a                                                               
reasonable price.                                                                                                               
                                                                                                                                
He  thought a  lot of  questions in  Mr. Barron's  testimony were                                                               
about AIDEA's  structure being  commercial or  a state-subsidized                                                               
structure  and then  the question  of making  a gas  to Fairbanks                                                               
project affordable.  The Fairbanks  Natural Gas program  has been                                                               
going on  for 20 years and  it has not seen  a significant amount                                                               
of market  expansion in that time  from the 1 bcf/yr.  level. So,                                                               
Commissioner  Myers  said,  commercial markets  really  have  not                                                               
responded to increased supply to  Fairbanks. The reasons are that                                                               
it's  a very  low density  market and  the infrastructure  is not                                                               
there to build out. It hasn't  been built because of the cost and                                                               
low   density  of   market,  the   supply   and  the   distances.                                                               
Realistically,  aggregation  of  demand  is necessary  to  get  a                                                               
request for enough  gas to get explorers  interested in exploring                                                               
or developers interested in developing additional reserves.                                                                     
                                                                                                                                
He  noted that  gas to  Fairbanks serves  a lot  of purposes.  In                                                               
addition to  lowering the cost  of energy, it provides  a cleaner                                                               
source of fuel than much of the  wood that is being burned and it                                                               
will address the urgency behind  air quality and health issues in                                                               
Fairbanks. It  comes down to  answering the question of  what the                                                               
commercial market can deliver to a  1 bcf proposal that scales up                                                               
to 10 bcf over a decade.                                                                                                        
                                                                                                                                
4:02:34 PM                                                                                                                    
PAUL  DECKER,   Acting  Director,   Division  of  Oil   and  Gas,                                                               
Department of Natural Resources  (DNR), Anchorage, Alaska, agreed                                                               
that  about 1  tcf/gas is  remaining in  the proven  and probable                                                               
categories  of reserves  in  the  basin. It  is  a best  estimate                                                               
gleaned from making  a series of incremental  estimates from 2009                                                               
onward and  he is more  comfortable with  .8 tcf to  1.3 tcf/gas.                                                               
Currently,  all  engineering data  is  being  reviewed to  get  a                                                               
better  estimate  and  that  will  be  available  in  mid-to-late                                                               
August.                                                                                                                         
                                                                                                                                
He  said   that  recent  exploration   successes  in   the  basin                                                               
demonstrate that  additional fields  remain to be  discovered and                                                               
brought on  line. Some are fairly  small like the Kenai  Loop and                                                               
others  appear to  be  larger  like the  jack-up  rig at  Kitchen                                                               
Lights  and  Cosmopolitan. It  would  be  a little  premature  to                                                               
assume  that  all  of  those  fields  are  going  to  be  equally                                                               
challenged  economically as  sources  of affordable  gas for  the                                                               
IEP.  The IEP  leadership's  goal of  putting  out a  competitive                                                               
solicitation or  request for information  (RFI) to find  out what                                                               
the market  will bear is  the right approach. Those  numbers will                                                               
speak for themselves.                                                                                                           
                                                                                                                                
4:05:52 PM                                                                                                                    
CHAIR  GIESSEL  said  she  wanted  it on  the  record  that  this                                                               
committee  understands the  imperative nature  of getting  gas to                                                               
Fairbanks and  they want to  facilitate in getting it  there, but                                                               
it's a question of where it  can be economically obtained and the                                                               
role of AIDEA in it.                                                                                                            
                                                                                                                                
4:07:20 PM                                                                                                                    
MR. THERRIAULT  said when  he first expected  10 years  for build                                                               
out  and ramping  up to  a total  of about  9.5 bcf/year  for the                                                               
distribution  and  demand  in Fairbanks,  he  expected  using  80                                                               
bcf/gas, which is equivalent to  one year of Cook Inlet's current                                                               
demand,  and AIDEA's  role in  putting those  pieces together  is                                                               
critical. Removing  the restriction on gas  molecules coming from                                                               
just the  North Slope doesn't  mean that  the North Slope  is not                                                               
still potentially  the source that would  supply Interior Alaska.                                                               
Going out  with a new  RFP could provide another  opportunity for                                                               
producers  to sharpen  their pencils  and still  create potential                                                               
competition   for  delivery   off  of   the  North   Slope.  This                                                               
legislation  is just  asking to  not  be restricted  to just  the                                                               
North  Slope  as they  utilize  the  tools that  the  legislature                                                               
proved two years ago.                                                                                                           
                                                                                                                                
4:09:43 PM                                                                                                                    
SENATOR MICCICHE said  his 10-year build out  was very aggressive                                                               
and  asked how  he arrived  at  that number  considering what  it                                                               
would take to even begin going from 1  bcf to as much as 5 mcf in                                                               
the first three years.                                                                                                          
                                                                                                                                
MR. THERRIAULT  replied that they used  conservative numbers, but                                                               
he would let  Mr. Szymoniak, who produced the  graph, answer that                                                               
question.                                                                                                                       
                                                                                                                                
4:10:28 PM                                                                                                                    
NICK   SZYMONIAK,   Deputy   Commissioner,   Alaska   Industrial,                                                               
Development  Export  Authority (AIDEA),  answered  that  it is  a                                                               
fairly aggressive build  out that is based  on analysis performed                                                               
by Cardno  ENTRIX, Corporation, in  2013 for AIDEA. He  said that                                                               
they are constantly  refining and working with  the utilities and                                                               
the local community to better  understand what the demand profile                                                               
looks like. While  it is an aggressive timeline,  they believe it                                                               
to be  reasonable. He noted that  in the early years  they expect                                                               
2-3  bcf   to  go  instantaneously  to   Golden  Valley  Electric                                                               
Association (GVEA), which  helps get that quick ramp  up and they                                                               
believe that AIDEA  has an important role to play  to help soften                                                               
that risk on the private investors.                                                                                             
                                                                                                                                
SENATOR  MICCICHE  asked  him  to   share  that  analysis  saying                                                               
overestimating is  not in  their favor  in thinking  about supply                                                               
challenges from Cook Inlet.                                                                                                     
                                                                                                                                
MR. SZYMONIAK replied that they  are fully aware and sensitive to                                                               
the demand  projections and  can share  the demand  projection by                                                               
utility for  the 10 years that  constitute the 80 bcf  as well as                                                               
the Cardno ENTRIX report.                                                                                                       
                                                                                                                                
CHAIR GIESSEL commented  that as of about 10 days  ago, the auto-                                                               
fill  pricing for  home  heating  oil in  Fairbanks  was $3.04  a                                                               
gallon and asked  if he was concerned about the  number of people                                                               
who may not  want to convert to  natural gas at this  time of low                                                               
oil prices.                                                                                                                     
                                                                                                                                
MR. SZYMONIAK  replied that  AIDEA is  concerned, but  oil prices                                                               
won't necessarily stay  low and this project is a  bit of a hedge                                                               
to protect  Fairbanks against  higher oil  prices in  the future.                                                               
They  don't want  to let  off  the gas  pedal just  because of  a                                                               
temporary  energy relief  concept for  Fairbanks. Because  of the                                                               
analysis  produced by  Cardno, there  was  a follow-up  analysis,                                                               
which they will  also supply to the committee that  looked at the                                                               
sensitivity of  conversion rates  to different prices  of natural                                                               
gas.  That analysis  held  the  price of  fuel  oil static  while                                                               
changing the prices  of natural gas to  determine what conversion                                                               
rates  to  expect  at  different natural  gas  prices  and  found                                                               
significant  conversions  to  natural  gas  even  at  softer  oil                                                               
prices.                                                                                                                         
                                                                                                                                
CHAIR  GIESSEL  said it  seems  like  a rational  consumer  would                                                               
consider the  cost of swapping  from oil to  gas and asked  if he                                                               
had taken into account the closing of Flint Hills.                                                                              
                                                                                                                                
MR. SZYMONIAK answered yes and that  Flint Hills is not in any of                                                               
the base scenarios.                                                                                                             
                                                                                                                                
4:15:31 PM                                                                                                                    
FRED  PARADY,   Deputy  Commissioner,  Department   of  Commerce,                                                               
Community  and Economic  Development (DCCED),  remarked that  two                                                               
prongs  drive  conversion. One  is  the  particulate matter  (PM)                                                               
concern  which may  involve local  government decision-making  in                                                               
support of that  conversion and the other is  what Mr. Therriault                                                               
described.                                                                                                                      
                                                                                                                                
CHAIR GIESSEL asked if he  was saying that local government might                                                               
require residences to convert.                                                                                                  
                                                                                                                                
MR. PARADY replied that he  would leave that to local government,                                                               
but it is within the possible  tool kit if one considers the fact                                                               
that  Fairbanks  is  a  non-attainment   area  that  will  impede                                                               
permitting abilities  of different projects going  forward. It is                                                               
a health issue that will have to be addressed in some fashion.                                                                  
                                                                                                                                
SENATOR MICCICHE asked if he  was willing to share his conversion                                                               
model.                                                                                                                          
                                                                                                                                
MR.  THERRIALUT responded  that  the Cardno  report  is on  their                                                               
website; he could also supply hard copies.                                                                                      
                                                                                                                                
4:17:23 PM                                                                                                                    
SENATOR MICCICHE said prices can  change dramatically in the Cook                                                               
Inlet but the  conversion rate in the model happens  at a certain                                                               
price point  and has an  age sensitivity  and asked if  the model                                                               
scaled the price oil per mmbtu  with potential changes in the gas                                                               
prices as supply either tightens or demand increases.                                                                           
                                                                                                                                
4:17:37 PM                                                                                                                    
MR. THERRIAULT replied that the  model, put together from surveys                                                               
and consumer  focus groups,  was constructed to  show a  scale of                                                               
consumer actions as the price of oil  or gas goes up or down. The                                                               
expectation  was  that 75  percent  of  consumers would  actually                                                               
convert  as the  pipe goes  down  the street  in the  subdivision                                                               
where they live. Consumers can  make different decisions based on                                                               
the age  of their  existing boilers and  the cost  of conversion,                                                               
which  is estimated  to be  about  $2500 compared  to $10,000  or                                                               
$11,000 for a complete swap out  for domestic heat and hot water.                                                               
When the Interior Gas Utilities (IGU)  went out with a model they                                                               
actually asked  for 50 homes to  volunteer to have an  audit done                                                               
on  their  actual infrastructure.  Of  those  50 volunteers,  the                                                               
conversion could be  achieved rather than a complete  swap out. A                                                               
lot of  housing was  built 30  or 40  years ago,  so a  number of                                                               
those original boilers had been swapped  out in the last 10 years                                                               
leading  to  the  possibility  for  them  to  be  converted  more                                                               
economically.                                                                                                                   
                                                                                                                                
SENATOR MICCICHE said he ran some  numbers on the 9.5 bcf/yr. and                                                               
the residential potential  is about 1 bcf. It looks  like the big                                                               
conversions will  be on  the industrial side  and asked  if there                                                               
was any offset  in potential federal financing  on the industrial                                                               
side.                                                                                                                           
                                                                                                                                
MR. THERRIAULT said  he wasn't aware of any  federal benefit that                                                               
can come  into play,  but another  separate piece  of legislation                                                               
targets business  conversions. He explained that  the majority of                                                               
the  light industrial  and business  use in  the Fairbanks  North                                                               
Star Borough  is in Fairbanks  and as quickly as  those potential                                                               
users could  convert the better.  The legislation is  a mechanism                                                               
by which the  local government can assist  businesses by offering                                                               
a low cost  source of financing and allowing the  payback of that                                                               
loan to  be stretched out  over time. It  has a zero  fiscal note                                                               
and is asking the legislature  to just allow the local government                                                               
to  have the  mechanism. It  applies to  any energy  efficiency a                                                               
local business wants to implement but  it has a particular use in                                                               
Fairbanks and they believe the cities  in the borough will be the                                                               
local governments  that fully  develop the  mechanism and  try it                                                               
out.                                                                                                                            
                                                                                                                                
4:22:46 PM                                                                                                                    
SENATOR  COGHILL  said the  Fairbanks  North  Star Borough  talks                                                               
about various ways to make sure the houses convert.                                                                             
                                                                                                                                
MR. THERRIAULT added  the bill mentions using  PACE financing for                                                               
local government to tap into possible federal funds.                                                                            
                                                                                                                                
4:24:40 PM                                                                                                                    
JOHN  COLLETTE,  Alaska  Works  Engineering,  Fairbanks,  Alaska,                                                               
supported SB  50. He  was asked  by the state  to look  at moving                                                               
natural  gas away  from  the Railbelt  area,  a very  complicated                                                               
task, and he didn't want to  see the legislature at this time tie                                                               
the hands of AIDEA. Fairbanks is  in a crisis situation and AIDEA                                                               
is the agency  the state relies on for making  deals with private                                                               
enterprise and they are good organization.                                                                                      
                                                                                                                                
4:25:53 PM                                                                                                                    
MERRICK   PIERCE,   representing  himself,   Fairbanks,   Alaska,                                                               
supported SB 50.  He said the air quality in  Fairbanks and North                                                               
Pole  is so  badly  degraded due  to lack  of  clean energy  that                                                               
morbidity  and   mortality  has   increased  among   the  100,000                                                               
residents of  the area. The  legislature has a  constitutional as                                                               
well as  a moral imperative  to act consistent with  Article VII,                                                               
Section  4, in  addition to  the  very large  body of  scientific                                                               
evidence  that documents  harm to  human health  from particulate                                                               
matter. A comprehensive  study was just published  by the British                                                               
Medical  Journal  in  March  2015  and  is  conclusion  was  that                                                               
particulate air  pollutants have  a marked and  close correlation                                                               
with emissions  which lead to  stroke. He appreciated  being able                                                               
to look at all ideas that  could be used to get affordable energy                                                               
to Fairbanks.                                                                                                                   
                                                                                                                                
4:28:05 PM                                                                                                                    
JOMO   STEWART,  Energy   Project  Manager,   Fairbanks  Economic                                                               
Development Corporation,  Fairbanks, Alaska,  supported SB  50 as                                                               
currently drafted and Senator Coghill's proposed amendment.                                                                     
                                                                                                                                
GARY NEWMAN,  representing himself, Fairbanks,  Alaska, supported                                                               
SB 50 and  Senator Coghill's amendment. He said he  serves on the                                                               
University of  Alaska Fairbanks (UAF)  Master Plan  Committee and                                                               
is familiar with the power  plant project that people are working                                                               
on to bring costs  down. He has also been an  active member and a                                                               
candidate for  the board of  GVEA. He  said he didn't  support HB
105, as amended.                                                                                                                
                                                                                                                                
MR.  NEWMAN also  said  AIDEA  actually exhibited  a  bit of  due                                                               
diligence in  pulling out of  the North Slope project  because it                                                               
didn't meet  the criteria of  supplying $15/mcf delivered  to the                                                               
home. GVEA said it wouldn't take  all the risk. The goal has been                                                               
to provide relief  to Fairbanks and AIDEA is trying  to make sure                                                               
it  is affordable.  There has  been  a slight  reprieve with  oil                                                               
prices, but $3/gallon  is still kind of high and  he is hoping to                                                               
get  an  equivalent  of  about  $2/gallon  with  natural  gas  or                                                               
propane.  Finally,  he  said the  argument  that  Fairbanks  will                                                               
constrain LNG for Anchorage and Kenai is a "paper tiger."                                                                       
                                                                                                                                
CHAIR GIESSEL  said he  brought up the  $15/mcf price  point that                                                               
seems to  be the threshold and  asked what if the  new idea can't                                                               
meet that? Is that a deal breaker, again?                                                                                       
                                                                                                                                
MR.  NEWMAN replied  that won't  be  known until  the experts  go                                                               
through the  effort. The bar  of getting affordable  energy seems                                                               
to be moving and he said, "Let's continue to move the bar."                                                                     
                                                                                                                                
4:31:58 PM                                                                                                                    
DAN  SPILLANE, representing  himself, Fairbanks,  Alaska, related                                                               
how bad  the air quality  is in Fairbanks.  He urged them  to not                                                               
pigeon-hole AIDEA.  He and his  wife are both business  owners in                                                               
Fairbanks and  a gasline would  be a  welcome relief for  them as                                                               
well  as the  economic benefit  of all  of Fairbanks.  He related                                                               
that  his daughter  was born  with congenital  heart defects  and                                                               
part of her continued health  and welfare is proper exercise. The                                                               
family goes cross country skiing at  least four times a week, but                                                               
sometimes the  air quality gets  so bad  their eyes will  get red                                                               
and their lungs will hurt.                                                                                                      
                                                                                                                                
4:33:24 PM                                                                                                                    
PAMELA   THROOP,   representing   herself,   Fairbanks,   Alaska,                                                               
supported SB  50. She  has been a  commercial real  estate broker                                                               
and developer for  20 years. She said that  many businesses would                                                               
love  to locate  in Fairbanks,  but they  often walk  away saying                                                               
that the  cost of  doing business  is way too  high. In  the last                                                               
three or  four months seven  or eight businesses are  closing and                                                               
leaving  town   or  moving  to   Anchorage.  Fairbanks   is  also                                                               
experiencing increasing foreclosures and  the health problem. She                                                               
wanted AIDEA to have  a broad enough scope to be  able to look at                                                               
anything  good for  them,  whether it's  the  pipeline from  Cook                                                               
Inlet or propane.                                                                                                               
                                                                                                                                
4:36:10 PM                                                                                                                    
CHAIR   GIESSEL  said   the  legislature   talks   a  lot   about                                                               
diversifying the  economy and everyone  sitting at  the Resources                                                               
table  understands that  resources, especially  energy resources,                                                               
are what is  going to facilitate that. She  remarked that Iceland                                                               
found a  very low cost energy  source and now it  has an aluminum                                                               
refining  company with  raw materials  being  shipped from  South                                                               
America. So, she knows the  difference that affordable energy can                                                               
make.                                                                                                                           
                                                                                                                                
4:36:59 PM                                                                                                                    
MR. PARADY  said AIDEA's  role in  this quest  is to  deliver low                                                               
cost energy. Yes, it is a  financial institution and as such, its                                                               
role is to  provide a combination of financing tools  in a manner                                                               
that benefits  Interior consumers  and third  party participants.                                                               
In  addition  to  low  interest   rates  and  flexible  repayment                                                               
schedules, AIDEA's IEP financing tools  are able to assume market                                                               
risks that the private sector might not otherwise take.                                                                         
                                                                                                                                
Is it  a facilitator of  commercial agreements  between producers                                                               
and  utilities?  The answer  is  yes.  The  IEP project  team  is                                                               
working to  facilitate commercial  agreements. The heart  of this                                                               
bill is to change four words  which say that that supply was from                                                               
the North  Slope and  to open  it to  other alternatives  such as                                                               
Cook  Inlet,  flex  steel  pipe  and  propane,  to  initiate  the                                                               
commercial process through a formal  solicitation for natural gas                                                               
and  liquefaction,  and  to facilitate  preliminary  negotiations                                                               
with Cook  Inlet producers and  liquefaction providers  on behalf                                                               
of the Interior utilities.                                                                                                      
                                                                                                                                
Through these  three roles  AIDEA is  working to  rationalize the                                                               
process and support development on  commercial terms, but it will                                                               
not  directly enter  into the  commercial  agreements beyond  its                                                               
financial role.                                                                                                                 
                                                                                                                                
4:39:52 PM                                                                                                                    
CHAIR GIESSEL  said the  fundamental question  is that  a private                                                               
sector  buyer  wanted  to  move  forward  with  an  LNG  facility                                                               
(purchase of  Pentex Exploration,  Inc.) and  was stopped  by the                                                               
Attorney General  (AG). Then AIDEA  stepped in and she  asked how                                                               
that fits the role of AIDEA.                                                                                                    
                                                                                                                                
MR.  PARADY  answered that  the  AG  stepped  in stems  from  the                                                               
original  Hilcorp consent  decree to  which those  parties agreed                                                               
(in the RCA  review) and that original letter was  written by the                                                               
prior AG rather  than the present one.  From AIDEA's perspective,                                                               
they are not interfering in buying  the parent, Pentex and it may                                                               
still go forward.  If it does go forward on  its own merits, then                                                               
AIDEA will work with that  entity to rationalize the distribution                                                               
system in  Fairbanks. It  is an accomplishment  of AIDEA  that in                                                               
moving  to purchase  Pentex,  it has  afforded  the community  of                                                               
Fairbanks the opportunity to have  a single utility. He commented                                                               
that  nothing makes  less sense  to him  than to  have a  postage                                                               
stamp  small  market  that  is   fragmented  in  two  pieces.  By                                                               
combining   it,   Fairbanks   will  have   one   warehouse,   one                                                               
administrative  staff, one  metering  system, and  it just  makes                                                               
sense.  It does  not preclude  Hilcorp's proposed  acquisition of                                                               
FNG.                                                                                                                            
                                                                                                                                
4:41:38 PM                                                                                                                    
CHAIR  GIESSEL said  it sounds  like he  is describing  a utility                                                               
company: the purchasing and metering.                                                                                           
                                                                                                                                
MR.  PARADY responded  that AIDEA  does not  intend to  operate a                                                               
utility and will divest those assets at the appropriate time.                                                                   
                                                                                                                                
CHAIR  GIESSEL asked  if AIDEA  will  hold gas  reserves in  Cook                                                               
Inlet.                                                                                                                          
                                                                                                                                
MR. PARADY  answered no. The role  of AIDEA is having  capital to                                                               
solve any number of problems, but  that role is in support of the                                                               
market.                                                                                                                         
                                                                                                                                
SENATOR  MICCICHE  said  AIDEA  didn't  intend  to  own  any  gas                                                               
reserves, but then he said it  intends if necessary to own equity                                                               
in gas reserves, and that seems to be the same thing.                                                                           
                                                                                                                                
MR. PARADY replied  that the answer is no; AIDEA  does not intend                                                               
to own  gas reserves in the  ground. He suggested there  may be a                                                               
role for  AIDEA to play  with its  patient capital in  the supply                                                               
chain, but not in the ownership of natural gas reserves.                                                                        
                                                                                                                                
4:44:04 PM                                                                                                                    
CHAIR GIESSEL said AIDEA is  conducting a $400,000 study with REI                                                               
relating  to a  potential LNG  facility in  Cook Inlet  and that,                                                               
again, seems like a complex relationship.                                                                                       
                                                                                                                                
MR. PARADY answered  that was outside his area  of expertise, but                                                               
Ted Leonard could answer that.                                                                                                  
                                                                                                                                
4:44:56 PM                                                                                                                    
TED  LEONARD, Director  Emeritus,  Alaska Industrial  Development                                                               
and  Export  Authority  (AIDEA),   answered  that  the  chair  is                                                               
correct; AIDEA has a reimbursement  agreement with REI to look at                                                               
the financing  of an  LNG export facility.  AIDEA would  have the                                                               
ability as part  of this financing to take  a preferred ownership                                                               
position  in it  to provide  the long-term  patient capital,  but                                                               
that's only  one of  the options  they are looking  at -  if that                                                               
project goes forward. It is in the very early stages.                                                                           
                                                                                                                                
CHAIR  GIESSEL said  that  AIDEA is  involved  with many  complex                                                               
projects:  an LNG  facility when  there  is already  one in  Cook                                                               
Inlet  and   a  gas  field   resource  basin  that   has  complex                                                               
structures. She  wondered about their  great involvement  in Cook                                                               
Inlet.                                                                                                                          
                                                                                                                                
MR. LEONARD responded  that AIDEA is trying to  ensure and assist                                                               
in the  development of Cook  Inlet through investments  they have                                                               
made before  taking into  account all  the complexities  that are                                                               
being discussed.                                                                                                                
                                                                                                                                
4:47:56 PM                                                                                                                    
MR. PARADY said Mr. Barron's last  questions was if AIDEA is some                                                               
entangled blend of  all three. He would simply say  that AIDEA is                                                               
a reasonable combination  of those tools. It  has been responsive                                                               
and nimble; it  is up to the challenges of  the project which are                                                               
complicated.  That is  why they  are before  the legislature  now                                                               
seeking a geographic diversification option.                                                                                    
                                                                                                                                
SENATOR MICCICHE  said he was  worried, because two years  ago he                                                               
tried  to  make  an  amendment   that  removed  the  North  Slope                                                               
language,  because  he believed  that  project  was $100  million                                                               
under-capitalized.   A  non-public fight  killed that  amendment,                                                               
but it  took AIDEA  "more money than  it took me  on a  napkin to                                                               
figure it out  how under-capitalized it was. Now here  we are two                                                               
years  later.  He  believes  AIDEA has  an  appropriate  role  in                                                               
projects such  as these,  but he  felt that  political motivation                                                               
does  not normally  arrive  at  the same  answer  that a  private                                                               
entity would, because of the push for a political solution.                                                                     
                                                                                                                                
4:50:44 PM                                                                                                                    
MR.  PARADY responded  that the  answer  isn't self-evident;  the                                                               
process needs to be worked  through before the answer will become                                                               
clear. It's  possible they will  still end  up back on  the North                                                               
Slope. A particular set of circumstances  led to a set of numbers                                                               
that  didn't  work for  delivery.  It's  possible that  could  be                                                               
revisited with  a different team  of partners that could  come up                                                               
with  a  lower  number.  It's possible  Cook  Inlet  works;  it's                                                               
possible  that  propane  works;  and the  pipeline  needs  to  be                                                               
evaluated.  AIDEA has  found itself  tied to  the North  Slope in                                                               
that  due  diligence  process.  That  is  why  they  are  seeking                                                               
flexibility.  He simply  didn't believe  that politics  can trump                                                               
numbers when it comes to  operation of an energy system. Politics                                                               
has a role in any aspect of  society, but not in the mechanics of                                                               
solving this particular problem.                                                                                                
                                                                                                                                
CHAIR GIESSEL  remarked that  the North  Slope didn't  pencil out                                                               
and asked how  he could justify the buildout  happening without a                                                               
gas contract.                                                                                                                   
                                                                                                                                
MR. THERRIAULT  answered that the proposal  is to go out  with an                                                               
RFI to  private sector  players that have  molecules to  bring to                                                               
the infrastructure as  well as an RFP for  private sector players                                                               
that  want to  propose  the infrastructure  liquefaction, but  it                                                               
would  be an  open  and competitive  process  for private  sector                                                               
players. That process  will happen between now and  the middle of                                                               
summer.                                                                                                                         
                                                                                                                                
CHAIR GIESSEL asked if he had  a timeframe for the stage-gates he                                                               
will be going through.                                                                                                          
                                                                                                                                
MR.  THERRIAULT  replied  that  the  RFI and  RFP  need  to  have                                                               
responses back  in 1.5 to 2  months and then the  proposals would                                                               
be  narrowed  down  to  a  smaller number  that  could  work  for                                                               
evaluation.  It  could be  from  the  north  or  the south  or  a                                                               
combination  that an  entity that  has  gas molecules  partnering                                                               
with  another entity  that wants  to build  infrastructure -  and                                                               
both are looking  for access to the patient capital  or an entity                                                               
that has  access to  the gas  molecules and  infrastructure. They                                                               
are also  open to  a propane  proposal or  someone that  wants to                                                               
deliver via  pipe. The language in  the bill would allow  them to                                                               
look at all of  the above. He said the number  of $15 gets thrown                                                               
out, but the end isn't quite that rigid; it is a range.                                                                         
                                                                                                                                
4:56:01 PM                                                                                                                    
CHAIR GIESSEL said  burner tip price was mentioned to  be $15 and                                                               
that's a pretty aggressive price goal.                                                                                          
                                                                                                                                
MR. THERRIAULT responded  that's comparable to about  $2 fuel oil                                                               
at the time and now the price of competing fuel has come down.                                                                  
                                                                                                                                
SENATOR  STOLTZE  said  two Interior  folks  suggested  they  are                                                               
violating  health and  welfare  provisions  of the  constitution:                                                               
Article 7,  Section 4. He asked  if this is an  official position                                                               
and a litigation concern.                                                                                                       
                                                                                                                                
MR. THERRIAULT replied there is  no suggestion of litigation. The                                                               
Environmental Protection  Agency (EPA)  is watching  the Interior                                                               
very  closely  and  allowing  Fairbanks   slack  in  coming  into                                                               
compliance.   If  the   project   is  further   delayed  by   the                                                               
legislature,  the  EPA  may  feel more  compelled  to  force  the                                                               
community into a compliance effort.                                                                                             
                                                                                                                                
4:58:46 PM                                                                                                                    
SENATOR MICCICHE remarked  that he couldn't believe  that a small                                                               
bore pipeline was  not one of the solutions in  the last 20 years                                                               
and  while he  supported Interior  senators, he  saw a  couple of                                                               
problems in looking  at the North Slope LNG  business model. They                                                               
talk  about combining  into one  utility,  yet they  have an  LNG                                                               
production  business model,  a  transportation trucking  business                                                               
model  and a  re-gas,  storage and  distribution  model. The  LNG                                                               
production  model  in  Cook  Inlet in  his  view  eliminates  the                                                               
potential  for the  best price  for a  competitive bid  option to                                                               
pipe, because  someone will control  the supply and  that worries                                                               
him. His  main concern with the  North Slope and down  the Dalton                                                               
Highway option was  not under capitalization, but  with what just                                                               
happened when  the Dalton  Highway was shut  down. The  long term                                                               
value  of this  project is  cents on  the dollar.   A  Richardson                                                               
Highway route  small bore pipeline  and Parks Highway  route with                                                               
AKLNG would solve  the problem out into the next  generation.  He                                                               
asked  them to  look  at  that approach  instead  of a  piecemeal                                                               
approach. He would rather subsidize a real solution.                                                                            
                                                                                                                                
SENATOR  COGHILL  agreed  with  Senator  Stoltze  that  they  are                                                               
looking for an economic solution not a constitutional mandate.                                                                  
                                                                                                                                
5:03:00 PM                                                                                                                    
SENATOR WIELECHOWSKI  commented that  he had  been here  for nine                                                               
sessions and  they had talked  about getting low cost  energy for                                                               
Fairbanks  every single  year.  He thought  they  needed to  pass                                                               
something  that gives  AIDEA authority  instead of  micromanaging                                                               
for another nine years and leaving Fairbanks to die on the vine.                                                                
                                                                                                                                
SENATOR GIESSEL closed public testimony and held SB 50 in                                                                       
committee.                                                                                                                      

Document Name Date/Time Subjects