[Senate Hearing 107-352]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-352

                      ALASKA NATURAL GAS PIPELINE

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

TO RECEIVE TESTIMONY ON THE STATUS OF PROPOSALS FOR THE TRANSPORTATION 
  OF NATURAL GAS FROM ALASKA TO MARKETS IN THE LOWER 48 STATES AND ON 
  LEGISLATION THAT MAY BE REQUIRED TO EXPEDITE THE CONSTRUCTION OF A 
                          PIPELINE FROM ALASKA

                               __________

                            OCTOBER 2, 2001


                       Printed for the use of the
               Committee on Energy and Natural Resources

                                _______

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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman
DANIEL K. AKAKA, Hawaii              FRANK H. MURKOWSKI, Alaska
BYRON L. DORGAN, North Dakota        PETE V. DOMENICI, New Mexico
BOB GRAHAM, Florida                  DON NICKLES, Oklahoma
RON WYDEN, Oregon                    LARRY E. CRAIG, Idaho
TIM JOHNSON, South Dakota            BEN NIGHTHORSE CAMPBELL, Colorado
MARY L. LANDRIEU, Louisiana          CRAIG THOMAS, Wyoming
EVAN BAYH, Indiana                   RICHARD C. SHELBY, Alabama
DIANNE FEINSTEIN, California         CONRAD BURNS, Montana
CHARLES E. SCHUMER, New York         JON KYL, Arizona
MARIA CANTWELL, Washington           CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware           GORDON SMITH, Oregon

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
               Brian P. Malnak, Republican Staff Director
               James P. Beirne, Republican Chief Counsel
                         Deborah Estes, Counsel
                 Mike Menge, Professional Staff Member


                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Aron, Mark, Vice Chairman, CSX Corporation, on behalf of Yukon 
  Pacific Corporation............................................    70
Bailey, Keith E., Chairman, The Williams Companies...............    87
Bayh, Hon. Evan, U.S. Senator from Indiana.......................    14
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................     1
Glenn, Richard, Vice President of Lands, Arctic Slope Regional 
  Corporation....................................................    52
Heyworth, Scott, Chairman, Citizens Initiative for the All-
  American Gasline...............................................    72
Hoglund, Forrest, Chairman and Chief Executive Officer, Arctic 
  Resources Company..............................................    80
Knowles, Hon. Tony, Governor of Alaska...........................     4
Koonce, K. Terry, President, ExxonMobil Production Co............    49
Kripowicz, Robert S., Acting Assistant Secretary for Fossil 
  Energy, Department of Energy...................................    32
Landrieu, Hon. Mary L., U.S. Senator from Louisiana..............    13
Malone, Robert A., Regional President, BP America, Inc...........    50
Marushack, Joseph P., Vice President, ANS Gas Commercialization, 
  Phillips Alaska Inc............................................    42
Murkowski, Hon. Frank H., U.S. Senator from Alaska...............     2
Pearce, Drue, Senior Advisor for Alaska Affairs, Department of 
  the Interior...................................................    29
Silva, Patricio, Energy Projects Attorney, Natural Resources 
  Defense Council................................................    56
Stewart, Michael and Dennis McConaghy, Co-Chief Executive 
  Officers, Foothills Pipe Lines Limited, on behalf of the Alaska 
  Northwest Natural Gas Transportation Company...................    74
Sullivan, Bill, Executive Vice President, Exploration and 
  Production, Anadarko Petroleum Corp............................    60
Torgerson, John, Alaska State Senator and Chairman, Joint 
  Committee on Natural Gas Pipelines, Alaska State Legislature...    21
Wood, Patrick III, Chairman, Federal Energy Regulatory Commission    23

                                APPENDIX

Additional material submitted for the record.....................    95

 
                      ALASKA NATURAL GAS PIPELINE

                              ----------                              


                        TUESDAY, OCTOBER 2, 2001

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:03 a.m. in 
room SD-366, Dirksen Senate Office Building, Hon. Jeff 
Bingaman, chairman, presiding.

           OPENING STATEMENT OF HON. JEFF BINGAMAN, 
                  U.S. SENATOR FROM NEW MEXICO

    The Chairman. Good morning. The Senate is about to vote and 
let me just advise folks that my plan is to go ahead and make a 
short opening statement and then recess the hearing, unless 
there are some other Senators who show up at that point to make 
opening statements. We will recess the hearing, vote, come 
back, and then begin at that point with any additional opening 
statements if other Senators are here or Senator Murkowski is 
here.
    We have a lot of witnesses, and a lot of testimony to hear 
today. I want to get going with the hearing.
    The purpose of this hearing--and this is a hearing Senator 
Murkowski requested we have--is to receive testimony on the 
status of proposals for the transportation of natural gas from 
Alaska to markets in the lower 48 States and on legislation 
that may be required to expedite the construction of a pipeline 
from Alaska.
    The committee held a similar hearing on this topic over a 
year ago. Frankly, I had hoped that by this time the witnesses, 
some of whom we will hear from today, would be involved with 
discussions of a commercial proposal and that we would have 
both the Federal and the State government working actively on 
legislation to expedite construction.
    I am concerned that in fact we have made fairly minimal 
progress in the last 13 months toward the goal of adding 
Alaska's natural gas resources to our domestic energy supply. 
According to the Department of Energy, the gas reserves in the 
Alaska North Slope equal 20 percent of the total gas reserves 
both onshore and offshore in the lower 48 States. Bringing this 
gas to market would have huge energy security benefits for the 
United States.
    In addition, it would be a multi-billion dollar 
construction project on the part of the private sector, 
requiring some 1,200 to 1,600 miles of steel pipe just to get 
from the North Slope to the hub at Alberta, Canada. The Arctic 
pipeline, plus the additional pipeline expansion needed to move 
the gas into end use markets, will provide a tremendous 
economic stimulus for the United States and Canada.
    No matter what route it takes, the natural gas pipeline 
will bring substantial economic benefits to Alaska. I believe 
that we are at a critical energy security decision point today. 
Over the past year, interest in bringing liquefied natural gas 
to the United States has increased exponentially. With the 
planned reopening of two moth-balled LNG terminals, expansion 
of existing facilities, and construction of new facilities, 
about 8 percent of our natural gas demand would be met by 
imported LNG in less than a decade.
    By inaction, we start down a path to increased import 
dependence on natural gas, thereby losing the Alaska natural 
gas for a substantial period, if not forever. Without Alaska 
gas, the United States will end up importing more liquefied 
natural gas from countries like Algeria, Qatar, Nigeria, and 
Indonesia. Once those LNG facilities are in place, the Alaska 
gas pipeline may not be economic.
    We will never be able to produce enough oil to be 
independent of the world oil market, but we have the potential 
to retain the security of a North American market. I believe we 
are at a critical energy security juncture here. It may be of 
interest to the members of this committee that this summer 
there were 11 gas-producing countries that met in Teheran to 
plan a new OPEC for natural gas.
    As chairman of the committee, I am prepared to develop 
legislation to streamline the regulatory approval process 
needed to move forward with the pipeline. This legislation 
would need to be supplemented by a mechanism to reduce the 
financial uncertainty for the companies that undertake to build 
the pipeline, and I am committed to work with the Finance 
Committee to see what can be done in that area.
    But a pipeline transporting domestic natural gas reserves 
from Alaska to markets in the lower 48 is a project that can 
provide real jobs across the country and in Canada and enable 
the United States to meet the growing demand for natural gas 
and prevent import dependence in this area of natural gas in 
the future.
    As I indicated, we will go ahead and recess the hearing now 
while I go vote. We will return and proceed with the hearing 
after I return.
    [Recess from 10:08 a.m. to 10:21 a.m.]
    The Chairman. All right, the committee will come back to 
order. Let me call Senator Murkowski for his statement, and 
then we will hear from witnesses.

      STATEMENT OF HON. FRANK H. MURKOWSKI, U.S. SENATOR 
                          FROM ALASKA

    Senator Murkowski. Thanks very much, Senator Bingaman, and 
let me apologize for the delay. As you know, we have just 
completed a vote.
    I want to welcome the Alaskans that are down here this 
morning and I want to thank again Senator Bingaman for 
scheduling this hearing. Some of you might recall it was 
September 14 of last year that we held our first hearing to 
consider the transportation of Alaska's North Slope natural gas 
to market. My objective in calling that hearing last year was 
to get a process under way that would move this project along. 
That hearing explored the economics of marketing Alaska gas, 
the energy security implications and route alternatives for 
moving gas through Canada, as well as the issue of developing 
LNG from Alaska.
    Many of the witnesses that were with us a year ago are back 
today, including the producers, Exxon, BP, Phillips, as well as 
the Department of Energy, the Department of the Interior, FERC, 
Yukon Pacific, Foothills, Arctic Resources, and others.
    I think all would agree that last year's hearing 
accomplished its purpose and that the issue of developing 
Alaska gas will one day become a reality under certain 
conditions. We hope to learn today just what those conditions 
are.
    Some may suggest that the Federal Government subsidize this 
project. Well, let me enlighten you a little bit on that. The 
comments of the Federal Reserve Chairman Alan Greenspan and 
former Secretary of the Treasury Bob Rubin when I posed that 
question at a Finance Committee meeting last week, their 
concern was that the gas pipeline would inevitably be built 
because natural gas is the energy of choice today and tomorrow. 
The issue is when the economics would justify the investment. 
In their view, to federally subsidize a project would set a bad 
investment precedent and draw down from the current surplus for 
an unreasonable duration.
    As you know, a lot of pressure on that surplus as a 
consequence of the terrorist activities. They oppose any 
Federal subsidy, but they did not rule out allowing accelerated 
depreciation for all gas line projects.
    I note that the producers in their testimony expressed 
concern that they need to have assurances from the State on 
long-term fiscal certainty. This may be one of the major 
threshold issues the Government and the legislature will have 
to deal with. A project of this magnitude must have the 
certainty, and the whims of State taxing authority are tied in 
real terms to the market price of gas. It would seem that, 
while attention has been directed to the proposed Federal 
pipeline legislation, the State needs to be prepared to address 
how it proposes to provide fiscal certainty regarding its 
taxing authority.
    I would remind my colleagues that the gas we speak of 
developing and sending to market in the lower 48 lies beneath 
State lands. This is Alaska's gas, unlike ANWR, which is on 
Federal lands. While there is no question that the development 
of this resources is important to Alaska as well as the Nation, 
it must be done with an eye to the long-term effect its 
development will have on my State.
    Today, we are presented with a number of proposals from 
petroleum and pipeline companies to bring Alaska gas to markets 
in the lower 48. While many of the proposals and suggestions 
are intriguing, many questions will remain. How can we reduce 
the cost of this project through technological advances and 
State and Federal incentives? And existing Federal law, is it 
really sufficient to expedite construction or is new Federal 
legislation really needed? How do we ensure development of 
secondary gas infrastructures in Alaska and active 
participation of all production companies in Alaska?
    Yes, significant progress has been made since the last 
hearing we had on Alaska gas and a great deal, a great deal of 
money has been spent by the producers to assess the economic 
viability of the gas project. But we still have not crossed the 
finish line.
    At the conclusion of last year's hearing, I asked the 
producers to submit draft legislation, which they presented to 
our committee a few months ago. We are now prepared to address 
the recommendations in some detail. This committee has an 
obligation to hear from Alaskans, the Governor as well as the 
legislature, and those who will be directly impacted by the 
project. Their experience, their insight, and their role in 
this project must be part of the consideration.
    In my letter to the witnesses, I stress that testimony from 
producers should address the economic incentives that might be 
required; further, to comment on the Governor's ten points and 
any proposals circulating from the legislature. I also asked 
that the Governor and legislative representatives be prepared 
to comment on what incentives the State might consider.
    Because of the limited time for witnesses, some 5 minutes, 
I would encourage each statement to be as responsive as 
possible. It is my hope that by the end of this hearing we will 
have a much better understanding of the important issues that 
need to be addressed as this committee contemplates Alaska gas 
line legislation and that we have moved the process even 
further toward realization.
    In the end, America cannot allow itself to become dependent 
on overseas sources of natural gas. The potential for 
disruption of supply makes this solution to our energy needs 
simply unacceptable. Getting North Slope gas to consumers in 
the lower 48 is vital to the energy security of the Nation.
    Well, where do we go next? It is my hope that after today, 
after airing the respective conditions in some detail, we can 
come together again soon in a less formal setting either here 
or in Alaska to work directly and collectively to initiate the 
startup of an economically viable project to bring Alaskan gas 
to market via a southern route--a project as bold and as 
imaginative as any ever conceived, a project of scope to 
challenge America's technical skills and environmental 
sensitivities.
    Thank you.
    The Chairman. Thank you very much.
    Our first witness today is Governor Tony Knowles, who is 
the Governor of Alaska. He has, of course, been a leader on 
this issue for some period here and spoke to me about it a 
couple of weeks ago. We are very pleased to have you here, 
Governor Knowles. Go right ahead.
    Senator Murkowski. Let me welcome the Governor as well. 
Thank you.

       STATEMENT OF HON. TONY KNOWLES, GOVERNOR OF ALASKA

    Governor Knowles. Thank you and good morning, Chairman 
Bingaman, Senator Murkowski, and distinguished members of the 
committee. For the record, I am Tony Knowles, the Governor of 
Alaska. I welcome this opportunity to testify on the vital 
national issue of my State supplying America with a secure, 
substantial, and long-term source of clean energy which is 
available today, Alaska natural gas.
    Now, I have also long advocated the development of both the 
gas line and development of ANWR as being in the Nation's best 
interests. These projects meet separate, distinct national 
energy needs. I will not go into detail concerning ANWR 
development today, but I have attached my recent letter to this 
committee to my written testimony.
    I especially appreciate the committee's willingness to 
consider development of Alaska natural gas when I know your 
attention as national leaders is rightly focused on America's 
recovery from the horrific acts of September 11. On behalf of 
all Alaskans, I extend to you and our President our gratitude 
for your strong leadership for America. Our thoughts and 
prayers and my generous acts of Alaskans are with the victims 
and families as we come together to mend our Nation.
    As our President said, America must return to work. There 
is no single undertaking on the national horizon that will do 
more to put Americans to work than the Alaska highway natural 
gas pipeline project. At a time when this Nation may well be in 
a recession and the only news from corporate headquarters is 
the size of layoffs, this project will provide 30,000 
construction, manufacturing, and transportation jobs with a 
payroll in excess of $1 billion a year. This would all start as 
soon as the financing was under way.
    At a cost estimated between $15 and $20 billion, it is the 
largest privately funded project in this Nation's history. This 
3,500-mile pipeline from the Alaska North Slope to lower 48 
markets would be the largest gas capacity pipeline in America 
as it pumps 4 billion cubic feet of natural gas a day into our 
homes, businesses, and electric generating plants for the next 
half century, tapping into America's largest known natural gas 
reserves of 35 trillion cubic feet.
    It has been estimated that an additional 65 trillion cubic 
feet are waiting to be discovered. This long-term supply of 
affordable energy will obviously increase consumer confidence 
and business investment. The cumulative effect of this 
development economically is estimated at 160,000 jobs and $300 
billion addition to our gross domestic product.
    The critical step in realizing this economic and energy 
boom is the strong, creative, focused national interest 
legislation that could come from this committee and this 
Congress. I respectfully suggest that there are three essential 
components of this vitally important legislation:
    First, the route must be mandated along the Alaska Highway, 
as provided for in the 1976 Alaska Natural Gas Transportation 
Act;
    Second, this legislation must build American industry and 
create American jobs;
    Third, there must be economic incentives to attract the 
private capital to the project, which when completed will 
substantially add to the national treasury.
    There are many reasons why the route of the gas line must 
follow the existing oil pipeline from the Alaskan North Slope 
to Fairbanks and then the Alaska Highway through Canada to 
Alberta. It is currently authorized in ANGTA and by 
presidential decision. It is part of an international treaty 
with Canada. It recognizes the environmental advantage of 
following existing transportation corridors. It allows vitally 
important access to the gas for the residents and businesses in 
Alaska.
    For all of these reasons, this route has the broadest 
support among Alaskans of any major project in recent history. 
Additionally, there are serious objections to the proposed 
alternative route, commonly known as the northern, or over-the-
top, route. This route would require 240 miles of pipeline 
buried under the ice-choked Beaufort Sea.
    The first and perhaps the most significant opposition has 
come from the unanimous objection of the North Slope Inupiat 
Eskimos. At a recent public hearing, their corporate community 
and tribal leaders vowed that they would use every resource 
available to them to fight this route, which would threaten 
their cultural and nutritional dependence on marine mammals.
    Second, Alaskans and national environmental organizations 
strenuously oppose this ill-conceived frontier route. Calling 
for previously untested technologies, this project could never 
be considered as a preferred alternative to an existing land 
transportation corridor.
    Finally, our congressional delegation and business, civic, 
and bipartisan political leadership in Alaska steadfastly 
oppose the northern route. It ignores the vital needs of the 
very State that houses the resource.
    Legislation already proposed to this committee by some 
North Slope producers is innocently advertised only to expedite 
permitting and to be route neutral. With all due respect, that 
is not the case. Their legislation puts the producers in the 
driver's seat, expediting Federal processing of the over-the-
top route despite the fact that no comprehensive environmental 
analysis has been completed, as is the case with the Alaska 
Highway route.
    The producers say their legislation does not preempt ANGTA, 
but in practice it would. Under their proposal, those what 
control the gas control the route. If the producers opt for 
this northern route, there would be years, if not decades, of 
fighting indigenous peoples, environmental groups, and Alaska's 
business and political leadership. There could also be 
potential litigation for claims of rights allegedly granted by 
Congress two decades ago in the ANGTA regime.
    The second major component of any Federal legislation 
should be to build American industry and create American jobs. 
I would recommend three specific provisions: There should be 
priorities for the use of American and Canadian steel, subject 
to reasonable costs and in the public interest. After talking 
to several steel company CEO's recently, I can tell you they 
are excited about what the biggest steel order in American 
history would bring to their industry.
    Second, I propose a project labor agreement to attract 
highly skilled workers and organized labor to build and 
maintain this pipeline. The Alaska Highway gas project will 
create about seven million job years over its half-century life 
in many industry sectors.
    Third, Federal legislation should include provisions to 
address employment needs in Alaska, the State that will supply 
the Nation's resource. These would include a preference for the 
hiring of Alaskans, Alaska Natives, and the use of Alaska 
businesses in accordance with applicable State and Federal law.
    The final component of Federal legislation should be 
economic incentives necessarily to attract private investment 
for the southern route. Four billion cubic feet a day of 
Alaskan gas flowing into the lower 48 will create market 
stability and lower prices, which is good for residential and 
industrial consumers and for the national economy. But 
uncertain gas commodity prices also make for razor-thin margins 
for investors. That is why I believe there are three key 
Federal economic incentives for the project:
    First, accelerated depreciation at a 7-year rate, rather 
than the 15-year rate often granted;
    Second, investment tax credits. A 10 percent investment 
credit, like that granted in previous Federally authorized 
projects, would save $2 billion on a $20 billion project.
    Finally, a gas production tax credit, which would provide 
investor confidence by allowing a tax credit for natural gas 
production tied to a floor price of gas.
    Mr. Chairman, the other key provisions of Alaska's proposal 
are summarized in a separate handout we have provided the 
committee. Since completion of the Trans-Alaska oil pipeline 
nearly 25 years ago, Alaska has been proud to be America's 
energy storehouse. By working with this committee, Congress and 
the national administration, Alaska will continue to help meet 
America's oil needs from the Arctic National Wildlife Refuge, 
the National Petroleum Reserve-Alaska, and other fields.
    Yet, just a pipeline away, North American demand for 
natural gas for electrical generation, industry and 
transportation is growing. Alaska can help meet this demand 
while giving our sagging national economy a sorely needed shot 
in the arm.
    To assist your efforts, the State of Alaska has developed 
draft legislation which we look forward to discussing in 
further detail with your staff. It is the result of an 
extensive public process and I believe represents about as 
close a consensus as is possible among Alaskans. For their 
contributions to this effort, let me commend the work of our 
Alaska Highway Natural Gas Policy Council and the State 
legislature, especially its Special Gas Pipeline Committee, 
whose chairman, Senator John Torgerson, you will hear from 
shortly.
    Before I conclude, let me quickly add in response to 
questions from Senator Murkowski that the State of Alaska is 
prepared on many fronts to assist in the development of this 
project. Among other things, we have expressed our longstanding 
willingness to work with the project sponsors of the southern 
route in designing a fiscal regime that recognizes the need for 
stability and predictability.
    In summary, Mr. Chairman and members of the committee, the 
State of Alaska and my administration stand ready to assist you 
and the national administration in crafting a sensible national 
energy policy that continues to rely on Alaska as our Nation's 
energy storehouse.
    Thank you.
    [The prepared statement of Governor Knowles follows:]

      Prepared Statement of Hon. Tony Knowles, Governor of Alaska

    Good morning, Chairman Bingaman, Senator Murkowski and 
distinguished members of the committee. For the record, I am Tony 
Knowles, Governor of Alaska.
    I welcome this opportunity to testify on the vital national issue 
of my state supplying America with a secure, substantial, and long-term 
source of clean energy which is available today--Alaska natural gas.
    I especially appreciate the committee's willingness to consider 
this matter when I know your attention as national leaders is rightly 
focused on America's recovery from the horrific acts of September 11th. 
On behalf of all Alaskans, I extend to you and our President our 
gratitude for your strong leadership for America. Our thoughts and 
prayers and many generous acts of assistance are with the victims and 
families as we come together to mend our nation.
    I have advocated the development of both a gas line and development 
of ANWR as being in the nation's best interest. These projects meet 
separate, distinct national energy needs. While I will not go into 
detail concerning ANWR development at this time, I have attached my 
previous letter to all of you on this subject to my written testimony 
today.
    As our President said, America must return to work. There is no 
single undertaking on the national horizon that will do more to put 
Americans to work than the Alaska Highway natural gas pipeline project.
    At a time when this nation may well be in a recession and the only 
news from corporate headquarters is the size of layoffs, this project 
will provide 30-thousand construction, manufacturing and transportation 
jobs with a payroll in excess of a billion dollars a year. This would 
all start as soon as the financing is underway.
    At a cost estimated between 15 and 20 billion dollars, it is the 
largest privately funded project in this nation's history. This 3,500-
mile pipeline, from the Alaska North Slope to lower 48 markets, would 
be the largest gas capacity pipeline in America as it pumps 4 billion 
cubic feet of natural gas into our homes, businesses, and electric 
generating plants for the next half century.
    Tapping into America's largest known natural gas reserves of 35 
trillion cubic feet, it has been estimated that an additional 65 
trillion cubic are waiting to be discovered. The cumulative economic 
effect of this development is estimated at 160,000 jobs and a $300 
addition to our Gross Domestic Product.
    This long-term supply of affordable energy will increase consumer 
confidence and business investment.
    The critical step in realizing this economic and energy boom is the 
strong, creative, focused national interest legislation that could come 
from this Committee and this Congress.
    I respectfully suggest there are three essential components of this 
vitally important legislation. First, the route must be mandated along 
the Alaska Highway, as provided for in the 1976 Alaska Natural Gas 
Transportation Act. Second, this legislation must build American 
industry and create American jobs. Third, there must be economic 
incentives to attract the private capital to the project which when 
completed will substantially add to the national treasury.
    There are many reasons why the route of the gas line must follow 
the existing oil pipeline from the Alaska North Slope to Fairbanks and 
then the Alaska Highway through Canada to Alberta.
    It is currently authorized in ANGTA and presidential decision. It 
is part of an international treaty with Canada. It recognizes the 
environmental advantage of following existing transportation corridors. 
It allows vitally important access to the gas for the residents and 
businesses in Alaska. For these reasons, this route has the broadest 
support among Alaskans of any major project in recent history.
    Additionally, there are serious concerns over the proposed 
alternative route commonly known as the northern or ``over the top'' 
route. This route would originate on the Alaskan North Slope then 
proceed 240 miles under the ice-choked Beaufort Sea to the Mackenzie 
River Delta and then up that river drainage to Alberta.
    First and perhaps the most significant opposition to that route has 
come from the unanimous objections of the North Slope Inupiat Eskimos. 
At a recent public hearing, their corporate, community, and tribal 
leaders vowed they would use every resource available to them to fight 
this route, which would threaten their cultural and nutritional 
dependence on marine mammals.
    Second, both Alaskan and national environmental organizations have 
said they too strenuously oppose this ill-conceived frontier route. 
Calling for previously untested technologies and risky ventures 
underwater, this project could never be considered as a preferred 
alternative to an existing land transportation corridor.
    Finally, our Congressional Delegation and business, civic, and 
bipartisan political leadership in Alaska have steadfastly opposed the 
northern route. Among other objections it ignores the vital needs of 
the very state that houses the resource. Access to the gas for business 
opportunities and affordable energy in a state, that already pays 
higher energy costs than most Lower 48 states, is essential to Alaska.
    Legislation already been proposed to this Committee by some North 
Slope producers which is innocently advertised only to expedite 
permitting and to be ``route neutral.'' With all due respect, that's 
not the case.
    Their legislation puts the producers in the driver's seat, 
expediting federal processing of the over-the-top route despite the 
fact that no comprehensive environmental analysis has been completed, 
as is the case with the Alaska Highway route.
    While the producers say their legislation doesn't pre-empt ANGTA, 
in practice it would. Under their proposal, those who control the gas 
control the route.
    If the producers opt for this northern route, there would be years 
if not decades of fighting indigenous peoples, environmental groups, 
and Alaska's business and political leadership. There also could be 
potential litigation for claims of rights allegedly granted by Congress 
two decades ago in the ANGTA regime.
    The only route that can provide a timely beginning of this national 
interest project is the already approved Alaska Highway route and 
current legislation must reflect that.
    The second major component of any federal legislation should be to 
build American industry and create American jobs. I would recommend 
three specific provisions.
    First, incentives for the use of American and Canadian steel, 
subject to reasonable costs and in the public interest. After talking 
to several steel company CEOs recently, I can tell you they are excited 
about what would be the biggest steel order in American history 3,500 
miles of specially designed, high-pressure 48- to 52-inch diameter 
pipe.
    Second, I propose a project labor agreement to attract the highly 
skilled workers in organized labor to build and maintain this pipeline. 
The Alaska Highway gas project will create about 7 million ``job-
years'' over its half-century life in many industry sectors.
    Third, the federal legislation should include provisions to address 
employment needs in Alaska, the state that will supply the nation this 
resource. These would include a preference for the hiring of Alaskans, 
Alaska Natives and the use of Alaska businesses in accordance with 
applicable state and federal law.
    The final component of federal legislation should be economic 
incentives necessary to attract private investment for a Southern 
route. Four billion cubic feet a day of Alaska gas flowing into the 
Lower 48 will create market stability and lower prices, both of which 
are good for residential and industries consumers. It will reduce the 
cost of living for American users and provide a needed boost to the 
national economy.
    Yet at the same time, uncertain gas commodity prices make for 
razor-thin margins for investors. That's why I believe there are three 
key federal economic incentives for this project.
    First, a provision that has been proposed by the Congress for other 
projects on a bi-partisan basis, accelerated depreciation, at a 7-year 
rate rather than the 15-year rate often granted.
    Second, investment tax credits are an important component to propel 
this project forward. In previous federal projects, a 10 percent 
investment tax credit adopted by Congress in other contexts would save 
$2 billion on a $20 billion project.
    Finally, a production gas tax credit which would provide investor 
confidence by allowing a tax credit for natural gas production tied to 
a floor price of gas.
    Mr. Chairman, the other key provisions of Alaska's proposal are 
summarized in a separate handout we have provided the committee.
    Since completion of the trans-Alaska oil pipeline nearly 25 years 
ago, Alaska has been proud to be America's energy storehouse. We have 
supplied up to a quarter of America's domestic oil production from the 
nation's two largest oil fields. By working with this committee, the 
entire Congress and the national administration, Alaska will continue 
to help meet America's oil needs from the Arctic National Wildlife 
Refuge, the National Petroleum Reserve-Alaska and other fields.
    Yet just a pipeline away, North American demand for natural gas for 
electrical generation, industry and transportation is growing. The 
United States and Canada already consume about 24 trillion cubic feet 
of natural gas a year, with that projected to soar to 30 trillion cubic 
feet by the decade's end.
    Alaska can help meet this demand, while giving our sagging national 
economy a sorely needed shot in the arm.
    To assist your efforts, the State of Alaska has developed draft 
legislation which we look forward to discussing in further details with 
your staff. It is the result of an extensive public process and I 
believe represents about as close a consensus as is possible among 
Alaskans.
    For their contributions to this effort, let me commend the work of 
our Alaska Highway Natural Gas Policy Council and the state 
Legislature, especially its special gas pipeline committee whose 
chairman, Senator John Torgerson, you will hear from shortly.
    Before I end I wanted to quickly add in response to questions from 
Senator Murkowski that the State of Alaska is prepared on many fronts 
to assist in the development of this project. Among other things, we 
have expressed our long-standing willingness to work with project 
sponsors of a southern route in designing a fiscal regime that 
recognizes the need for stability and predictability.
    In summary, the State of Alaska and my administration stand ready 
to assist you and the national administration in crafting a sensible 
national energy policy that continues to rely on Alaska as our nation's 
energy storehouse.

    The Chairman. Thank you, Governor. Thank you very much for 
that testimony. Let me just ask a couple of questions and then 
defer to Senator Murkowski.
    You have indicated that the legislation or the draft 
legislation that was presented to us regarding expediting the 
permitting process is objectionable, that it is not in fact 
route-neutral. You have indicated that the State of Alaska has 
developed its own draft legislation as an alternative. Do you 
address this issue of expediting the permitting process as part 
of what you are proposing, or do you believe that that is not a 
necessary element of what we do? How do you deal with that 
subject?
    Governor Knowles. Yes, sir, Mr. Chairman, we do believe 
that the expedited permitting process could take place on the 
southern route, as it has already been subject to an EIS 
statement, which does need to be renewed, but indeed has met 
all of those provisions. An expedited permitting process for 
the over-the-top route would be seen by many, and I think 
validly so, as a shortcut through important environmental 
considerations that have not been addressed through that route.
    We do believe that the expedited permitting process should 
take place, but that the producers should not be put for the 
first time ever in the position of choosing who, where and when 
a route would be decided upon, that it is in the national 
interest to dictate the route, just as it was in 1976 with a 
presidential action and Congressional action, and would remain 
so today.
    The Chairman. So the main difference between what you are 
proposing and what has otherwise been recommended is that you 
would have the Congress dictate the southern route as the way 
to go?
    Governor Knowles. Yes, sir.
    The Chairman. On the financial incentives, how do you 
respond to the position that Senator Murkowski summarized, that 
we heard from Chairman Greenspan and from former Secretary of 
Treasury Bob Rubin about how they did not believe the 
Government should subsidize the construction of a pipeline? 
What is your view? How do you counter that?
    Governor Knowles. Mr. Chairman, there is no question that 
this project is unique, not only being the largest in American 
history privately funded project, but by the nature of the 
resource and the time period over which a return on the 
investment would have to be realized and a commodity price that 
fluctuates wildly, to say the least.
    In order to do that, there does have to be fiscal regimes, 
both at the Federal and State level, that would attract the 
necessary capital to that. We believe it does have to be 
tailor-made for the project and, rather than a subsidy, would 
be really the opportunity to create a project which will add 
substantially to the national treasury, and not in the sense of 
a subsidy be a drain on it.
    The Chairman. Let me defer to Senator Murkowski.
    Senator Murkowski. Thank you, Senator Bingaman.
    Good morning, Governor. We are very pleased that you could 
be with us. My compliments on your testimony. Let us together 
share the dilemma. I have had the opportunity to read the 
testimony of the producers and they without exception 
generalize that currently neither the northern or southern 
route is economically viable.
    Where do we go next? We can talk about your ten points. We 
can talk about the legislature's 12 points, I believe. Maybe 
there is 14. I am not sure. We can talk about the Federal 
proposal that the producers have submitted. But the price of 
natural gas is the price of natural gas today and this is a 
long-term project. I am wondering from the standpoint of the 
State what your thoughts are relative to where we go next.
    Governor Knowles. Thank you, Senator Murkowski. I too have 
heard the interim or midterm report from the producers and, 
looking at it in a very positive light, I found it very 
productive and optimistic. The fact that they could look even 
at this mid-term report not yet finished and see that there 
would be a 10 to 12 percent return on investment, something 
that our mutual constituents would be glad to be receiving 
these days, I do not think is a hindrance.
    What I do suggest that we need to do is work in a 
collaborative fashion between the public and the private sector 
to craft a project that does meet the needed investment needs 
to pull in, and if it is not the producers, perhaps it is 
pipeline companies and other investment opportunities that can 
be attracted to it. There certainly has been a lot of interest 
in it.
    So I see the report that they have come up with, not saying 
that saying that neither route is economic, but that this still 
remains a very doable project. The advice that we have had from 
any number of industry experts and energy experts believes that 
this project, despite a current low price and commodity 
fluctuations, is not a hindrance to the long-term need of 
America for this project because of the fundamental change in 
the structural demand for natural gas, as you alluded to in 
your comments.
    Senator Murkowski. One more question, Governor, relative to 
your specific recommendations about what the Federal Government 
can do in regard to incentives, and I think the possibility of 
accelerated depreciation applicable to all gas pipelines might 
be a possibility as well. But when we are dealing with a 
business decision, as you and I know from our long experience 
in Alaska, the major corporations do not come to Alaska because 
they are in love with our State; they come because they want a 
return on investment to their shareholders.
    We have provided I think a good business climate, but they 
want some certainty that indeed the State will maintain a 
fiscal continuity. As you know, that is pretty hard, to bind 
one legislature with another. But in my conversations time and 
time again I have heard: Well, what assurances can the State 
provide that there is going to be a certainty associated with 
the taxing authority? I am going to ask the legislative 
representation here the same question as well.
    But I think you generalize a little bit in your statement 
that the State is prepared to give that, but could you be a 
little more specific relative to just what you feel the State 
should do to provide that degree of certainty, which I think 
can make up to some extent for the evaluation. Maybe the return 
is 11 percent now, they are looking for 15 percent, and we are 
trying to obviously increase the and make it more attractive.
    Governor Knowles. Mr. Chairman, Senator Murkowski, in 
response to what specific measures the State would take, indeed 
I think it would have to come down to the specific details in a 
wide universe of needs. It is not just the needs of producers. 
There are other companies that are interested perhaps in 
building a pipeline and we have not yet exhausted all of those 
opportunities.
    The State has recognized the fact that the predictability 
and that current State laws are really more oriented toward an 
oil tax regime rather than a gas tax, which has different needs 
because of the length of the time that it requires to have a 
return on investment.
    I do not necessarily accept the 15 percent investment 
return, nor do industries that are interested in developing a 
pipeline. I think that what we need to do is look specifically 
to a model on how the pipeline can be developed, with what 
safeguards need to be applied, to provide the necessary 
investor confidence. The State has certainly a history of 
working in partnership with the industry for this procedure and 
we would do the same.
    But we would have to see first of all, concerning the route 
designation, as mandated along the southern route, which would 
then give us the basis upon which we could proceed with that in 
conjunction with Federal legislation.
    Senator Murkowski. I am going to ask the producers that 
same question because I think it is paramount: How do we get 
over the hump relative to their evaluation that it is currently 
not economic? There are obvious ways to tie taxation to a 
floating price structure for gas and taxes that would, in other 
words, correspond with whatever the price of gas was. If it 
went up higher, the tax would be higher, and if it went down it 
would be lower as well. Some assurances along that line might 
sooth some of the concern that the investors have with the 
project.
    Thank you very much.
    Governor Knowles. Mr. Chairman, if I might, Senator 
Murkowski, that would also comply with, I respectfully suggest, 
with the Federal tax legislation level of the industry also, 
with this being in the national interest in the form of jobs 
and a secure, clean source of affordable energy that residents 
and consumers of gas in the lower 48 would recognize. That 
would also indicate a responsibility for Federal legislation.
    The Chairman. Senator Landrieu.

       STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR 
                         FROM LOUISIANA

    Senator Landrieu. Thank you.
    Welcome, Governor. It is always a pleasure to have you 
before the committee. I want to acknowledge and thank you for 
your leadership in this area and so many important issues for 
our Nation. Let me just make a couple of comments and then just 
a brief question.
    I really appreciate the chairman calling this hearing and 
recognize that when Senator Murkowski chaired this committee 
this was one of the focuses, about trying to move this gas from 
Alaska to be beneficial to our Nation. It was important before 
September 11. Now, post-September 11, it becomes even I think 
more important, more critical. The country is really focusing 
on our vulnerabilities, not just our military but our economic.
    The energy policy of this Nation is one clear place where 
we need to refocus our efforts to try to make our country more 
self-reliant.
    Second from self-reliance is reliance on allies we can 
count on in places in the world that are closer and safer than 
the areas that we find ourselves to be. So I, in the context of 
that, want to give my support in whatever way to speed up the 
development of this pipeline, thinking that it has been much 
too long in its development.
    I would say that, as a producing State, that I would argue 
strongly that the Alaska delegation, the Governor and the 
delegation that is ably represented by Senator Stevens and 
Murkowski and Don Young in the House, that your views be given 
extreme importance or weight in terms of what is best for 
Alaska, as well as what is best for the Nation, because while 
you are producing the gas and it is economical for the private 
companies and hopefully beneficial to Alaskans, it is the 
Nation that needs the gas, not necessarily the people in 
Alaska, but the rest of the 48 States that need the gas, as 
well as the 500,000 or so people in Alaska.
    The second point I want to make is that, while I generally 
support Federal-State partnerships and have found them useful, 
whether you are talking about housing developments or 
reconstruction of downtowns or gas, oil, energy delivery 
systems, I would just say, Mr. Chairman, that I think we have 
to be very careful about the nature of this subsidy, because we 
have a lot of energy to produce in this Nation at a lot of 
different ways, and the subsidy that we craft for this pipeline 
is going to set precedent for how we craft other subsidies for 
other pieces of this energy puzzle.
    So I think we have to be very careful. While I normally 
want to be in partnership with industry and I am not saying 
that I would not give my vote along that line, I just think 
that we have to be careful.
    So my question is, Governor, would you be specific with us 
about your ideas as Governor about trying to move a route that 
the delegation from Alaska favors, what the specifics of some 
kind of partnership or subsidy might be to get this project 
really moving and get the gas where we need it as quickly as 
possible?
    Governor Knowles. Thank you, Mr. Chairman, Senator 
Landrieu, thank you very your comments. I certainly am very 
supportive of what you have established as important to the 
national policy. In regard to the routing of the pipeline, the 
southern route, which has already been subject to congressional 
act, a presidential decision, and an international treaty, we 
believe has the broadest national and certainly State of Alaska 
support of any direction from all of the relevant perspectives.
    We think we could immediately begin the successful start of 
this project. In relation to the subsidies, I do perceive this 
project to be unique, certainly in size. There is no project in 
the history of America that comes close to the $20 billion that 
are estimated here, also going through two countries. I believe 
it does need to have some special consideration concerning the 
long-term relationship of the payback.
    I make suggestions that certainly the State will be looking 
at similar types of partnerships and security to private 
investment. But I would note that there are only private 
investment dollars that are going into this project, that it 
will when completed substantially add to the national treasury 
and through the increased employment and prosperity will 
certainly add to the Federal treasury in that regard.
    Senator Landrieu. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    I am advised that Senator Bayh wanted just a minute to make 
a statement and has to leave again. Could I interrupt and do 
that, and then Senator Campbell?
    Senator Campbell. Yes.

           STATEMENT OF HON. EVAN BAYH, U.S. SENATOR 
                          FROM INDIANA

    Senator Bayh. Thank you, Senator Campbell.
    I apologize, Mr. Chairman. I do have to preside on the 
floor at 11 o'clock and so it is not a meeting I can very well 
put off. I just very quickly want to say welcome to Governor 
Knowles. Governor Knowles and I, Mr. Chairman, had the pleasure 
of serving together as governors for several years, and it is 
good to see you again, Tony, and I look forward to working with 
you as best we can on this issue.
    Mr. Chairman, I am struck by the fact that this issue was 
first visited by the U.S. Senate in 1976, I believe. It shows 
you how long this issue has been around that my father voted on 
this subject. So generations come and go in the U.S. Senate, 
but the issue of this gas pipeline remains.
    But I am hopeful that we can make some progress on it. It 
is clearly an issue whose time has come. The gas spikes of last 
winter remind us of that. So, Governor, I just want to say that 
I am going to do what I can in being constructive in getting 
this project going, getting this gas on line. It is important 
for the American people, for consumers. As Senator Landrieu 
mentioned, there is an important national security issue here. 
So let us pick the route in a way that will expedite this, get 
on with it, and you can count on me to be a constructive 
supporter of that recommendation.
    It is good to see you again.
    Senator Campbell, thank you for your courtesy.
    Mr. Chairman, thank you. I apologize for needing to get to 
the floor.
    Senator Campbell. Thank you, Mr. Chairman.
    Welcome to the lower 48, Governor. I am a big supporter of 
any energy-producing systems and I know that, particularly when 
we have got ourselves into being more and more dependent with 
each passing year on getting our energy from countries who 
would like to bury us, it is not a good long-range plan for us.
    I wanted to ask you two or three questions. I come from a 
State that has huge natural gas reserves, as you probably know, 
Colorado, as does Wyoming, my colleague to my left. To my 
knowledge, none of the companies that build transmission lines 
for the natural gas for our States get any kind of a government 
subsidy. I may be wrong, but I do not think they do for 
building their lines.
    Let me play the devil's advocate and ask you, why should 
the Federal Government subsidize one from Alaska, which I am 
not opposed to doing? But I have to go home and explain that to 
my companies. Why should we do that when we are not subsidizing 
the companies in the lower 48 to transport natural gas?
    Governor Knowles. Mr. Chairman and Senator Campbell, I 
believe that there are projects on the record where an 
investment tax credit has been given to companies for 
investments. There are situations--I believe it is currently 
being considered by Congress for gas infrastructure to be given 
accelerated depreciation.
    Certainly because of the nature of the size of this 
particular project, which would have an enormous national 
interest impact, perhaps some type of security in regards to a 
commodity pricing that may well fall and hesitate to have 
investors put $20 billion towards it, might indicate a need for 
some type of gas production tax credit. This I think should be 
judged in that light.
    Certainly Congress would be looking at providing incentives 
for investment in all industries, particularly rebuilding our 
infrastructure, which I believe Felix Rohatyn has recently 
written some important articles on. There is nothing more 
important than getting this business and economic back on the 
positive direction of that type of investment.
    So all of these I think are going to be closely considered 
and I would only represent this to this committee and the 
Congress in that light.
    Senator Campbell. Thank you.
    There are several routes that have been proposed, as I look 
through the notes, and I have not read them line by line. But 
you prefer the one that is called the southern route that goes 
along the AlCan Highway, is that correct?
    Governor Knowles. Yes, sir.
    Senator Campbell. I have not seen anything in here that 
compares the costs. Two things, actually: the cost of the 
different proposals, transmission proposals, number one; and 
the security of it. Obviously, since the 11th of the month we 
have all been concerned about security of everything here in 
Washington. Long transmission lines, long transportation lines, 
would seem to me offer great opportunity for people that would 
want to disrupt our energy policy.
    Could you speak the both of those things, the comparative 
costs between the different proposals and the comparative 
difficulty of securing?
    Governor Knowles. Yes, sir. Mr. Chairman, Senator Campbell. 
I used to work in your State, back working for a drilling 
company up in a place in Colorado.
    Senator Campbell. It is still there.
    Governor Knowles. In regards to the cost of the pipeline, 
there has been an interim report to where some producers 
estimate there might be an approximately $2 billion difference 
between the so-called over-the-top route and the southern 
route. But I believe you will hear testimony today perhaps that 
indicates that this may not exist at all, from producers and 
from other witnesses.
    It is really unknown and untested technology, in reference 
to that section of the pipeline under the sea. Also, being a 
frontier route down the MacKenzie River, there are a wide 
number of both logistical questions that are not applicable to 
the route along the already existing Alaska Highway, as well as 
just unknowns in a frontier area, that would say that whatever 
cost estimates there are are going to be very inexact.
    So it may not be any difference whatsoever. I do say, 
though, that in reference to the ability to get the project 
started, the enormous barriers that confront the over-the-top 
route from the indigenous peoples of the Alaska North Slope, 
who are adamantly opposed to it, as you will hear today, 
environmental concerns, again from groups both Alaskan and 
national the are adamantly opposed to it, as well as the 
Alaskan business and political leadership, would make, if time 
is money, the northern route I think extraordinarily expensive 
in regards to meeting the national interest.
    Senator Campbell. The northern route, is that the one that 
proposes that they bring the gas by pipeline a certain portion 
of the way, then liquefy it and put it on ships for the rest of 
the way? That is not the northern route?
    Governor Knowles. Mr. Chairman, Senator, no, sir. that 
would be an LNG project that has been discussed from the Port 
of Valdez in Alaska with the LNG. This route would be one that 
would go from Alaska's North Slope 240 miles under the Beaufort 
Sea to the MacKenzie River Delta, then up the MacKenzie River 
to Alberta.
    In reference to the question concerning security----
    Senator Campbell. How do we secure from sabotage?
    Governor Knowles. Of course, the security of the existing 
oil pipeline was very first on the concerns of the State of 
Alaska. My Adjutant General during the events on and 
immediately after and continuing today of September 11, the 
security of the pipeline, the port facility and the production 
facility are critical and are shared jointly by both the 
private ownership of that pipeline as well as the State 
troopers of Alaska, the FBI, the Coast Guard at Valdez. We have 
a number of provisions, all of which, like everything else in 
America, are being reviewed.
    I would suggest that the security even of a long 
transmission line within the confines of the United States and 
Canadian territories is certainly more secure than the tanker 
and facility traffic from far distant ports in other countries.
    Senator Campbell. Thank you, Mr. Chairman.
    Just let me say, I also heard with interest that the 
Governor mentioned the use of American steel. Knowing the 
proximity of part of that northern part of Alaska to Japan, it 
is a lot closer than it is to here. I sure hope that we can 
preserve some jobs in steel and contracting contracts to build 
that with American labor and American supplies. But that is yet 
to be played out, I suppose.
    Senator Murkowski. Senator Bingaman, let me just make a 
very short reference to the issue of subsidies, which has come 
up here by at least two members. In reading over the producers' 
testimony, there is no request for subsidies. There is 
incentives relative to expediting permitting. There is a 
concern over the benefits of accelerated depreciation, taking 
it from 15 years to 7 years. One producer would like to see a 
floor and ceiling.
    But I do not want the public or the press to be misled that 
producers are asking for subsidies. They are simply saying that 
the economics currently do not favor either route. But I do not 
want to be construed that we are talking about subsidies here 
for this pipeline.
    The Chairman. Senator Feinstein.
    Senator Feinstein. Thanks, Mr. Chairman. Mr. Chairman, 
Senator Bayh said that he knew Governor Knowles. I also know 
him. We were mayors together and he hosted the U.S. Conference 
of Mayors in Anchorage. Tony, I think that was what, 16, 17 
years ago?
    Governor Knowles. Yes, Senator.
    Senator Feinstein. When I returned home there was a huge 
king salmon awaiting me. It was still the best salmon I ever 
had, I want you to know. I do not know if it will get you a 
pipeline, but it was the best salmon I ever ate. So it is great 
to see you again.
    Governor Knowles. Thank you, Senator. As I recall that trip 
also, while you and I were mayor your husband was climbing 
Mount McKinley. Certainly, my great respect for his athletic 
prowess.
    Senator Feinstein. Well, yes. He is still doing those 
things today. But anyway, thank you very much. It is great to 
see you.
    I wanted to follow up on something Senator Campbell said. 
That is, it is the price difference. I have the route options 
between the north and the south. If I understand it correctly, 
the southerly one is $17.1 billion and the northerly $15.1 
billion, so there is a $2 billion difference in cost.
    Why in your view is there such a difference in cost?
    Governor Knowles. Mr. Chairman, Senator, I think that you 
will hear today that that cost has not yet been determined. 
There are estimates as of the interim report. The studies have 
not been completed, and until that information is given the 
opportunity for scrutiny they will have to answer the question 
of the untested technology of heretofore never tried before 
span of 240 miles of pressurized pipe, which has never been 
achieved, without booster stations along the way.
    They will have to address some of the other issues that 
will be certainly questioned about the routing up the MacKenzie 
River. So the difference of $2 billion has yet to be 
established.
    Even if it is, Mr. Chairman, Senator, at a level more from 
just a purely engineering perspective, there is certainly the 
consideration that the people of the North Slope deserve 
regarding protection of their marine mammals, certainly the 
environmental concerns that we would all share, that would make 
a scrutiny of this project years, decades, if ever at all; and 
that, if time is money, I think would have to be part of the 
equation in determining the advantages of one route over the 
other.
    Senator Feinstein. I would assume that either route would 
have some environmental problems, not that they cannot be 
remedied. But who would be expected to pay that differential?
    Governor Knowles. Of course, the cost of the pipeline will 
be reflected in the tariff which would be paid for by the 
consumer.
    Senator Feinstein. Thank you, Mr. Chairman.
    The Chairman. Senator Thomas.
    Senator Thomas. Welcome, Governor. Glad to have you here. 
Certainly interested in this pipeline, as we are a production 
State in Wyoming certainly.
    Someone mentioned there is no need for legislation now. How 
do you react to that?
    Governor Knowles. It is our belief that if there is to be 
legislation that will actually get this project moving, it has 
to be addressed by this committee and this Congress.
    Senator Thomas. Why could it not move without legislation? 
Why is this not a private sector operation?
    Governor Knowles. It is a private sector operation. But 
just as there needed to be national legislation in 1976 which 
exists on the books, it does have to be, I believe, modernized 
to existing conditions today. All of the provisions under the 
existing national law of the Congressional Act of 1976 are not 
applicable today. So we would like to see--and it is in the 
legislative amendments that we have suggested--there are a 
couple points that do need to be addressed, certainly in terms 
of the regulatory structure and the franchise of it, that have 
not yet been satisfactorily answered.
    So it is private sector-driven, but there does need to be, 
I think, national action, or there is national action already 
on the books and it would have to be, I think, brought up to 
date.
    Senator Thomas. Notwithstanding what you said before, in 
your testimony you asked for a tax credit for producing gas 
tied to a price floor. Do we have that same thing in Wyoming?
    Governor Knowles. I do not believe so, sir.
    Senator Thomas. Why should they then have it in Alaska?
    Governor Knowles. Well, in reference to the investment that 
is being made here, the amount of money is I think certainly a 
consideration that should be part of the equation in 
determining what would be necessary to attract all of the 
private sector dollars.
    Senator Thomas. I understand, but is not this gas going to 
be competitive with the rest of the country, or is it going to 
be treated separately?
    Governor Knowles. I believe that it would be competitive 
with all gas. But it is determined that America needs an 
additional 6 trillion cubic feet by the year 2010 and there is 
a real question as to whether we can make up that supply. There 
is currently a 24 trillion cubic feet every year use in 
America. It is going to go to 30, and there is real concern as 
to whether we will be able to meet that gap.
    Senator Thomas. I agree with you entirely, but I do not see 
how you can kind of single out one development and one 
production area as opposed to others which are going to be in 
the marketplace. For instance, you say you would provide for 
Alaska hiring. Was that done when we built our pipeline to 
California? Did we hire Wyoming people?
    Governor Knowles. I believe that all States do look to 
having----
    Senator Thomas. You can look to, but you cannot pass it in 
the legislation, can you?
    Governor Knowles. I make reference to it, sir, that that is 
something that would be allowable under applicable current 
State and Federal law.
    Senator Thomas. It would be strange if it were, real 
strange. That is a little unusual, is it not, to say, look, you 
can only hire Alaskans for this job, especially if you want to 
kind of support nationally that you are asking for?
    Governor Knowles. I believe that there are certain 
considerations for areas that have very wide unemployment. We 
have some remote rural areas where there are 50 percent 
unemployment, there is no private sector jobs. I think 
empowerment zones is something that has been embraced by this 
Congress to look to local hire.
    Certainly there are provisions in national law for American 
Indian opportunities and the Alaska Native opportunity that we 
are doing has been reflected in previous national law with 
construction of the oil pipeline. So this does have precedent 
in law and we are asking for nothing more than could be 
provided to other projects.
    Senator Thomas. But you do agree that when this gas arrives 
at wherever, Chicago or wherever, it is going to be competitive 
with the gas produced in Wyoming and in Colorado and in 
Louisiana?
    Governor Knowles. Yes, sir.
    Senator Thomas. Okay. I just am a little concerned that it 
is hard to be competitive when on the other end you provide 
unusual incentives. I am for this and I hope we can come up 
with something, but I am a little concerned that we are saying 
we are going to come into the marketplace, we are going to 
provide all of this, but here are the conditions that do not 
apply to the rest of the producers in the country.
    Thank you very much.
    The Chairman. Senator Dorgan.
    Senator Dorgan. Mr. Chairman, thank you.
    Governor Knowles, I missed your testimony. I have read it, 
however. But I have another Commerce Committee hearing on 
transportation security occurring right now, so I am trying to 
get to both of them, and excuse my absence while you were 
testifying.
    The price of natural gas today is what, $1.85, $1.90?
    Governor Knowles. Yes, sir.
    Senator Dorgan. A dramatic change from 6 months ago or 9 
months ago, 12 months ago. So when you in your testimony talk 
about certainty and about price floors and so on, you are 
making the point, I suspect, that in order to justify the kind 
of money that is necessary to build a pipeline to transport 
that natural gas. The market would have to feel some certainty 
with respect to income, is that the point you are making?
    Governor Knowles. Yes, sir.
    Senator Dorgan. My own view is that, while there are a lot 
of controversial issues in energy policy that we will come to 
grips with in this committee, I really feel that the issue of 
natural gas from Alaska is a question of not whether, but when 
and how. Your testimony I think is instructive for us. I think 
there are a lot of questions.
    The folks in Alaska who will contribute substantially to 
our energy, present and future, are receiving State royalty 
payments and so on. We watch all that from down here. I guess 
the question I would ask you is, as we proceed to try to 
connect your supply to our demand as a Nation with a pipeline, 
what is the State of Alaska prepared to do to help provide that 
certainty that I just described earlier about price and 
economic return or financial return, rather, to those who will 
be involved in building the pipeline?
    Governor Knowles. In reference to the fluctuation of the 
price, clearly the $1.80, $1.90 that it reflects today would 
not substantiate the building of the line. However, the gas 
that has stayed for 20 years in the ground has not had really a 
market. There was in the last 2 years a feeling that there was 
a dramatic change in the demand structure of the demand curve 
for natural gas in the future, even despite the current dip in 
the prices.
    It has been my advice that this feeling remains strong. You 
will have witnesses coming up here to testify from both 
producers as well as pipeline companies that I think will also 
adhere to the fact that the long-term feeling that the price of 
natural gas will justify this development.
    In regards to competing other gases much closer to market, 
there does have to be I think some collaborative measures taken 
both by the Federal Government and by the State of Alaska to 
ensure some type of security so that the investment dollars 
will go into this unprecedented transportation infrastructure 
which will be necessary to bring this gas to market.
    Senator Dorgan. But do you have some idea as to what the 
State of Alaska's piece of that might be?
    Governor Knowles. Yes, we are willing to talk about all 
aspects of the gas tax structure, to tailor it, not as a 
subsidy, as Senator Murkowski has said, but as part of the 
necessary incentives to attract the dollars to a market that 
previously has not existed. So we feel that, just as there are 
uniquely tailored tax structures throughout a tax code that is 
rather thick to address specific areas that are not done on a 
uniform basis, so will be this project.
    Senator Dorgan. Mr. Chairman, I do not think the present 
price of natural gas diminishes the need at all for us to be 
working on this issue. I agree with Governor Knowles that our 
view of this in terms of energy security must be on the longer 
term, not the shorter term. We might want to learn from the 
period where oil went to ten dollars a barrel and people 
stopped looking for oil and gas and then we had really flat 
exploration and we needed supply and the price spiked way up.
    It does not serve anybody, It certainly does not serve this 
country or its consumers, to have these roller-coaster rides on 
prices. We need more stability, stability in exploration, 
stability in supply. We need a lot of other things in energy 
policy, including conservation.
    But I think the point of your testimony is very important 
for us to understand. That is, that current circumstances do 
not diminish the need for us to do this. The question is not 
whether, the question is how and when do we do it.
    Mr. Chairman, thank you very much.
    The Chairman. Thank you very much.
    Senator Craig.
    Senator Craig. I have no questions.
    The Chairman. Governor, thank you very much for your 
excellent testimony. We appreciate it, and we will take your 
suggestions under advisement, as they say in the courts.
    Governor Knowles. Thank you, Mr. Chairman and distinguished 
members of this committee.
    The Chairman. Thank you very much.
    Senator Murkowski. Thank you, Governor.
    The Chairman. We have a panel one. We also have one 
additional witness specifically representing a State senator 
from Alaska, who is chair of the Joint Committee on Natural Gas 
Pipelines, Mr. John Torgerson. If he would come forward with 
the first panel, and I will ask them each to testify before we 
start our next round of questions.
    Mr. Kripowicz, who is the Acting Assistant Secretary for 
Fossil Fuel in the Department of Energy; Pat Wood, who is the 
Chairman of the Federal Energy Regulatory Commission; and Ms. 
Drue Pearce, who is the Senior Advisor for Alaska Affairs in 
the Department of the Interior. We are very glad to have all of 
you here.
    Why don't we start with you, Senator Torgerson. We 
appreciate you being here and look forward to hearing your 
perspective, each of you. In each case, of course, we will take 
the full testimony into the record. If you could summarize the 
main points you think we need to be aware of in about 5 
minutes, that would be great. Please go ahead.

STATEMENT OF JOHN TORGERSON, ALASKA STATE SENATOR AND CHAIRMAN, 
    JOINT COMMITTEE ON NATURAL GAS PIPELINES, ALASKA STATE 
                          LEGISLATURE

    Mr. Torgerson. Thank you, Mr. Chairman. Good morning. Good 
morning, Senator Murkowski and members of the committee. My 
name is John Torgerson. I chair the Alaska State Senate 
Resources Committee and the Joint Committee on Natural Gas 
Pipelines, which is made up of equal members from our House and 
Senate. One of the responsibilities of this joint committee is 
to represent the legislature before this Congress on natural 
gas pipeline issues.
    The committee met on September 19, where we discussed the 
Alaska gas producer pipeline team's proposed legislation. We 
unanimously oppose this draft legislation and voted in favor of 
requesting Congress to reaffirm the Alaska Natural Gas 
Transportation Act, ANGTA, as the prevailing law. Virtually 
everything the producers have proposed can be found in ANGTA.
    One of our major concerns with the producers' legislation 
is the fact that it is route-neutral, giving them the 
opportunity to apply for a buried, underwater, offshore ANWR 
pipeline route, which Alaska is adamantly opposed to. Back in 
the mid-1970's there were three pipeline applications filed 
under the Natural Gas Act: the so-called over-the-top route, 
the Alaska Highway or AlCan route, and an all-Alaskan or 
liquefied natural gas route.
    To end the route debate, Congress passed the Alaska Natural 
Gas Transportation Act. Section 7 of this act required the 
President to prepare a decision on the Alaska natural gas 
transportation system, which he did, and which he submitted to 
Congress on September 22, 1977. The President's decision was 
approved by Congress in Public Law 95-158 and modified later on 
by Public Law 97-93. The Canadian Parliament then passed its 
own version of ANGTA, known as the Northern Pipeline Act.
    So the President and Congress have not repealed their 
action on the Alaska highway route. ANGTA is still the 
prevailing law with respect to Alaska pipelines. Furthermore, 
an application should not be considered if filed under the 
Alaska Natural Gas Act since these very same proposals have 
already been reviewed and the route has been selected.
    An Alaska Highway route authorized by Congress and the 
President is important for Alaskans for the in-State jobs and 
the creation of value-added industries along the line and along 
spur lines to tidewater, the stable revenue stream for our 
communities and to our State, and most importantly a clean-
burning energy source for Alaskans to rely on for many years in 
the future.
    A pipeline built in the Beaufort Sea greatly reduces the 
potential for Alaskans to reap the benefits from our gas. In 
addition, we believe, and the national environmental 
organizations agree, that the Alaska Highway route is more 
environmentally sound than the Beaufort Sea route.
    In our support for ANGTA as the prevailing law, the Joint 
Committee recognizes that a few changes will be helpful to 
bring this project into the twenty first century. Therefore, we 
approve 12 proposals that I have submitted in my written 
testimony, and in the interest of time I would like to just 
highlight a few of those.
    The first proposal we have already discussed. It is to 
reaffirm the Alaska Natural Gas Transportation Act as the 
prevailing law.
    Second, to adopt the provisions in H.R. 4 to ban the over-
the-top route to the Beaufort Sea as a legitimate pipeline 
route.
    Third, create a joint board consisting of members appointed 
by the Federal Energy Regulatory Commission and the regulatory 
commission of Alaska, to ensure that Alaska has fair and 
reasonable access to the gas produced within our State.
    The last two proposals I will highlight have to do with tax 
incentives. First, we support the language currently in H.R. 4 
allowing for an accelerated depreciation schedule of 7 years. 
Our next proposal could be considered a tax disincentive. Since 
it is the policy of the United States to reduce our dependence 
on foreign energy sources, we believe Congress should not pass 
any law giving incentives to liquefied natural gas imported 
from outside North America. Rather, Congress should give 
incentives to gas from nonconventional sources in frontier 
areas within the United States.
    As far as other tax incentives are concerned, the producers 
have not asked for any. They have not shared their financial 
projections with my committee. The only thing the producers 
have mentioned is a need for fiscal certainty in the State's 
tax regime. The Alaska legislature has funded the Department of 
Revenue to hire outside experts to study our gas tax regime, to 
make recommendations to advance the project, and to offer 
market-based incentives.
    We have also funded and hired experts to make 
recommendations regarding the possible ownership by the State 
or financing all or part of the line.
    These reports are due back to the legislature January 2002. 
So we will be prepared to consider any necessary incentives 
when we have the data from the project's sponsors to justify 
the incentive. Right now I feel we should not begin our 
negotiations by leading with incentives until we at least 
verify the profitability of the project.
    In closing, Mr. Chairman, I would like to mention this is 
important to Alaskans, that the provisions authorizing the 
exploration and drilling in the Arctic National Wildlife Refuge 
remain in H.R. 4. America needs more reliable energy sources. 
We have those resources available in Alaska. Alaska stands 
ready to assist you in delivering those to market.
    Thank you.
    [Attachments submitted by Senator Torgerson have been 
retained in committee files.]
    The Chairman. Thank you very much.
    We have Pat Wood, who is the Chairman of the Federal Energy 
Regulatory Commission. Very pleased to have you here. Go right 
ahead.

           STATEMENT OF PATRICK WOOD III, CHAIRMAN, 
              FEDERAL ENERGY REGULATORY COMMISSION

    Mr. Wood. Thank you, Chairman Bingaman, Senators Murkowski, 
Craig, and Feinstein.
    I think, as Senator Dorgan just pointed out, with regard to 
Alaska natural gas, it is not a question of if, but when. I 
should say that FERC or my fellow commissioners and I and our 
staff are ready and willing to move this as fast forward and as 
thoroughly forward as we need to once an application is filed. 
This is a national priority. In order to make the rest of all 
the integrated energy plans of North America work, Alaska 
natural gas has to be part of the equation.
    Getting it to the entire North American market is a 
critical priority. In that light, I wanted to lay out the 
procedural paths that the Commission has before it. Attached to 
the back page of my testimony is a little one-page chart that 
lays out the concerns that we have got with the current state 
of play under the three different paths that are available and 
provide, as requested, some feedback to the committee as to 
issues that may arise that would tend to impede the swift 
processing of one or more applications to transport gas to the 
broader market.
    Certainly, the issue we focused on so far this morning is 
in the middle box, which is the ANGTA from a quarter century 
ago. The pipeline that has been permitted under that, a lot of 
the work under that has already been done, as is pretty clear. 
A couple of the issues under that particular path were that if 
a revised application, also known I believe as the southern 
route, were to come back and be activated before the 
commission, there is some I think flexibility within the 
original act as to how much the original proposal which had 
already been approved by President Carter can be modified and 
amended by the current applicants in light of new technology, 
the new market, new environmental conditions. That is a 
potential litigation point.
    It would certainly be helpful for the committee to clarify 
that in fact flexibility does exist.
    Similarly, on the environmental impact statement, it is 
over 23 years old and new environmental legislation has been 
passed by Congress since that time. I believe even the 
applicants acknowledge that it would have to be updated, 
certainly through at least a supplemental environmental impact 
statement. But a project of this nature certainly has some 
environmental issues that would be raised.
    The second subpart of that question is, is that subject to 
judicial review or not? Then I think I would defer to certainly 
the Department of Energy, which has a broad role to play under 
the ANGTA application in actually administering the 
construction of the project as to what resources may be needed 
there. Certainly the Department can speak to that.
    A second option that is available today is for an applicant 
to come in under the Natural Gas Act. There has been some I 
think fair questions raised as to whether the original ANGTA 
prohibits the Commission from moving forward at all on any 
filing under the Natural Gas Act. The Commission in the staff 
report submitted to the committee on January acknowledged that 
this is arguable, but that the better read is that a 
simultaneous application could move forward under the Natural 
Gas Act, and I share that view. But that has not been before 
the Commission for a formal ruling.
    A second issue under the Natural Gas Act is true for many 
applications, and that is the ability of the Commission to 
coordinate the time lines of other different agencies, 
particularly on environmental issues, to expedite the swift 
processing of that type of application. So any ability to 
streamline that would certainly save months and perhaps years 
on the processing of an environmental impact statement.
    The final path is not one that exists today, but it is a 
variation of the Natural Gas Act. It is the proposed Alaska 
Natural Gas Pipeline Act, I believe known as the producers' 
bill. In reviewing that, I think one of the concerns that we 
had was that, similar to the last one I mentioned under the 
Natural Gas Act, is the ability to coordinate the processing 
with a number of Federal agencies.
    Then, importantly, there is a 180-day--I am sorry--an 18-
month time line for processing an environmental impact 
statement for a new filing under that act. That is fine, but it 
has got to be off of a complete application. The legislation 
was not clear on that point, and we would certainly offer that 
it would be helpful if we as the commission had the ability to 
tell the applicant they must get everything to us before the 
18-month time frame starts working.
    In conclusion, there are a number of procedural paths. The 
commission has a really front-seat role to play here and we are 
committed to taking any or all applications that come forward 
and treating them as national priority projects.
    [The prepared statement of Chairman Wood follows:]

   Prepared Statement of Patrick Wood, III, Chairman, Federal Energy 
                         Regulatory Commission

                      I. INTRODUCTION AND SUMMARY

    Mr. Chairman and Members of the Committee:
    Thank you for the opportunity to speak today on the status of 
proposals for the transportation of natural gas from Alaska to markets 
in the Lower 48 States and legislation to expedite the construction of 
a natural gas pipeline from Alaska. As an initial matter, I want to 
assure you that the FERC Commissioners and staff stand with President 
Bush and Congress in our commitment to ensure that America's energy 
markets function reliably and well at this crucial time and for many 
years to come.
    Natural gas is an essential part of our Nation's energy future. The 
Department of Energy estimates that natural gas currently represents 24 
percent of the energy consumed in the United States, and that demand 
may reach almost 35 trillion cubic feet (Tcf) by 2020, an annual level 
requiring a significant increase in production and delivery.
    Against this backdrop, the importance of Alaska natural gas 
supplies, including those in the North Slope area, is clear. It is 
impossible to envision a 30-35 Tcf annual domestic market without 
Alaska natural gas. There has recently been renewed interest in the 
development of the transportation infrastructure necessary to move that 
gas to markets in the Lower 48 States. However, there are currently no 
applications before the Commission regarding an Alaska natural gas 
transportation project.
    In this testimony, I will first describe the statutory schemes 
under which the Commission may consider applications filed with it for 
authorization for Alaska pipeline projects. I will then discuss issues 
that may be expected to arise under these laws and provide my thoughts 
on how these matters could be addressed through Congressional action. 
While I recognize that energy markets, like all markets, are subject to 
change, so that the economic viability of building an Alaska gas 
pipeline may vary from time to time, the need for Alaska natural gas in 
the Lower 48 market is only going to increase as the years go by.
    My overall regulatory philosophy is to ensure that there are an 
adequate energy infrastructure, clear and balanced rules that allow 
efficient trading between market participants, and effective regulatory 
oversight. These key elements have led to robust competition in energy 
markets, with resultant benefits to customers. Toward that end, we will 
make every effort to process and act upon any applications for Alaska 
gas transportation projects as efficiently as possible, working with 
the applicants, other federal and state agencies, Native Americans, 
shippers, end users, and other interested parties, to ensure timely, 
reasonable decisions.

                        II. STATUTORY BACKGROUND

    Applications for authorization to construct and operate an Alaska 
natural gas transportation project may currently be filed under either 
the Natural Gas Act (NGA) or the Alaska Natural Gas Transportation Act 
(ANGTA). I will address these statutes in turn. I will also review 
proposed legislation which I understand has been submitted to Congress 
for its consideration (the proposed Alaska Natural Gas Pipeline Act).

A. The Natural Gas Act
    Under Section 7(c) of the Natural Gas Act, the Commission issues 
certificates of public convenience and necessity authorizing the 
construction and operation of natural gas pipelines. The Commission 
also establishes initial rates for new facilities.
    Most natural gas pipeline facility construction is authorized under 
the case-by-case certificate review process embodied in Subpart A of 
Part 157 of the Commission's regulations. 18 C.F.R. Part 157 (2001). 
The Commission reviews numerous aspects of a proposed project, 
including the route, environmental impacts, engineering and design, gas 
supply, market, cost, financing, construction, operation, and 
maintenance, revenues, expenses, and income, and tariff and rate 
matters.
    During the last fifteen years, the Commission has moved 
increasingly to promote competition in the natural gas industry. The 
Commission has strongly encouraged pipelines subject to its 
jurisdiction to unbundle their production, sales, and transportation 
functions, and to provide transportation on an open-access basis. 
Almost all have done so. Under the open-access policy, shippers are 
able to buy gas directly in production areas and separately obtain 
transportation on interstate pipelines on an equal footing with other 
shippers. Moreover, in response to competition, the interstate pipeline 
transportation grid has expanded significantly, offering shippers more 
flexibility in their choice of supply areas, and creating new paths 
from supply areas to additional markets.
    When the Commission receives an application under Section 7(c), it 
issues public notice of the application in the Federal Register, and 
notifies potentially-impacted landowners of the proposed project. 
Interested persons may file motions to intervene or protest. Generally, 
Commission staff requests from the applicant any additional information 
it needs to fully understand the application, considers issues raised 
by other persons, and conducts a thorough environmental review. A 
certificate order is then drafted, containing whatever terms and 
conditions are deemed necessary for the public convenience and 
necessity. The Commission can set an application for evidentiary 
hearing before an administrative law judge, if there are material 
issues of fact that cannot be resolved on the basis of the written 
record, although such hearings regarding construction applications are 
rare.
    I am proud of the prompt manner in which the Commission in recent 
years has acted on natural gas pipeline applications. For major 
projects, we have been making every effort to act within 18 months of 
the time that the application is complete, which, given the complexity 
of these cases, is quick indeed. This requires a significant commitment 
of time and resources, but we know that swift regulatory action is 
necessary for properly functioning markets.

B. The Alaska Natural Gas Transportation Act
    In response to the energy shortages of the 1970's, Congress passed 
ANGTA, in an effort to establish streamlined procedures for the 
consideration, approval, and construction of a natural gas pipeline to 
bring Alaskan natural gas to the Lower 48 States (the Alaska Natural 
Transportation System, or ANGTS).
    ANGTA established a unique process for selecting an ANGTS and 
expediting its construction and initial operation. Under this process, 
the Commission was directed to recommend to the President a specific 
transportation proposal. The President then would submit a decision to 
Congress, and Congress would approve or disapprove that decision. 
Thereafter, the Commission was to issue an NGA certificate for any 
approved project. ANGTA also established other procedural mechanisms to 
assist in the completion of an ANGTS, including requiring all federal 
agencies to expeditiously grant necessary authorizations for the ANGTS, 
establishing the Office of the Federal Inspector to oversee the timely, 
efficient, and environmentally sound construction of the ANGTS and to 
coordinate federal efforts related to the project, and strictly 
limiting judicial review.
    In 1977, in the President's Decision and Report to Congress on the 
Alaskan Natural Gas Transportation System (President's Decision), 
President Carter designated the route and selected the project sponsors 
for construction of the ANGTS, running 4,787 miles from Prudhoe Bay, 
south to near Fairbanks, and then southeast along the route of the 
Alaska-Canadian highway to near Calgary, Alberta, where it would split 
into two legs, one continuing to California in the West, and the other 
to Illinois in the Midwest.
    The President's designation of the ANGTS route and choice of 
sponsors to construct and operate it were closely coordinated with the 
government of Canada and followed adoption of an Agreement Between The 
United States And Canada On Principles Applicable To A Northern Natural 
Gas Pipeline (Agreement on Principles). Pursuant to the Agreement, 
Canada enacted the Northern Pipeline Act, which is similar to ANGTA.
    On December 16, 1977, the Commission issued a conditional 
certificate under ANGTA and the NGA to designate project sponsors. (The 
project sponsors have changed over the years and the certificate is 
currently held by the Alaska Northwest Natural Gas Transportation 
Company, a partnership between Foothills Pipelines, Inc. and 
Transcanada Pipelines Limited). This conditional certificate, which 
authorized the project sponsors to construct and operate the pipeline 
system to transport gas from Alaska's North Slope to the Lower 48 
States, was actually the initial step in the process of issuing a more 
detailed final certificate. The conditional certificate was followed by 
extensive procedures to establish further conditions for the project, 
including the design specifications and initial system capacity of the 
Alaskan segment of the ANGTS and an interim rate of return mechanism 
applicable to the segments of the ANGTS located in the United States.
    The ANGTS sponsors, in order to facilitate financing for what would 
be the largest privately financed construction project in U.S. history, 
proposed to build the project in two phases. Phase 1, or the 
``Prebuild,'' completed in 1982, is an approximately 1,500-mile 
segment, which presently delivers large volumes of Canadian gas from 
Alberta to Stanfield, Oregon in the Western Leg, and to Ventura, Iowa 
in the Eastern Leg.
    At the time work on Phase I was being completed, the energy outlook 
of the United States and Canada changed substantially. Natural gas 
discoveries in Canada and in the Lower 48 States ballooned, and world 
oil prices moderated. With this changed natural gas market, the ANGTS 
sponsors announced in April 1982 that the Alaska portion of the project 
(Phase II) would be substantially delayed. No final certificate for 
Phase II was requested or issued before proceedings came to a halt in 
1983.
    On January 18, 2001, former Chairman James Hoecker submitted to 
Congress a report on ANGTA prepared by Commission staff. That report 
reviewed the background of ANGTA and discussed issues that might arise 
in the event of a renewed ANGTS application or of an Alaska gas 
pipeline application under the NGA.

C. The proposed Alaska Natural Gas Pipeline Act
    The proposed Alaska Natural Gas Pipeline Act, as I understand it, 
is an effort to apply many of the streamlining aspects of ANGTA to a 
project filed solely under the NGA. To that end, the proposed 
legislation would, among other things: require the Commission to 
complete environmental review and issue a certificate to any proposal 
backed by an agreement with a shipper of Alaska gas, within 18 months 
of the filing of an application; establish a Federal Pipeline Director 
with sweeping authority to coordinate and control federal activities 
relating to a proposed project; establish the Commission as the lead 
agency for purposes of environment review; and, like ANGTA, strictly 
limit environmental review. The bill contains provisions relating to 
facilities constructed within Alaska and to those located in the Lower 
48 States.

                         III. POTENTIAL ISSUES

    In this section, I will discuss issues that may arise with regard 
to applications filed under each of the three potential statutory 
schemes. I have also attached to my testimony a chart which lists some 
of the key issues on a side-by-side basis, for ease of comparison.

A. Issues with Respect to an NGA Application
    The NGA itself raises few issues. The Commission has been reviewing 
applications under Section 7 for more than 60 years, and that process 
is well-known and understood by all participants. I am confident that 
Commission staff would work quickly to complete its review of any NGA 
application for an Alaska natural gas pipeline, and that, if the 
Commission is presented with a complete application, including all 
necessary environmental documentation, the Commission would be prepared 
to act on the application in a timely manner.
    Two key matters could nonetheless arise. First is the question of 
the effect of ANGTA on the Commission's authority to consider an NGA 
proposal. Arguably, ANGTA precludes the Commission from approving any 
other proposal for an Alaska gas pipeline until the ANGTS is complete. 
Chairman Hoecker and the staff report concluded that, while ANGTA 
provided that the Commission was required to give precedence to 
consideration of the ANGTS, nothing in ANGTA bars the Commission from 
considering competing NGA proposals. I agree with that conclusion. 
Nonetheless, it would eliminate delays occasioned by litigation if 
Congress were to clarify that, since the Commission satisfied the 
requirements of ANGTA by issuing an ANGTS certificate in 1977, nothing 
in ANGTA precludes, or requires delay in, Commission consideration of 
another Alaska pipeline proposal, filed under the NGA. Alternatively, 
Congress could establish that the Commission in fact is precluded from 
approving any other proposal for an Alaska natural gas pipeline until 
the ANGTS is either procedurally or physically complete.
    Second is the question of the coordination of federal efforts. 
There is no doubt that coordinated federal action is necessary to avoid 
increased expense, redundant reviews, and delay. It would greatly 
assist the consideration and implementation of an Alaska gas pipeline 
proposal if Congress were to provide that the Commission has the 
authority to coordinate federal activities with respect to a proposal 
filed under the NGA. At a minimum, it would be helpful if Congress 
provided that the Commission has the authority to establish deadlines 
for action by other federal agencies with respect to an Alaska natural 
gas pipeline proposal, so that the Commission can ensure that it is 
able to act on any application in a timely manner.

B. Issues With Respect to an ANGTA Application
    As I explained earlier, the Commission granted to the ANGTS 
sponsors a conditional certificate in 1977. Before the ANGTS could be 
constructed, the Commission would have to issue a final certificate. A 
renewed or revised ANGTS application could raise several issues. These 
issues are discussed in detail in the staff report, but I will 
summarize some of the key questions here.

            1. Ability to Deal With a Revised ANGTS Proposal
    The President's Decision, which was issued pursuant to ANGTA and 
approved by Congress, contains a number of conditions that on their 
face seem to affect directly the Commission's consideration of a 
renewed application to complete the ANGTS. Among other things, the 
President's Decision, in addition to designating the sponsors and route 
for the pipeline, specifies many aspects of the design, provides for a 
variable rate of return as an incentive to limit costs, and determines 
that the required environmental impact statements relative to an Alaska 
natural gas transportation system have been prepared and are in 
compliance with NEPA. Completion of the certificate process more than 
twenty years after issuance of the conditional certificate could raise 
some questions about aspects of the President's Decision that could 
appear to restrict the applicants' and/or the Commission's ability to 
revise the project in light of changes in the market, technology and 
environmental circumstances.
    ANGTA permits the Commission or another federal agency to amend the 
ANGTS (15 U.S.C. 719g(d)), but restricts agency discretionary revisions 
only to those that would not alter ``the basic nature and general 
route'' of the ANGTS. The staff report noted that these provisions 
leave it unclear as to what extent the project sponsors or the 
Commission or other federal agencies could propose or authorize changes 
to the ANGTS as outlined in the President's Decision. I observe, 
however, that the term ``basic nature and general route'' is 
sufficiently broad to encompass a number of update-related revisions 
that the sponsors, the Commission or another federal agency could take 
upon reactivation of the project. This becomes more difficult, however, 
if revisions were to reasonably vary from the ``basic nature and 
general route'' of the original project. In such event, Congressional 
guidance would assist prompt processing of a reactivated project.

            2. Environmental Considerations
    The original environmental impact statement (EIS) for the ANGTS 
project was prepared more than 20 years ago by the Department of 
Interior and supplemented by the Commission's predecessor, the Federal 
Power Commission. In 1980, the Commission prepared a second EIS to 
consider the environmental impacts of a gas conditioning plant that was 
proposed to be built, as part of the ANGTS, at Prudhoe Bay.
    ANGTA provided that a decision by Congress approving the 
President's Decision designating an ANGTS was deemed conclusive as to 
the sufficiency of the underlying EIS and that the EIS was insulated 
from judicial review. Given that the ANGTS environmental documentation 
is now more than 20 years old, a supplemental EIS may need to be 
prepared before the Commission can issue a final certificate for Phase 
II. It would expedite Commission review of a reactivated project if 
Congress would clarify whether the original EIS is legally sufficient 
or if a supplemental EIS should be prepared and, if so, whether the 
supplemental EIS is also protected from judicial review.

            3. Role of Other Federal Agencies
    As noted above, coordinating the roles of the various Federal 
agencies that have responsibility over various aspects of such a 
proposal is critical to efficient, timely review of any Alaska natural 
gas pipeline proposal. During the original ANGTS proceedings, this 
coordination role was performed by the Office of the Federal Inspector. 
The Office of the Federal Inspector was abolished by Congress in 1992, 
and those functions and authorities were transferred to the Secretary 
of Energy. I defer to the Secretary with respect to any budgetary or 
other authority he might need to fulfill the coordinating and 
compliance functions if the original ANGTS proposal is renewed by the 
project sponsors.

C. Issues With Respect to the Proposed Alaska Natural Gas Pipeline Act
    I have reviewed the proposed Alaska Natural Gas Pipeline Act. I 
support what I see as the overall thrust of the bill, which is to 
streamline consideration of an Alaska natural gas pipeline, and to 
ensure coordination of federal actions with respect to such a project. 
I do have two implementation-related concerns with the proposal:
    First, Section 6 of the proposed bill would require the Commission 
to complete environmental review and act on an application for an 
Alaska natural gas project within 18 months of its filing. This 18-
month time frame would be achievable only if the Commission were to 
receive a complete application (this is often not the case, requiring 
Commission staff to seek additional information from applicants), and 
if all the other federal agencies were to complete their efforts in a 
timely fashion. Thus, any legislation should provide that any deadlines 
begin to run from the date that the Commission deems an application to 
be complete, and that the Commission is empowered to set deadlines for 
action by other agencies, including state agencies.
    Second, while the proposed bill would establish an Office of the 
Federal Pipeline Director, it is not clear how the authority of the 
Director would mesh with that of the Commission, and who would control 
the timing and processing of an application. I believe that those 
decisions should rest with the Commission. Pipeline certification is 
what we do. I believe the pipeline certification record of the 
Commission in recent years demonstrates it is able to properly handle 
the required environmental, siting and other issues under the most 
aggressive of timetables.

                             IV. CONCLUSION

    I cannot predict which, if any, applications for Alaska natural gas 
projects will be filed with the Commission. That is for the investors 
in those projects to decide. But, in my view, at least one pipeline 
carrying Alaska natural gas will need to be built in the near future. 
It would be most helpful for interested parties to collaborate on a 
single project of sufficient scope to enable our focus to be on getting 
the gas to the market rather than on spending time in litigation. In 
the event that settlement of issues is not forthcoming, it would be 
wise, in advance of such events, to clarify the statutory structure(s) 
governing the issue, so we don't spend more time in Court than in the 
field building the needed transportation. A quarter-century wait is 
long enough.
    I can assure you that whatever application(s) is/are ultimately 
filed with the Commission, we will review it/them thoroughly, promptly, 
and fairly, with the public interest firmly in mind, and with a clear 
understanding of how important Alaska natural gas is to our Nation's 
long-term energy security.
    The Commissioners and staff of the FERC are always available to 
assist the Committee in any manner.

  RECOMMENDATIONS WITH RESPECT TO AN ALASKA GAS TRANSPORTATION PROJECT
                 UNDER THREE POSSIBLE STATUTORY SCHEMES
------------------------------------------------------------------------
                                  Alaska Natural Gas
         Natural Gas Act             Transportation     Alaska Natural
                                          Act          Gas Pipeline Act
------------------------------------------------------------------------
1. Clarify that ANGTA does not    1. Provide          1. Provide that
 preclude, or require delay in,    guidance as to      any deadline
 Commission consideration of an    the extent to       imposed on
 Alaska natural gas project        which the           Commission action
 under the NGA.                    original ANGTS      of an application
                                   proposal can be     begins to run
2. Grant the Commission the        revised.            from the date
 authority to coordinate federal                       that the
 activities with respect to an    2. Clarify whether   Commission deems
 Alaska natural gas project        the ANGTS EIS is    the application
 under the NGA, or authorize the   still legally       complete, and
 Commission to establish           sufficient and      empower the
 deadlines for action by other     whether a           Commission to set
 federal agencies.                 supplemental EIS    deadlines for
                                   would be            action by other
                                   protected from      federal and state
                                   judicial review.    agencies.

                                  3. Provide any      2. Provide that
                                   necessary           the Commission
                                   clarification and   will control the
                                   budgetary           timing and
                                   authority           processing of any
                                   necessary to        application.
                                   revitalize the
                                   Office of the
                                   Federal Inspector.
------------------------------------------------------------------------


    The Chairman. Thank you very much.
    Ms. Pearce, it is nice to see you here again. Why don't you 
go ahead.

 STATEMENT OF DRUE PEARCE, SENIOR ADVISOR FOR ALASKA AFFAIRS, 
                   DEPARTMENT OF THE INTERIOR

    Ms. Pearce. Thank you. Good morning, Mr. Chairman and 
members of the committee. Good morning, Senator Murkowski. 
Thank you for inviting the Department of the Interior to 
testify here today regarding an Alaska natural gas pipeline.
    I am not here today to testify as a proponent for any 
particular pipeline proposal. Rather, I would offer the 
Department's expertise and experience of over 30 years of 
pipeline oversight in the State of Alaska.
    Senator Murkowski. I wonder if you could pull the 
microphone a little closer, please.
    Ms. Pearce. Okay.
    The Department of the Interior is committed to the full 
development of the National Petroleum Reserve-Alaska, to 
opening the Arctic National Wildlife Refuge, and improving the 
energy infrastructure, of which a gas pipeline is a critical 
part. For more than 30 years, the State of Alaska, the Federal 
Government, and industry have studied and pursued development 
of an Alaskan natural gas pipeline. We began the first pipeline 
studies in 1969. But today that pipeline remains a pressing 
need for the Nation's energy infrastructure.
    In May of this year, the pipeline was singled out as a 
priority in the President's national energy policy. The 
President directed the Secretaries of Energy and State, 
coordinating with the Secretary of the Interior and FERC, to 
work closely with Canada, the State of Alaska, and all other 
interested parties to expedite the construction of a pipeline 
to deliver natural gas to the lower 48 States.
    The development of the natural gas pipeline ought to be 
part of a broad approach to energy development in Alaska for 
the United States. I recommend that we avoid a singular 
solution to the gas pipeline question that limits other North 
Slope energy development potential. We must model that 
infrastructure and increase energy supplies in the State for 
the Nation. The oil and gas potential for the entire North 
Slope is critical to meeting that challenge.
    The Department of the Interior looks forward to being an 
active participant in the development of an Alaskan pipeline 
system, as we have a long and effective history in Alaska. The 
Bureau of Land Management currently administers three Federal 
rights of way in Alaska: the Trans-Alaska Pipeline System, or 
TAPS; the Alaska Natural Gas Transportation System, or ANGTS; 
and the Trans-Alaska Gas System. If the BLM receives an 
application from producers for an over-the-top offshore route, 
the right of way application will be adjudicated by the 
Minerals Management Service, also an agency of the Interior 
Department.
    The Mineral Leasing Act placed in the Department of the 
Interior the authority and responsibility for granting pipeline 
rights of way through any Federal lands. This responsibility 
includes assessment of the technical and financial capability 
of a pipeline operator to construct, operate, maintain, and 
terminate a pipeline project. Through the execution of these 
duties, the Department has been involved in technical design, 
construction, operations, and maintenance oversight on the TAPS 
system throughout its history.
    The Department of the Interior has through its several 
bureaus the oversight responsibilities for thousands of miles 
of offshore oil and gas pipelines in both the Gulf of Mexico 
and the Pacific Ocean. In exercising our responsibilities, the 
Department has a number of pipeline employees who can assist in 
the Alaska natural gas pipeline project. In addition, we have 
numerous environmental and biological scientists with years of 
experience in Alaska who can assist in the review of the 
various proposals and permits that will be required.
    The BLM is the lead Federal agency in the Joint Pipeline 
Office since its inception in 1990. The Joint Pipeline Office 
was administratively established to coordinate government 
oversight of the Trans-Alaska Pipeline System. The office is 
currently comprised of six Federal and seven State agencies, 
Interior being represented by both BLM and the Minerals 
Management Service. It allows for a single functional 
organization and the avoidance of duplicated resources and 
efforts.
    The organization has the ability to tap the knowledge of 
member agencies, to share expertise, to coordinate permitting, 
technical reviews, and the issuances of leases and rights of 
way. The Joint Pipeline Office represents the type of multi-
agency oversight that will be necessary for the design and 
construction of any Alaska natural gas pipeline.
    One of the most significant recommendations to come out of 
the lessons learned exercise conducted after the construction 
of TAPS was to mandate the coordination of Federal and State 
agencies involved in any new pipeline projects of similar 
magnitude. The Alaska Natural Gas Transportation Act of 1976 
authorized the appointment of a Federal inspector to oversee 
construction of the gas pipeline system in accordance with a 
joint Federal-State monitoring agreement. The Office of the 
Federal Inspector was an independent executive agency that 
received advice from an executive policy board comprised of the 
Secretaries of the Interior, Energy, Agriculture, Labor and 
Transportation, the Administrator of the Environmental 
Protection Agency, the Chairman of the Federal Energy 
Regulatory Commission, and the Chief of Engineers of the Army 
Corps of Engineers.
    However, progress on the gas pipeline project ceased in the 
1980's and in 1992 the Federal Inspector's Office was disbanded 
and those responsibilities were transferred to the Department 
of Energy.
    There are many issues surrounding an Alaska gas project, 
such as Alaska Native hire agreements, special provisions for 
construction in Arctic and sub-Arctic regions, and unique 
environmental conditions that make the Department of the 
Interior's regional expertise a very real advantage to 
expedient government regulation. Given that the law transfers 
monitoring authority to the Department of the Interior 1 year 
after construction of the gas pipeline and because latent 
design and construction deficiencies can have a significant 
impact on pipeline operations, Interior's involvement in 
construction monitoring is essential for effective oversight 
throughout the life of a project.
    As I have noted, the Department of the Interior has a 
longstanding partnership with the State of Alaska and years of 
experience in the Arctic. We stand ready to partner with our 
sister agencies in the coordination of the gas pipeline 
project.
    This concludes my testimony and I will be happy to answer 
any questions that the committee may have.
    The Chairman. Thank you very much.
    Mr. Kripowicz, you are the Acting Assistant Secretary for 
Fossil Fuel in the Department of Energy. We welcome you. Go 
right ahead.

 STATEMENT OF ROBERT S. KRIPOWICZ, ACTING ASSISTANT SECRETARY 
            FOR FOSSIL ENERGY, DEPARTMENT OF ENERGY

    Mr. Kripowicz. Thank you. Mr. Chairman, members of the 
committee: As virtually every witness has testified this 
morning, Alaska's natural gas on the North Slope represents a 
large and potentially significant future energy resource for 
the United States. I have outlined in my testimony the Nation's 
growing demand for natural gas. Last year we consumed 22.8 
trillion cubic feet of natural gas and by 2020 under a 
business-as-usual scenario gas consumption could jump to almost 
35 trillion cubic feet, a 52 percent increase.
    Even though we have large quantities of natural gas in the 
lower 48 States, demand for natural gas between now and 2020 
will likely outpace supply, at least supply from those 
resources we are developing today. Especially in the power 
generation market, natural gas use is on the rise, largely 
because it can help generators meet increasingly stringent 
clean air requirements. More than half the projected increase 
in gas use will likely be in the electric power sector.
    President Bush's national energy policy recognizes the 
importance of natural gas to our energy, economic, and 
environmental future. The policy emphasizes the need to develop 
a variety of new natural gas resources. It specifically calls 
attention to the prospects for producing and transporting 
Alaskan natural gas to markets in the lower 48 States.
    One of the policy's recommendations which the President 
subsequently implemented has been to direct the Secretaries of 
Energy and State, along with the Interior Department and the 
Federal Energy Regulatory Commission, to be ready to expedite 
any necessary permitting for an Alaska gas pipeline. We have 
responded to the President's direction by creating a multi-
agency task force. This task force is meeting regularly to get 
a head start on identifying impediments to ensuring that 
relevant agencies are communicating well with each other.
    We also intend to work closely with the government of 
Canada to determine if existing bilateral agreements are 
sufficient or whether additional government to government 
agreements might be warranted. Obviously, however, we can only 
go so far before there is an actual proposal before us, and 
that in turn will depend upon business' decisions made by the 
private sector. The administration remains neutral regarding 
the specific project or projects that the private sector might 
undertake in order to develop and market North Slope gas. We 
believe the marketplace should determine when, how, and by whom 
North Slope gas is developed and transported.
    In short, Mr. Chairman, the vast natural gas resources of 
the Arctic represent one of our largest, most promising, and 
most secure domestic energy supplies. America certainly needs 
the energy that Alaska's North Slope can provide. When or if a 
commercially viable transportation project emerges, the 
President has made it clear that he expects the government to 
be ready and responsive to perform its duties as quickly as 
possible.
    That completes my opening statement. I am pleased to answer 
any questions.
    [The prepared statement of Mr. Kripowicz follows:]

 Prepared Statement of Robert S. Kripowicz, Acting Assistant Secretary 
                for Fossil Energy, Department of Energy

    Mr. Chairman and Members of the Committee:
    One of the largest known reserves of natural gas in the United 
States is found in the Arctic, associated with the development of oil 
at Alaska's Prudhoe Bay. These proven gas reserves, likely totaling 
more than 35 trillion cubic feet, could make a significant long-term 
contribution to the Nation's energy supplies if delivered to the lower 
48 states. There may also be an additional 100 trillion cubic feet of 
natural gas resources on the North Slope that, although currently more 
speculative, could potentially be a source of new energy supplies in 
the future.
    Recently, as demand for natural gas has increased, interest has 
been renewed in tapping into Alaska's natural gas supplies. During the 
past year, producers on the North Slope have begun reexamining market 
and technical factors to determine whether transporting this gas is 
likely to be economically feasible in the near future.
    Recognizing the resurgent interest in moving Alaskan natural gas to 
lower-48 markets, the President's National Energy Policy calls for a 
coordinated federal/state/private sector effort to expedite 
construction of the necessary pipelines. Specifically, the National 
Energy Policy recommended that:

        . . . the President direct the Secretaries of Energy and State, 
        coordinating with the Secretary of the Interior and the Federal 
        Energy Regulatory Commission, to work closely with Canada, the 
        State of Alaska, and all other interested parties to expedite 
        the construction of a pipeline to deliver natural gas to the 
        lower 48 states. This should include proposing to Congress any 
        changes or waivers of law pursuant to the Alaska Natural Gas 
        Transportation Act of 1976 that may be required.

    Following release of the National Energy Policy in May, the 
Administration has responded to the President's direction. A multi-
agency federal task force has been established to identify impediments 
to the expedited construction of an Alaskan natural gas pipeline and to 
advise the Federal Government on how best to respond to such 
impediments.

                  THE NEED FOR NORTH SLOPE NATURAL GAS

    The prospect for increasing demand for natural gas in the United 
States has been the primary reason for the resurgence of interest in 
transporting Alaskan North Slope gas to market. Natural gas is an 
especially attractive energy resource due to its environmentally clean 
characteristics.
    Currently it represents 24 percent of the energy consumed and 27 
percent of the energy produced in the United States. In 2000, U.S. 
natural gas consumption totaled 22.8 trillion cubic feet. According to 
projections by the Department's Energy Information Administration 
(EIA), natural gas consumption is expected to grow by 2.3 percent 
annually, reaching 34.7 trillion cubic feet by 2020.
    Spurred mainly by dramatic increases in the use of natural gas to 
generate electricity, the demand growth rate is faster than any other 
major fuel source consumed in the United States. More than half of the 
projected increase in consumption is expected in the electricity 
generation sector.
    Between now and 2020, domestic natural gas demand is expected to 
increase more rapidly than supply. Much of the difference between U.S. 
gas consumption and lower 48 production will be made up by imports, 
primarily from Canada. Today, net natural gas imports account for 16 
percent of total U.S. natural gas consumption, or about 3.5 trillion 
cubic feet. By 2020, the United States will likely be importing about 
5.8 trillion cubic feet of natural gas, or about 17 percent of its 
projected consumption. However, these EIA projections do not include 
gas from the North Slope which, if made available to the lower 48 
States, would probably reduce gas imports.
    Natural gas prices will likely have an effect on private sector 
investments necessary to bring Alaskan natural gas to market. In the 
short-term, EIA projects that the average wellhead price of natural gas 
will be around $2.65 per Mcf in 2002, while longer-term projections for 
the average wellhead price are around $3.13 per Mcf in 2020. Like any 
commodity, however, the actual price of natural gas oscillates 
frequently. Also, technological progress in pipeline construction 
practices and equipment, in pipe materials, in welding, and in 
telecommunications are reducing pipeline construction and operating 
costs. This, along with the normal business cycles in the natural gas 
industry, may support prospects for new pipeline construction linking 
the North Slope to lower-48 markets.

                 PIPELINE PROJECTS CURRENTLY ENVISIONED

    The private sector is currently examining three general approaches 
for transporting North Slope gas to markets: (1) new gas pipelines 
linking to connection points in Canada, (2) liquefied natural gas, and 
(3) gas-to-liquids conversion that could utilize the existing Trans-
Alaskan oil pipeline.
    Some of the most widely-discussed natural gas pipeline proposals 
include:

   The Alaska Natural Gas Transportation System (ANGTS)--In 
        September 1977, President Carter designated a specific 
        transportation system known as the Alaska Natural Gas 
        Transportation System, or ANGTS, for streamlined certification 
        under the authorities of the 1976 Alaska Natural Gas 
        Transportation Act (ANGTA). The proposal, selected by the 
        President from three different projects then competing before 
        the Federal Power Commission for certification, envisions a 
        nearly 5,000-mile joint U.S.-Canadian overland pipeline 
        following the Alcan Highway, capable of delivering up to 2.5 
        billion cubic feet of gas per day to markets in the lower 48 
        states. President Carter's decision was approved by a joint 
        resolution of Congress.

    Although only portions of ANGTS have been constructed--the 
``rebuild'' segments extend 2675 miles along two legs from Alberta, 
Canada into the lower-48 states--its legal framework still exists.

   Northern Gas Pipeline Project--Arctic Resources Co.'s 
        Northern Gas Pipeline Project would run eastward from Prudhoe 
        Bay and come ashore in the Mackenzie Delta area in northern 
        Canada, then follow the Mackenzie River south through the 
        Northwest Territories to interconnect with pipelines in 
        Alberta, Canada, providing access to lower-48 markets.
   Producers' Alternatives--The three producers that own nearly 
        all of the North Slope gas currently are assessing the 
        feasibility of different pipeline routes, including a northern 
        route similar to the Arctic Resources proposal and a southern 
        route that would either be the same as or similar to the ANGTS 
        route.

  THE FEDERAL ROLE IN EXPEDITING ALASKAN NATURAL GAS PIPELINE PROJECTS

    Our National Energy Policy strongly supports the environmentally 
responsible development of Alaskan North Slope natural gas and the 
actions to expedite the delivery of that important energy resource to 
the lower 48 states. The Administration remains neutral regarding the 
specific project(s) the private sector might undertake to accomplish 
this task. The marketplace should determine when, how, and by whom the 
North Slope gas resource is developed and transported.
    The Administration is also committed to an expedited, coordinated 
effort in permitting whichever commercial pipeline project or projects 
emerge as a viable candidate. As one of the implementations of the 
National Energy Policy, the Administration has created a task force 
involving various government agencies including the Departments of 
Energy, State, Interior, Agriculture, and Transportation, and the 
Federal Energy Regulatory Commission. These are the government agencies 
that have responsibilities related to a project to transport Alaskan 
North Slope gas to lower 48 markets.
    The Task Force has been meeting regularly since July 2001, to 
establish a communication network within the various agencies, to 
disseminate information and ideas through this network, and to address 
issues related to permitting and pipeline construction.

                  CURRENT AND FUTURE LEGAL AUTHORITIES

    The Administration could be faced with new or revised proposals to 
transport Alaska North Slope gas, filed under ANGTA or the Natural Gas 
Act (NGA). The Department of Energy has certain authorities under both 
legal frameworks.
    In 1977 the Department of Energy Organization Act transferred 
authority from the former Federal Power Commission to the Secretary of 
Energy to regulate natural gas imports and exports under the NGA, 
including section 3. Section 3 requires persons seeking to import or 
export natural gas, including liquefied natural gas, to first secure an 
order from DOE authorizing the import or export. In reviewing the 
application, DOE must determine if the public interest standard in 
section 3 of the NGA, as amended by the Energy Policy Act of 1992 
(EPACT), is met. In addition, authorization must be granted if the 
import or export is with a nation with which the United States has a 
free trade agreement, such as with Canada, requiring national treatment 
for trade in natural gas.
    The Department of Energy also has ANGTA-related authorities. EPACT 
abolished the Office of the Federal Inspector (OFI) for the ANGTS and 
transferred its functions and authorities to the Secretary. The primary 
function of the OFI, which was created by President Carter through 
Reorganization Plan No. 1 of 1979, was to enforce terms and conditions 
relevant to the pre-construction, construction, and initial operations 
of ANGTS.
    Regardless of whether an application is filed under the NGA or the 
ANGTA, we, in consultation with the Congress and in coordination with 
the Department of State and other relevant agencies, will work closely 
with the Government of Canada to review existing bilateral agreements 
and to determine if additional government-to-government agreements 
might be warranted.

                               CONCLUSION

    In short, Mr. Chairman, as our National Energy Policy states: 
``America needs the energy that Alaska's North Slope natural gas can 
provide.''
    Natural gas will play an increasingly important role in providing 
secure, reliable, and environmentally clean energy to American 
consumers. We must recognize that the attractiveness of natural gas 
requires that we look seriously at all potentially viable gas supply 
sources while not creating an over-reliance on any one energy resource.
    The vast natural gas resources on Alaska's North Slope are one of 
the largest, most promising and most secure domestic energy supplies 
that could become available to America's consumers. We are committed to 
working with the private sector and with Canada to ensure that any 
commercially viable proposal to bring this natural gas to market is 
processed as expeditiously as possible.
    This completes my prepared statement.

    The Chairman. Thank you very much.
    Let me start first with a question to Mr. Torgerson. As I 
understand, in your position there in the legislature you 
have--you say in your testimony that: ``As far as tax 
incentives are concerned, the producers have not asked for any. 
They have not shared their financial projections with your 
committee, with my committee. The only thing the producers have 
mentioned is a need for fiscal certainty in the State's tax 
regime. I feel we should not begin our negotiations by leading 
with incentives until we at least verify the profitability of 
the project.''
    That seems like a sound position to take. Why do you not 
recommend the same course of action to the Federal Government?
    Mr. Torgerson. Can I claim the Fifth Amendment? Well, sir, 
we have had discussions in general terms about tax certainty, 
but I have not seen either in-depth financial projections other 
than a couple slides that show profitability and some other 
things, but nothing in detail enough for us to make a decision 
on whether or not incentives were a good or a bad thing or if 
we need to do that.
    The Chairman. It would be logical, then, for Congress to 
take the same basic position, that for us to be giving 
preferential tax treatment to investments interest in this 
particular line, pipeline or production going into this line 
would be foolhardy unless we know what the profitability of 
this project is before we act, would you not agree with that?
    Mr. Torgerson. I would, Mr. Chairman. I do not want to 
leave you with the impression that the State of Alaska is not 
ready to look at some incentives that come under our control. 
But it is my position not to until we are familiar with their 
financial projections. I would recommend that to this committee 
also.
    The Chairman. Mr. Kripowicz, your task force, when was it 
established?
    Mr. Kripowicz. In July.
    The Chairman. This is the inter-agency task force?
    Mr. Kripowicz. Yes, sir.
    The Chairman. But the administration position, as I 
understand your testimony, is that the administration is 
neutral as to whether a southern route is chosen or a northern 
route?
    Mr. Kripowicz. That is correct, yes, sir.
    The Chairman. Is the administration also neutral on whether 
Congress legislates anything on this subject? Because we are in 
this awkward position where we are being urged to complete 
action on a comprehensive energy bill, which of course is to a 
large degree an outgrowth of the commitment the President and 
the Vice President have had to move energy legislation in this 
Congress.
    We are under pressure to move ahead with that, to complete 
action to deal with these issues. At the same time, we have no 
recommendation from the administration as to what should be 
done on this subject.
    Is it your view that we should not legislate on this 
subject? Is that the position of the task force?
    Mr. Kripowicz. I think at this point, Mr. Chairman, we are 
uncertain also. We have identified all the relevant authorities 
either from ANGTA or from the Natural Gas Act. We have reviewed 
the possible problems that each one of those has and many of 
those problems are identified in Chairman Wood's statement to 
the committee. We have prepared some recommendations for the 
administration, which are now being looked at at levels above 
the task force.
    But one of the problems with recommending legislation at 
this point is a lot of it would depend on what the application 
is. Currently, without an application it is very difficult to 
recommend the specifics of legislation that might be required. 
Many of these items may very well be able to be handled 
administratively without changes to the law.
    The Chairman. So your basic view is, as I understand it, 
that it is premature for the Congress to be legislating on this 
subject until we know more about what the proposal is?
    Mr. Kripowicz. Because you might have to legislate again 
once you get a proposal, because the legislation might not fit 
the proposal that you receive or that we receive.
    The Chairman. So would the recommendation be that we hold 
up action on a comprehensive bill until we have more 
information or that we go ahead with a comprehensive bill and 
then, if necessary, come back at some future date and deal with 
this issue legislatively? What is your thought there?
    Mr. Kripowicz. The administration, of course, is very 
anxious to move ahead on a comprehensive bill and I would not 
recommend holding that up for this particular piece of 
legislation.
    The Chairman. So your thought is that the administration's 
position is that we should move forward, but we should not deal 
with this matter as part of this legislation, either by 
adopting the proposal of the producer group which has come 
forward or adopting the proposal of the State of Alaska which 
was discussed by Governor Knowles?
    Mr. Kripowicz. Mr. Chairman, I think it would be very 
difficult for us to recommend specific legislation at this 
point absent a concrete proposal from the producers or from 
other parties who might submit an application.
    The Chairman. Senator Murkowski.
    Senator Murkowski. Thank you, Senator Bingaman.
    Perhaps we should go back to just what the producers are 
asking for so we can focus in on the reality. The purpose was 
to expedite the approval of construction and initial operation 
of one or more gas transportation systems from Alaska to the 
Canadian border and from the Canadian border to the lower 48 to 
markets.
    Now, that means what it says. What they asked for was quite 
specific: expedited review of applications, single consolidated 
EIS review, the establishment of a Federal pipeline director, 
limited judicial review. Clearly, it was route-neutral. That is 
obviously contrary to the State and the legislative position 
and, for that matter, my own position and the delegation.
    That has to stand alone relative to the proposal from the 
President and the administration for a national energy security 
legislation, which as proposed covers three titles: protecting 
critical energy infrastructure, which includes provisions from 
the administration on energy security about ports, about 
pipelines, transmission pipeline safety, electric reliability. 
There was another title concerning domestic suppliers, Price-
Anderson, clean coal, renewable energy inventory, ANWR, hydro 
provisions, filling SPRO, alternative transportation fuels; and 
title III, reducing demand and increasing efficiency, State 
programs in LIHEAP, Federal energy management, appliance and 
building standards.
    Now, I am not putting words in the mouths of the 
administration, but obviously this project is going to be 
determined on the timeliness of the economics that support it 
standing alone from the standpoint of the producers. Anything 
that would suggest some kind of an emergency action would have 
to be predetermined by the Congress with the support of the 
administration, because it would suggest that it would be 
expedited and if it is going to be expedited, why then, the 
economics to a degree would go out the window.
    I want to be sure that we generally understand the 
parameters that we are considering. Now, I do not know if you 
are familiar, but I am going to pose this to the panel, the 
status relative to the role of the Corps of Engineers and where 
the Corps has evaluated this. I will just quote very briefly in 
the Corps' statement: ``It should be noted that a permit 
already exists for the ANGS, or the Alaska Natural Gas 
Transportation System, which runs from the North Slope to 
Fairbanks, following the AlCan through Canada. This route is 
already permit-approved, which means work could begin 
immediately if this route is chosen.''
    Now, there is another route, the Trans-Alaska Gas Line, 
which would run from Prudhoe Bay to Valdez. This is a permit 
that was issued some time ago with the idea of LNG being 
shipped out of Valdez. Now, this route would require additional 
authorization for rivers and stream crossings, but it has been 
for practical purposes approved and an abbreviated permitting 
mechanism has been granted.
    Now, if neither of these are proposed the Corps indicates 
that there would be a requirement of an EIS. Now, we have heard 
from FERC relative to the suggestion that a supplemental EIS 
may be needed to be completed. Yet, in the proposal from 
Foothills the suggestion is an EIS would be a violation of the 
Federal law and Canadian treaty obligations.
    I would ask the Chairman of FERC if he agrees that indeed 
an EIS would be unlikely since a project of this magnitude has 
already been addressed and that a pipeline can be built from 
the Alaska North Slope the existing infrastructures? What would 
be the purpose of an EIS? Would it be to re-examine another 
route, LNG transportation? Certainly it would not be applicable 
to the existing permit already available under the Alaska 
Natural Gas Transportation System.
    Mr. Wood.
    Mr. Wood. Senator Murkowski, I think certainly that is one 
of the reasons why I mentioned in my testimony clarification 
would be helpful. But barring any clarification coming, I think 
what we would look at in any sort of supplemental EIS is the 
fact that there have been some additional environmental laws. 
For example the Coastal Zone Management Act may or may not be 
implicated by this.
    Senator Murkowski. It is pretty hard to reach out on that 
one.
    Mr. Wood. To do the original route--if the route deviates 
from the original route--the language as proposed is the 
general route. It is fine to deviate from that and those have 
already been done. I think it would be a relatively short 
process, but I think just the kind of gut reaction I have to 
reviewing the issues in these cases is it is a 23-year-old EIS 
and to go from a conditional certificate which was granted by 
the Commission as I think the Commission's first order back 
when it was first formed in 1978, to now the changes in the 
environmental laws and the changes in the technology that would 
be used and was originally approved, could be subject to some 
review.
    Without seeing what they propose to do, Senator Murkowski, 
it would be difficult to know what, if any, environmental 
review is needed.
    Senator Murkowski. Well, that is a safe answer and I 
appreciate it. Thank you very much.
    Let me ask one final question. This is also to Pat Wood. 
What is the usual return allowed on debt and equity for a large 
pipeline of this magnitude?
    Mr. Wood. Well, we have never seen one like this, but I 
think the larger pipelines, the equity return would generally 
be in the--it could be up to the low teens.
    Senator Murkowski. The low teens? Is 15 percent low teens?
    Mr. Wood. Well, let us say that is probably the upper end 
of where we would go.
    Senator Murkowski. Well, I am going to conclude with a 
reference from the Corps' statement and it will make some of my 
Alaska friends a little more pleased. It says: ``Selection of 
some other route--other than the southern route of the Alaska 
Natural Gas Transportation System; for example, another route 
would be the Beaufort Sea pipeline route to the Canadian 
MacKenzie Delta--would be expected to be dead on arrival and 
could not obtain State approvals unless the State were to 
change its position on the option. If the State would consider 
this option or another route, expect a minimum of 6 years to 
complete the process of the EIS and permit authorizations 
before construction could begin.''
    Thank you.
    The Chairman. Senator Carper.
    Senator Carper. Thank you, Mr. Chairman.
    To our witnesses, welcome. It is nice to see some of you 
once again and to meet others for the first time. I have been 
over on the Senate floor and I have missed most of your 
testimony. We are working on the Department of Defense 
authorization bill. I needed to be there to attend a couple of 
amendments, so I missed a good deal of what you said.
    I understand that Governor Knowles was here earlier and 
testified. He is my old colleague. He and I were governors 
together for I guess about 6 years or so, and I very much 
regret missing him. If there is anybody in the audience from 
the State of Alaska office who works with the Governor, give 
him my best and tell him to call Delaware; I would like to talk 
to him.
    To Senator Torgerson: Do I understand that the land which 
the natural gas is believed to lie under is owned or controlled 
by the State of Alaska?
    Mr. Torgerson. Yes, sir, it is.
    Senator Carper. In its entirety?
    Mr. Torgerson. In its entirety.
    Senator Carper. Do I understand that so far--and this is to 
anybody on the panel--so far nobody has stepped forward from an 
energy company and said that they would like to help finance or 
build a natural gas pipeline? No one has deemed this to be a 
commercially viable project; is that correct?
    Mr. Torgerson. No, sir. They are in the process, the 
producers--BP, Exxon and Phillips--are currently in the process 
of a very intensive study, spending somewhere upwards of $100 
million seeing if it is profitable and trying to find out what 
barriers might be out there and other things.
    Mr. Wood. Senator Carper, I think the main thing is that 
there has not been a formal application filed, but there is 
quite a bit of activity.
    Senator Carper. Well, good.
    Will the State of Alaska realize royalty payments from the 
extraction of the natural gas from your land?
    Mr. Torgerson. Yes, sir.
    Senator Carper. Give me some idea?
    Mr. Torgerson. 12.5 percent is the royalty for the State of 
Alaska.
    Senator Carper. Give me an example of how that would work? 
12.5 percent of what?
    Mr. Torgerson. Of the market value. We could either take 
that in kind or we could take it in value. So we could have the 
producer sell it to wherever their market would be and we would 
be reimbursed 12.5 percent.
    Senator Carper. If the market value were, say, a billion 
dollars, 12.5 percent of that would be about $125 million?
    Mr. Torgerson. Yes, sir.
    Senator Carper. Now, the U.S. Government, to what extent 
does the U.S. Government benefit from that, at least with 
respect to revenues?
    Mr. Torgerson. Nothing off the royalty, sir. But certainly 
off of income taxes and corporate taxes. I think I have seen 
one report that shows in the 25-year life of the project, which 
would be what we know is the reserves and not the potential for 
that area--the potential is a lot greater in the Prudhoe Bay 
area or in the basin, which we all have a shared ownership in--
but it is up in the $20 billion somewhere is the Federal 
potential, Federal take through your taxes on the life of the 
project.
    Senator Carper. The potential take for Alaska would be how 
large, using the same hypothesis or same assumptions?
    Mr. Torgerson. We are somewhat, as I believe, a little bit 
more than that with our royalty share, and we have a severance 
tax and also a corporate business tax, not as high as what the 
Federal Government is, but we are in that ballpark also.
    Senator Carper. Let me ask other panelists: What should the 
Federal Government do in order to encourage the construction or 
completion of the pipeline to ship natural gas from Alaska's 
land down to the 48 States? What should the Federal Government 
do?
    Mr. Kripowicz. We expect the market to determine whether it 
is economic to build a pipeline. But the Government has 
committed, the President has committed, once an application is 
tendered to the Government that we will move with the utmost 
speed in order to process it and not cause any delays in the 
process.
    Senator Carper. So on a permitting basis, we should try to 
expedite the process. What else should the Federal Government 
do?
    Mr. Wood. I think, just to build on Bob's point, the 
economics drive it and to move through the southern route, for 
example, to Chicago, from the gas coming out, paying all the 
bills all along the route, you have already taken about $2.50 
out of the gas stream. Today gas in Chicago is selling for less 
than $2. So the economics there just are not there today.
    Now, in 2006, '07, '08, I do not think anybody expects we 
are going to have $2.00 gas. It will be higher than that. But 
at some point--I think the producers and shippers can tell you 
on the next panel there is an economic flip point at which it 
makes sense to do the project. But I think really, the way 
pipeline have worked in the last 15 years, they have been 
driven by the economics of supply and demand and that has 
resulted in a pretty robust grid in the lower 48.
    This is different. It is huge. It is really one of the 
biggest projects you can imagine in the energy industry. Again, 
the economics are really the key driver, as Bob pointed out.
    Senator Carper. Other than expediting the permitting 
process, is there an appropriate role for the Federal 
Government to move this project along? Anyone?
    Mr. Torgerson. Could I? From the State of Alaska or from 
the legislature's position, you could verify that the Alaska 
Natural Gas Transportation Act is the prevailing law and that 
any other applications filed under any other, the Natural Gas 
Act or any other Act, would not apply to this.
    That was in my earlier testimony, that it is our belief 
that the Federal Government went through a selection process 
back in the mid-seventies and you have not repealed your action 
on that. So therefore that law that you passed in 1977 did not 
expressly forbid someone from filing another application under 
the Natural Gas Act, but by not doing that we have left this 
cloud open that anybody could file under a previous law, 
although this body has already acted and so has the President 
of the United States.
    Once we get that cloud clear, then all this starts falling 
into line.
    Senator Carper. Anybody else on the panel want to comment, 
respond to anything I have asked?
    Ms. Pearce.
    Ms. Pearce. No, thank you.
    Senator Carper. Mr. Chairman, I thought I heard you in your 
questioning of the panel--I heard someone mentioning, one of 
the panelists mentioning, government incentives, Federal 
Government incentives to move this along. My thought, the first 
thought I had was, to the extent that the Federal Government 
provides those incentives, moves the project along and natural 
gas prices go through the roof, energy companies make out well, 
Alaska makes out well, and we will have obtained a new source 
of natural gas for the rest of the country, but we will not 
have participated in the profitability of the venture, unlike 
the State of Alaska and the producers.
    To the extent that the Federal Government is asked to play 
that kind of role and provide some incentives, we may want to 
consider what we did with Chrysler, the Chrysler bailout about 
20 years ago, where we did not just give Chrysler money, we did 
not just loan Chrysler money; we actually issued warrants, or 
they issued them, and we ended up not only providing the money 
and financial assistance to Chrysler, but in the end when it 
became profitable we shared in that success. The Government 
actually, maybe one of the few times in our history, we 
actually made money on the deal.
    I do not know. We might take some of the lessons we learned 
from there and incorporate them here. But perhaps we could.
    The Chairman. Thank you.
    Senator Murkowski. If I may just make a point, I would 
remind my friend of the reality that this particular gas is on 
State lands. Obviously, it belongs to the State of Alaska. The 
State of Alaska is entitled to a reasonable return for it, 
unlike ANWR, which the Federal Government would receive the 
benefit because ANWR is on Federal land.
    Thank you.
    Senator Carper. Thanks, Mr. Chairman.
    The Chairman. Thank you very much.
    I thank this panel very much for their testimony. It is 
very useful to us. Let me ask the next two panels to both come 
forward: Mr. Marushack, who is the vice president of ANS Gas 
Commercialization; Mr. Terry Koonce, who is the president of 
ExxonMobil Production; Mr. Robert Malone, who is the regional 
president of BP America; and also Mr. Richard Glenn, who is 
with the Arctic Slope Regional Corporation; Mr. Patricio Silva, 
who is the Energy Projects Attorney with the Natural Resources 
Defense Council; Mr. William Sullivan, who is the executive 
director or executive vice president of Anadarko.
    We thank you all very much for coming today. Again, we will 
take everyone's testimony and include it in the record, and I 
would urge each witness to summarize the main points that you 
believe that the committee needs to be aware of.
    Why don't we go in the order that I introduced people: Mr. 
Marushack, who is with ANS Gas Commercialization first. Is that 
the right pronunciation?
    Mr. Marushack. Yes, ``MAR-ue-shack,'' sir.
    The Chairman. Why don't you start out, please.

   STATEMENT OF JOSEPH P. MARUSHACK, VICE PRESIDENT, ANS GAS 
            COMMERCIALIZATION, PHILLIPS ALASKA INC.

    Mr. Marushack. Thank you. Good morning, Mr. Chairman, 
Senator Murkowski, members of the committee. My name is Joe 
Marushack and I am vice president of Alaska North Slope Gas 
Commercialization with Phillips, Alaska, and I am based in 
Anchorage. I am pleased to be here today to discuss our efforts 
to develop an Alaska North Slope natural gas pipeline. We 
provided extensive written testimony for the record, so I will 
summarize our views briefly.
    As background, the development of the natural gas resource 
on the Alaska North Slope is a priority for Phillips Petroleum 
and we recognize the strategic importance of this resource to 
the State of Alaska and the rest of the United States. We 
believe that it is possible to develop this important resource 
if all the stakeholders in the project work together to find 
solutions and to share the risks and rewards of this important 
project.
    The benefits of developing the resource are immense. The 
ANS Gas project will allow the development of 45 TCF of natural 
gas resources over the next 40 years and provide infrastructure 
to potentially develop even larger volumes of domestic gas 
production. These production volumes are needed to meet the 
growing North America gas demand and will help prevent the 
United States from developing the same dependence on imports 
that currently characterizes our use of crude oil.
    Using Energy Administration price forecasts, the project 
could generate over $70 billion in government revenues over its 
life. The risks of developing this project are also high. With 
initial cost estimates approaching $20 billion, the ANS gas 
project is one of the largest investments ever contemplated in 
North America. The project will require construction of the 
largest gas treatment plant in the world, the laying of about 
3,600 miles of pipe from the Arctic North Slope to the North 
American market.
    The project will need 5 to 6 million tons of steel. The 
type of materials and pipeline technology used will require the 
development of specialized equipment solely for this project. 
The challenges of timely permitting and implementation of a 
safe, environmentally sound project will be critical and 
unparalleled.
    The project will be subject to considerable price risk, as 
evidenced by the fact that natural gas prices this year alone 
have fluctuated between $2 and $10 per thousand cubic feet.
    There has been considerable debate on whether to use a 
northern or southern route for the proposed pipeline. A joint 
team from Phillips, BP, and ExxonMobil has been studying this 
and other issues for almost a year. Jointly, we will have spent 
almost $100 million by year end, utilizing over 100 company 
employees and 500 contractors.
    Unfortunately, the preliminary results show the project is 
not economically viable with either route, though we continue 
to improve the project's technical design and formulate 
legislative and fiscal proposals that will improve the 
project's viability.
    While both routes have their own unique set of risks, on 
balance Phillips sees certain advantages to the southern route. 
Accordingly, if it is the opinion of the members of this 
committee that endorsement of a southern route would materially 
improve the prospects for passage of a bill granting fast track 
regulatory authority needed to move forward, then Phillips is 
prepared today to make that endorsement.
    But we need and ask for your help, as well as that of the 
State of Alaska, in obtaining the following requirements: 
First, Federal enabling legislation that will result in a well-
coordinated, streamlined regulatory process; second, Federal 
fiscal relief that will ensure the appropriate sharing of risks 
and benefits; third, Alaska fiscal certainty; and finally, the 
project must not be subject to mandated requirements that would 
diminish the viability of the project.
    Phillips' assessment of the benefits of the southern route 
should not be interpreted as a departure from the joint work 
team. Rather, we recognize that for the project to progress 
most rapidly the State of Alaska's interests, as well as that 
of the other stakeholders and the producers, must come 
together. We hope the ongoing route debate can be positively 
settled so we can focus on ways to improve project viability.
    Phillips, ExxonMobil, and BP have each provided draft 
Federal legislation to the committee that would provide an 
expedited process that is fair, simple, and efficient for 
obtaining permits and other approvals for the Alaska gas 
pipeline. The project would still be subject to FERC regulation 
and a full-scale environmental impact study would be required.
    The proposed legislation is not exclusive. The legislation 
could be used by the current producer group, either with or 
without additional partners, by other pipeline companies, by 
the State, or even by the current ANGTS permit holders. The 
enabling legislation would permit market-driven competition, 
better assuring the project with the lowest cost will be 
allowed to prevail.
    Indeed, we feel that a streamlined regulatory legislation 
encouraging projects is a cornerstone to making any Alaska 
pipeline project a reality. It is good for the consumer and it 
is good for the stakeholder.
    Phillips has also submitted proposals to the committee to 
help manage the large financial risks associated with the 
project. They are intended to encourage increase of the Alaska 
natural gas pipeline and are specifically designed to provide 
relief only when marketplaces in the lower 48 fall to levels 
that would not otherwise support a level of this magnitude and 
risk.
    In either case, the American public is the winner. If 
prices are lower, as might be the case when this substantial 
resource is brought to the market, the consumer benefit from 
lower gas prices far outweighs the proposed fiscal relief. If 
prices are as projected by the Federal Energy Information 
Administration, no tax relief would be provided.
    In conclusion, we understand the ANS gas project's critical 
role in providing a new source of reliable, long-term energy. 
Phillips is extremely anxious to see the development of this 
project and we urge you to carefully consider our suggestions. 
We look forward to continuing our discussions of this exciting 
project with all potential stakeholders and we welcome the 
opportunity to answer any questions you may have at this time.
    [The prepared statement of Mr. Marushack follows:]

      Prepared Statement of Joseph P. Marushack, Vice President, 
            ANS Gas Commercialization, Phillips, Alaska Inc.

    Good morning Mr. Chairman and Members of the Committee. My name is 
Joseph P. Marushack. I am Vice President, Alaska North Slope Gas 
Commercialization, Phillips Alaska Inc. based in Anchorage, Alaska. 
Phillips Alaska is a major subsidiary of Phillips Petroleum Company 
charged with all exploration and production of oil and natural gas 
resources in Alaska.
    Let me start by saying that Phillips understands that national 
energy security and economic revitalization have taken on a new 
priority in light of the tragic events of September 11. We would like 
to assure the Committee that the women and men of Phillips are 
committed to the maximum development of our Alaskan and Lower 48 
resources while continuing to adhere to our enduring and high standards 
of safety and environmental responsibility and compliance.

                 ENERGY SECURITY & ALASKA GAS RESOURCES

    National Energy Policy proposals recognize the importance of both 
national energy security and economic growth in developing reliable, 
economic, long-term domestic energy supplies. At the same time, 
consumers recognize the need to encourage the use of the most 
environmentally friendly sources of energy. Natural gas is the most 
efficient and most environmentally acceptable fuel currently serving 
consumers. Alaska has been blessed with abundant domestic resources 
that are readily available. Bringing gas from the Alaska North Slope to 
market in the Lower 48 states can provide a new source of reliable, 
economic, long-term energy that is consistent with the country's 
environmental desires, national security objectives, economic 
prosperity, and National Energy Policy.
    The Alaska North Slope gas represents the largest known but 
untapped natural gas resource in North America. The demand for natural 
gas in the United States is expected to grow by 17% over the next 
decade. Our current domestic gas consumption out-paces domestic gas 
production by 14 billion cubic feet per day and this shortfall is 
expected to grow in the future. An Alaska gas project, sized at about 
4.5 billion cubic feet per day (bcfd), could supply about 10% of the 
projected 2010 new gas supply required to meet domestic demand. Once an 
ANS gas pipeline is on stream, it will provide gas to the American 
consumer for at least 30 years and will be a stabilizing force on gas 
prices. As a point of reference, every $1 per mcf in avoided gas price 
increase is worth $30 billion annually to the U.S. economy consuming 30 
trillion cubic feet of gas per year.
    The ANS gas project will enable commercialization of at least 45 
tcf of stranded natural gas resources over 30 years. This volume is 
equivalent to approximately 7.5 billion barrels of oil. With additional 
exploration and development efforts, total recovered resources may 
increase up to 100 tcf.
    In addition to the direct economic benefit of developing ANS gas, 
there are also environmental and other indirect benefits. Natural gas 
is the fuel of choice for its environmental and energy efficiency 
attributes. Natural gas is highly versatile in that it can be used not 
only in the generation of electricity but also in residential and 
commercial space heating, in industrial uses, and as a transportation 
fuel. A project of this magnitude would also stimulate money flow 
through the economy through multiplier effects and through induced 
investments.
    Currently, there are two routes being considered to deliver Alaska 
North Slope gas to the U.S. A southern route takes a southern direction 
parallel to the Alaska oil pipeline, then follows the Alaska Highway 
and thereafter traverses Canada to the Lower 48 states. A northern 
route takes a northern direction from the North Slope running under the 
Beaufort Sea for about 240 miles before landing just east of the 
Ivvavik National Park in Canada. The route then turns south passing the 
Mackenzie Delta and thereafter continues through Canada to the Lower 48 
states. The two routes merge roughly at Vegreville, Alberta before the 
line reaches the U.S. border.
    The position of the three major gas owners on the North Slope 
continues to be that route selection should be determined by the 
economics of the project. This rule of thumb applies to all business 
decisions worldwide and, when not adhered to, usually results in sub-
optimal financial results. We see an Arctic natural gas pipeline to the 
Lower 48 states as being no different. To date, the feasibility study 
clearly indicates that, in today's natural gas climate, this project is 
not economic, regardless of the route selected.
    While the current environment shows the project to be uneconomic, 
we also recognize its strategic importance to the energy future of this 
country. Moving the project forward under the right circumstances is 
likewise a high priority for us. The debate over the selection of the 
pipeline route has obscured the need for adequate enabling legislation 
to allow fast-track regulatory authority for construction of the 
pipeline. While both routes have their own unique set of risks, on 
balance we see certain advantages to a southern route. Accordingly, if 
it is the opinion of the members of this Committee that the endorsement 
of a southern route would materially improve the prospects for passage 
of a bill granting the fast-track regulatory authority needed to move 
forward then Phillips is prepared today to make that endorsement, but 
only under certain conditions. These conditions include the following:

   First, federal enabling legislation is required that will 
        result in a coordinated, streamlined regulatory process.
   Second, federal fiscal relief is required that will ensure 
        the appropriate sharing of risks and benefits.
   Third, Alaska fiscal certainty is required.
   Additionally, while we will work in good faith to source 
        both labor and products domestically, there should be no 
        mandated requirement for Project Labor Agreements (PLA), nor 
        any mandate to use steel solely from U.S. sources.

    The balance of my comments further outline Phillips' position and 
explain measures we think must be taken to make this project a reality.

                BACKGROUND ON PHILLIPS PETROLEUM COMPANY

    Let me take a moment to help you understand our company, as we have 
changed significantly over the last two years. Phillips Petroleum 
Company is an integrated international petroleum company with worldwide 
operations, headquartered in Bartlesville, Oklahoma. In the last 
eighteen months, we have doubled our assets and reserve base, increased 
production by more than 70 percent, and become one of the nations' 
leading refiners and marketers. While we were one of the first 
producers in Alaska, having had operations in Alaska since 1952, our 
position there increased significantly when we purchased ARCO Alaska 
last year. Our Alaskan assets now represent 47% of our total production 
and employ about 950 of our 38,600 employees. Our North Slope gas 
resources, at 8 trillion cubic feet (tcf) or about 1.5 billion barrels 
oil equivalent, represent one of Phillips' largest untapped resources 
and are a key investment priority for us. Phillips is focused on the 
economic, technical and environmental merits of bringing Alaska North 
Slope gas to the Lower 48.

                    NORTH SLOPE GAS PIPELINE PROJECT

    Phillips, ExxonMobil and BP formed a joint team last year to assess 
the economic viability of the project. Jointly, we will have spent over 
$100 million by year's-end, utilizing over 100 employees and about 500 
contractors. Preliminary results show that the project is not 
economically viable, and we are focusing on how we can improve 
technology and reduce risks to improve the project's viability.
    With initial pipeline cost estimates approaching $20 billion, the 
ANS Gas Project will be the largest private project ever contemplated 
in North America. Any project of that size will involve significant 
costs and risks that must be managed. The project will require 
construction of the largest gas treatment plant in the world, and 
laying of about 3600 miles of pipe from the Arctic North Slope to the 
Lower 48 markets. The project will need five to six million tons of 
steel. The type of materials and the pipeline technology to be used 
will require development of specialized equipment solely for this 
project. Logistical arrangements of the construction will be enormous. 
The challenges of permitting and implementation of a safe, 
environmentally sound project will be critical and unparalleled. Yearly 
operating expenses of the project will exceed $700 million.
    Enormous spending requirements make the project uneconomic at low 
gas price scenarios. Gas prices in the US have fluctuated between $2/
mcf and $10/mcf within the last year, and this price uncertainty and 
volatility poses substantial downside risk for the project. The 
attached chart showing gas price volatility in the U.S. illustrates the 
size of the risk.*
---------------------------------------------------------------------------
    * The chart has been retained in committee files.
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    The project, which spans over two sovereign nations, encompassing 
several states and provinces, requires alignment of interests and 
support of many stakeholders. Implementation of the project will also 
require resolution of diverse political interests.

                            ROUTE SELECTION

    While a northern route is significantly shorter, given the 
uncertainty regarding the capital cost of the project we do not believe 
either route can realistically claim a meaningful cost advantage. Both 
routes would sell natural gas to the same markets and receive the same 
prices, so neither route would have an advantage in marketing. As 
capital costs and natural gas prices are the largest factors in 
determining the economic benefit of the project to the producers and as 
both projects are exposed to these factors, we do not believe relative 
economics can necessarily be used to decide between the two routes.
    A southern route may have certain technical, expandability, 
environmental, and timing benefits. From a technical perspective, a 
southern route's ability to use existing infrastructure over much of 
the Alaska segment of the project is a benefit, particularly given the 
harsh Arctic environment. A southern route would follow the Alaska oil 
pipeline for a portion of its route, and would generally follow the 
Alaska Highway for the remainder of the route. By contrast, a northern 
route would have no access to infrastructure, and would have the 
additional technical challenge of having to construct a pipeline under 
the Beaufort Sea. We believe these factors place more of a construction 
and environmental risk on a northern route.
    The ability to expand the pipeline to meet the country's future 
energy needs favors a southern route. Both routes would use the largest 
pipeline size currently practical, so increases in capacity would come 
from addition of compressor stations along the pipeline route. Addition 
of these compressor stations will be built into the design of either 
route, but for a southern route additional compression has the 
advantage of existing infrastructure related to pump stations on the 
oil pipeline or access from the Alaska Highway. Capacity increases are 
somewhat more problematic for a northern route because a compressor 
station would need to be placed in the environmentally sensitive 
Beaufort Sea. The Alaska North Slope has tremendous potential for 
additional resource development, with some estimates of future 
resources as high as 100 tcf, and the ability to expand the pipeline is 
a significant consideration.
    Construction of a southern route does not preclude development of 
the Canadian gas in the Mackenzie Delta. Gas from both the North Slope 
of Alaska, as well as gas from the Mackenzie Delta in Canada will be 
needed to serve North America's growing demand for natural gas. We 
believe that if the ANS pipeline is built using a southern route that 
the Mackenzie Delta producers will separately decide to build a 
pipeline from that area to serve their needs. As a result, Canada and 
the U.S. will benefit from both sources of gas in the future. Two 
separate lines will create the infrastructure to allow both of these 
potential sources of energy to be developed to their full potential and 
ultimately provide more gas supplies from strategically secure sources 
than would be the case with a single line.
    Advantages from an environmental perspective are another feature of 
a southern route. Since a pipeline following the southern route will 
use land that is adjacent to either an oil pipeline or a highway over 
much of its length, the incremental change in the environment will be 
minimized. Environmental issues associated with the southern route are 
easier to manage and therefore less likely to cause delays in the 
construction of the pipeline.
    The State of Alaska has endorsed a southern route. Alaskans' 
preference for a southern route is based on the ability to provide the 
State's natural gas to key areas in Alaska, the opportunity to develop 
natural gas related industries, and the increased opportunity for 
construction and operations employment that would result from more of 
the pipeline being built through Alaska. The active support from Alaska 
will expedite the realization of the benefits of the project for the 
rest of the U.S.
    In summary, we believe a southern route has a distinct timing 
advantage over a northern route. A southern route has the benefits of 
fewer environmental issues, less construction risk due to the 
availability of existing infrastructure, support from the State of 
Alaska, and a less difficult permitting process. Timing is an important 
consideration. Delays will hurt the economics of the project, and will 
create uncertainty in natural gas markets as to when this vital source 
of energy will be delivered.

                          FEDERAL LEGISLATION

    Federal Enabling Legislation. Phillips, ExxonMobil and BP have 
provided draft federal enabling legislation to the Committee that would 
provide an expedited process that is fair, simple and efficient for 
obtaining permits and other approvals for an Alaskan gas pipeline. 
Under that proposal, a federal director would be appointed to expedite 
the coordination of all federal agency activities. However, regulatory 
agencies would still have to be satisfied that tariff rates and terms 
are equitable and that there is full compliance with environmental 
laws. A full scale Environmental Impact Study (EIS) would be required.
    This new enabling legislation would not impact the provisions of 
the Alaska Natural Gas Transportation Act (``ANGTA''). Although enacted 
in an era of regulation, ANGTA would remain in effect, just not as the 
exclusive means of implementing an Alaska gas pipeline project. The 
prospects for development of a successful pipeline project would be 
significantly enhanced under our proposal because it is free and clear 
of the constraints and mandates of ANGTA.
    It is essential that the lowest cost projects be allowed to compete 
utilizing the proposed federal enabling legislation. The provisions of 
the enabling legislation would be available to anyone sponsoring the 
construction of an Alaskan gas pipeline who has reached an agreement 
with one or more shippers (including the State) for the transport of 
Alaskan North Slope gas to the Lower 48 markets. The legislation could 
be used by the current producer group with or without additional 
partners, or by other pipeline companies, the State of Alaska, or even 
the current ANGTS permit holders. This enabling legislation would 
promote market-driven competition, better assuring that the project 
with the lowest cost and corresponding lowest possible tariff to 
prevail.
    Mandates will decrease the chance a project will be developed. We 
would discourage Congress from including language mandating Project 
Labor Agreements (PLAs), any sole sourcing requirements for steel, or 
any other mandates. These are business decisions that the federal 
government must allow the private sector to decide through normal 
competitive processes.
    In some cases, these mandates are impossible to meet. For example, 
a requirement that all steel used in the pipeline come from American 
mills would be impossible to meet. We have visited with the major steel 
and pipe mill companies in the U.S. and have found only one currently 
capable of providing the pipe milling specialization that this project 
will require. The sheer size of this pipeline will require steel 
supplies from many sources, both domestic and foreign. The pipeline 
developers will certainly favor domestic supplies whenever it is 
economically feasible to do so.
    On the issue of Project Labor Agreements (PLAs), it is very 
probable that any pipeline built will require the use of a PLA, as was 
the case with the Trans-Alaska Pipeline. This project will require a 
vast trained labor pool, and one of the issues for the project will be 
finding the required number of skilled laborers to allow timely 
completion of the project. A key factor in the economics of any project 
is the cost of labor and a mandate to utilize a PLA up front gives an 
unfair advantage to one side in the labor negotiations. The result will 
be a more costly pipeline. Congress should leave it to the private 
sector and labor to negotiate an agreement and not mandate a PLA, 
thereby tipping the negotiating scale.
    Federal Fiscal Incentives. Any pipeline from Alaska to the Lower 48 
states will be the most expensive project undertaken in North America 
and will involve a natural resource whose price history is extremely 
volatile. (See attached chart) The risk of this pipeline will be 
significant.
    Phillips has submitted two proposals to the Committee that help 
manage these risks. Both are intended to encourage construction of an 
Alaska gas pipeline and the second one is specifically designed to 
provide relief only when market gas prices in the Lower 48 states fall 
to low levels that would not otherwise support a project of this 
magnitude and risk.
    The first proposal is an acceleration of the depreciation recovery 
period for that part of an Alaska North Slope gas pipeline 
infrastructure that is located within the United States. Specifically, 
such gas pipeline infrastructure should be treated as 7-year recovery 
property instead of 15-year recovery property. There is widespread 
agreement that this provision makes good tax sense. A similar provision 
is in the House energy bill, applicable to all domestic gas gathering 
and distribution pipelines.
    The second proposal is a credit against federal income tax that 
would provide downside price relief only if natural gas prices in the 
Lower 48 states are at low levels. That is, relief under this provision 
would be contingent because it would be available only when gas prices 
are low and, even then, the amount of the relief would be capped when 
gas prices are extremely low. For example, using government EIA 
forecasted gas prices, there should be no relief given under this 
proposal. The contingent nature of this relief provision means the 
potential relief would be small particularly when compared to the 
significant benefits to the American consumer and economy (see above).
    Unlike Section 29, marginal well and other tax incentives being 
pursued for producing properties located in the Lower 48 states, this 
incentive is not automatic and may never be utilized. For a project of 
this size and cost and located so far from market in a frontier area, 
we believe this credit mechanism is fair and will help in our efforts 
to move this huge gas supply to market.
    We believe that $1.25/mmbtu is an appropriate initial base line for 
this credit. However, such base line amount should be adjusted annually 
for inflation in much the same way as is currently done in existing tax 
relief provisions.
    Essentially, this relief mechanism, as proposed, would equal the 
amount by which a ``netback'' value for Alaska gas sold in the Lower 48 
markets falls below the base line. The ``net back'' value would be an 
amount equal to the market price for gas in the Lower 48 markets minus 
the actual cost of treating Alaska gas and transporting it from the 
Alaska North Slope to the Lower 48 states. The relief available under 
this provision would be capped at the base line. As noted above, there 
would be no relief where the ``netback'' value equals or exceeds the 
base line.
    These legislative proposals should provide a necessary environment 
for the sponsors to fully commit their resources to the project. 
Coupled with timely regulatory review, this will expedite the process 
of completing engineering studies on time, going to open season in the 
first half of 2002 and starting construction of a pipeline to bring 
first gas to the market as soon as possible.

                               CONCLUSION

    We understand the ANS Gas project's critical role in providing a 
new source of reliable, economic, long-term energy that is consistent 
with the country's environmental desires, economic prosperity and 
national security objectives. We believe that the Alaskan gas can be 
brought to the U.S. markets by either a southern or a northern route in 
an environmentally sound way with similar cost structures. However, we 
are concerned about capital expenditure uncertainty with a northern 
route and that potential opposition may cause significant delays in its 
construction. Additionally, a southern route offers more flexibility 
for future expansions. Accordingly, Phillips is prepared to commit to a 
southern pipeline route if the necessary support mechanisms are 
provided.
    Our proposed Federal enabling legislation will result in a 
coordinated, streamlined regulatory process and is an essential element 
in making a competitive national interest project a reality. The 
federal fiscal relief will ensure the appropriate sharing of risks and 
benefits. The project's enormous benefits for the U.S. economy justify 
the need for Federal support.
    Eliminating the uncertainty around route selection should be a 
major step forward for the project and will focus all of the 
stakeholders on the next steps and provisions for successful 
implementation of this project, which is key to the future energy 
security of the U.S. Phillips wants to make an Arctic gas pipeline to 
the Lower 48 states a reality. We would be happy to meet and discuss 
the project with any and all stakeholders who share our vision of 
providing improved energy security through the development of the 
unique resource of Alaskan natural gas.

    The Chairman. Thank you very much.
    Mr. Koonce, why don't you go right ahead.

STATEMENT OF K. TERRY KOONCE, PRESIDENT, EXXON-MOBIL PRODUCTION 
                              CO.

    Mr. Koonce. Thank you, Mr. Chairman. Senator Murkowski has 
left the room, I guess, and there are no other members of the 
committee present, so I will address these comments, Mr. 
Chairman, to you.
    Good morning. My name is Terry Koonce. As president of the 
ExxonMobil Production Company, I am responsible from 
ExxonMobil's worldwide production operations, including our 
extensive oil and gas holdings on the North Slope of Alaska. As 
the largest holder of natural gas on the North Slope, 
ExxonMobil has a keen interest in commercializing that 
resource.
    ExxonMobil has diligently pursued commercializing Alaska 
North Slope gas since the startup of the Prudhoe Bay field in 
1977. However, in spite of significant efforts over the years, 
no economically viable project has been identified.
    Beginning late last year, ExxonMobil, BP, and Phillips have 
been working together to evaluate and address a potential 
pipeline project to serve gas markets in Canada and the lower 
48 States. We are examining multiple routes and the attributes 
of those routes in an effort to identify an economic project. 
Our preliminary cost estimates are in the range of $15 to $17 
billion for what would be one of the largest North American 
projects in history.
    There are clearly many risks associated with a project of 
this magnitude, including cost, the market, and regulatory 
issues. Acquiring all the necessary permits and authorizations 
will take time and could result in major delays and increase 
the cost of the project. This is an important area where 
Congress could take action to improve the prospect of an 
economically viable project being built to supply additional 
energy to our country.
    The legislation that ExxonMobil, BP, and Phillips have 
proposed would simply provide a level playing field. It creates 
a market-driven expedited regulatory process for any viable 
project or projects for the delivery of Alaska natural gas to 
the lower 48 States. A project would be subject to FERC 
regulation, including fair and reasonable terms, and provide 
for open access consistent with FERC rules. The project would 
be subject to all environmental laws and regulations.
    The provisions of the producer-proposed legislation are 
available to any project, not just one sponsored by producers. 
Also, this legislation does not affect the existing provisions 
of the Alaska Natural Gas Transportation Act, or ANGTA, that 
was passed by Congress over 25 years ago. Those would remain in 
place and be unchanged.
    As I mentioned, a major risk that we face is cost, being 
able to hold the line on the investment associated with a 
project of this magnitude. Of course, cost is a major factor in 
determining whether a project is economically viable. It is 
important not to have any mandates, including route, that could 
raise the cost of a project and possibly preclude a project 
from being built. A project that stays on the drawing board 
benefits no one, while an economic project would provide 
significant benefits in the form of energy for U.S. consumers, 
jobs, and government revenues.
    Some have suggested that the government provide incentives 
for an Alaska natural gas pipeline project. However, ExxonMobil 
is not asking for anything specific for this project. If a 
project is determined to be economic in a normal market 
environment, no special incentive or subsidy is necessary. If a 
project is not economic, our preference is to try to improve it 
through our own actions or wait until market conditions support 
the project. ExxonMobil does not support the concept of 
subsidies, but prefers a level playing field that allows the 
market to operate unencumbered.
    ExxonMobil, BP, and Phillips are spending over $100 million 
this year on a work program that involves about 100 company 
personnel drawn from the three companies, along with 
significant contractor support. The areas of focus include 
conceptual design, project costing, permit considerations, 
commercial structure, and the overall viability of the pipeline 
project.
    Based on our preliminary cost estimates, our current 
analysis has not identified a project that is presently 
economic. Our work remains on target for completing technical 
and engineering studies and having updated cost estimates by 
early year end--by year end or early next year. The continued 
expenditure of significant sums of money in continued joint 
producer study is only justified if the way forward from a 
regulatory perspective is clear. This clarity is provided by 
the producers' proposed enabling legislation that would be 
route-neutral and give some assurance that a project can be 
permitted in a timely manner.
    We urge your favorable consideration of this draft 
legislation. Thank you, Mr. Chairman. We would be glad to 
answer questions at the appropriate time.
    The Chairman. Thank you very much. Thank you for that 
testimony.
    Mr. Robert Malone, who is the regional president for BP 
America. We are glad to have you here.

STATEMENT OF ROBERT A. MALONE, REGIONAL PRESIDENT, BP AMERICA, 
                              INC.

    Mr. Malone. Mr. Chairman, Senator Murkowski. It has been 
just over 12 months since I provided this committee's with BP's 
views on Alaska's gas. This morning I am pleased to have an 
opportunity to provide the committee with a brief update on our 
activities and developments since the last time we met.
    Since discovery of Prudhoe Bay some 33 years ago, the 
energy industry has sponsored a number of efforts to identify 
commercially viable means to bring Alaska's 35 trillion cubic 
feet of natural gas to market. In fact, BP has participated 
directly in the majority of these studies, including the gas 
pipeline studies that were encompassed in the ANGTA process 
over 20 years ago.
    BP, Exxon, and Phillips are spending more than $100 million 
on the only current study to determine the viability of 
transporting Alaska gas to North American markets. The study is 
almost complete. Our work to date indicates the costs are 
extraordinary and the project is not presently economic.
    Now, this is not the final answer and I do not want to 
leave the impression that it is. This is clearly work in 
progress. With our partners, we will be completing this work 
and we will have better information by the end of the year. We 
hope as this work progresses that additional efficiencies and 
technological advances can be found. At the same time, we hope 
that other possible project sponsors will be making similar 
efforts.
    Mr. Chairman, governments have asked what they can do. 
There are areas where governments can help this process and 
they are being clearly communicated to. First, in Alaska we 
communicated the need to develop simple, clear, and predictable 
State fiscal terms for major gas development.
    The Federal Government can provide regulatory clarity that 
will help reduce risk. This is an area where this committee can 
help. The producer team has prepared draft legislation and we 
believe it provides a positive regulatory foundation from which 
to develop a fully competitive Alaska gas pipeline project. But 
it is simply draft legislation. It is not etched in stone. BP 
stands ready to discuss viable improvements or alternatives 
that serve the same purpose.
    We are aware that Governor Knowles also called for Federal 
legislation to facilitate construction of an Alaska gas 
pipeline. While we have not had the opportunity to view any 
specific legislation language, I can speak, as this committee 
requested, to some of the Governor's points. The Governor has 
proposed expanding opportunities for other investors to 
participate in the pipeline. This principle is consistent with 
the draft legislation, whose framework is available to any 
project and any investor.
    However, let me assure you, pipeline ownership and control 
are not driving motivators for BP. We have no precondition on 
pipeline ownership and indeed we would expect that if we 
identified an economic project we would seek other investors or 
pipeline companies to participate in this construction of a 
line. If others are able to develop a lower cost or more 
efficient proposal, we would ship our gas on that pipeline. 
That is how the market is meant to work.
    We support the use of local hire, native hire, and the use 
of local businesses in Alaska and Canada. It is how we do 
business today and we stand by our track record. In addition, a 
project of this magnitude will require the in-migration of 
labor and business to support the project and we should be 
careful not to impede the free flow of goods and labor across 
lines.
    We support the principle of access both for communities and 
now exploration, but we believe existing FERC regulations 
address these issues. We could not agree more that Alaska gas 
into the North American market is good for the United States 
and Canada, and we support the use of U.S. and Canadian steel. 
It is critical, however, that it be competitively priced and 
that free trade principles are honored. We have to recognize 
that a project of this scale is going to stretch global steel 
capacity.
    A project of this magnitude is going to require union labor 
and BP recognizes this. We have a long and productive 
relationship with organized labor and we are confident that we 
would be able to address issues between us without the need for 
Federal legislation.
    Finally, let me turn to route. Alaskans have made clear 
their desire to see a pipeline built along the Alaska Highway, 
while the producers have suggested that no route decision 
should be taken until all the facts are in. I think we all 
agree that, first, the project has to be economic, but let me 
assure you the gas pipeline that BP will support will be the 
pipeline to which Alaskans, Canadians, and the Federal 
Government can all agree.
    Mr. Chairman, BP believes the time has come for government 
and industry to sit down collectively to collaborate on what 
tangible steps can be taken to actually progress this project 
forward. This process needs to be open, transparent, and 
constructive in order to advance a highly competitive and 
economically viable project. BP stands ready to be an active 
participant in any such effort, around the following 
principles:
    A project must be economic to attract investor support 
under a stable and predictable fiscal framework; any solution 
must create a level playing field; embracing competitive free 
market principles, no single party can be perceived as having 
monopoly rights to build a pipeline; a project must have a 
competitive tariff. This is critical not only to the producers, 
but to the State of Alaska through its percentage ownership of 
the gas, and the United States with its taxing policies.
    Finally, any solution must have active support of all 
governments--Alaska, United States, and Canada.
    So in closing, let me assure you that BP remains fully 
committed to progressing this important project, and I thank 
you for allowing us to participate today.
    The Chairman. Thank you very much.
    Mr. Glenn, why don't you go right ahead.

  STATEMENT OF RICHARD GLENN, VICE PRESIDENT OF LANDS, ARCTIC 
                   SLOPE REGIONAL CORPORATION

    Mr. Glenn. Thank you, Mr. Chairman, committee members, 
Senator Murkowski. First of all, let me begin by thanking the 
chairman for taking the time to visit the North Slope of Alaska 
in the past year. Our region was proud to host you, and Senator 
Murkowski's work in bringing other members of Congress to the 
place where this discussion is coming from is well worth the 
cost and I would like to thank you for that.
    The Chairman. I hope it has warmed up a little since I was 
there.
    Mr. Glenn. It is getting cooler. It is getting cooler right 
now.
    My name is Richard Glenn and I am the vice president of 
lands for Arctic Slope Regional Corporation, or ASRC. This is 
the Native regional corporation established pursuant to the 
Alaska Native Claims Settlement Act. Our corporation represents 
more than 8,000 Inupiat Eskimos of Alaska's North Slope. Our 
shareholders, who are the Inupiat Eskimos, own surface and 
subsurface title to more than 4 million acres of North Slope 
lands and by virtue of this title ASRC represents the largest 
private landowner on the North Slope.
    As a slight correction to the earlier discussion, we talked 
about ownership of resources, oil and gas. The more than 35 
trillion cubic feet of natural gas identified at Prudhoe Bay 
and Point Thompson does belong to the State, but the lands 
surrounding Prudhoe Bay are owned by the Native corporation, 
our Native people, and also by the State of Alaska. These 
lands, located just south of the Prudhoe Bay area, are in one 
of America's premier natural gas provinces and could hold as 
much as 60 trillion cubic feet of gas. We urge the committee 
not to overlook this significant resource when discussing 
routing or any other structures, cost structures, tariff 
structures, and capacity structures for any proposed natural 
gas pipeline.
    Much of the discussion documents drafted by the producers 
that has been presented to your committee covers these topics 
and we would like to provide additional discussion of these 
topics just to make sure that the interests of our people and 
the significant resources that we own as a people are not 
neglected.
    As it stands now, the producers' document needs the 
consider a capacity allocation that looks to the resources 
outside of the Prudhoe Bay. In addition, assumptions regarding 
secondary treatment services, the design and cost structure of 
these services, and the shippers' bidding schedule and 
structure also need to take this into account.
    Now, it is said that the existing FERC regulations have 
made provisions for this. But we urge the committee not to 
overlook these items when discussing any Alaska natural gas 
pipeline, because to overlook them now has the potential to 
condemn the more than 60 trillion cubic feet of natural gas 
that sits on these important lands.
    In addition to access to capacity, we request access to 
opportunity. As you know, there is no industry in the rural 
parts of Alaska save for resources extraction. It is for 
reasons like this that title 29 of the Trans-Alaska Pipeline 
Agreement was developed, to support native hire. We supported 
this provision, but we also know that the results fell a little 
bit short of the intent. Alaska Natives were aggressively 
recruited during the construction of the Trans-Alaska pipeline, 
but for purposes of operations of the pipeline some of that 
original intent seemed to fade with time.
    We urge this committee to learn from the mistakes of the 
title 29 or from the disappointing results of title 29 for a 
renewed look at this effort should an Alaska natural gas 
pipeline be constructed.
    Regarding jobs and job allocations, this project is huge. 
There are enough jobs to go around and we hope that our Native 
people living in rural parts of the State will also have access 
to these jobs.
    We would like to stress that there is no linkage one way or 
another between this issue for our people and the issue of 
developing the oil in the Arctic National Wildlife Refuge. Both 
are critical to the country. One is not being done for purposes 
of the other. In fact, they both answer different needs that 
America currently has for its energy supply.
    Finally, I would like to convey the wishes of the people of 
the North Slope in supporting an overland route for an Alaska 
natural gas pipeline. The issues of offshore development have 
received strong objection from our people and we see more 
benefits than disadvantages for the overland route. It does not 
avoid the resources--it does not condemn the resources located 
in the lands to the south. The greater environmental safety 
factor has also been mentioned. We are aligned with our 
Governor in this position.
    Finally, Mr. Chairman, I carry with me the statements of 
the CEO's of Alaska's Native Claims Settlement Act regional 
corporations, who made statements similar to this presentation 
and to the Governor's supporting an overland route for 
transportation of Alaskan natural gas. I hope that you will 
find the opportunity to accept them as testimony at some point 
and I give them to you for use at your discretion.
    [The prepared statement of Mr. Glenn follows:]

     Prepared Statement of Richard Glenn, Vice President of Lands, 
                   Arctic Slope Regional Corporation

    My name is Richard Glenn and I am Vice-President of Lands for 
Arctic Slope Regional Corporation (``ASRC''). Arctic Slope Regional 
Corporation (``ASRC'') is the Alaska Native-owned Regional Corporation, 
established pursuant to the Alaska Native Claims Settlement Act of 1971 
(``ANCSA''), representing more than eight thousand Inupiat Eskimos of 
Alaska's North Slope. The shareholders of ASRC own surface and 
subsurface title to more than four million acres of North Slope lands. 
By virtue of this title, the ASRC represents the largest private North 
Slope landowner. The ASRC ownership stems from an earlier claim of 
aboriginal title--covering the entire Alaskan North Slope--that was 
eventually settled in part by ANCSA.
    A large percentage of ASRC's current land holdings are in the 
Central Arctic region of the North Slope, an area that extends from the 
foothills of the Brooks Range north to the Colville River. ASRC's 
Central Arctic lands are located between the National Petroleum 
Reserve--Alaska on the west and the Arctic National Wildlife Refuge on 
the east. This is an area of high probability for large natural gas 
discoveries which, if found, will allow ASRC to succeed in its mission 
to enhance the cultural and economic freedoms of its shareholders, who 
are the North Slope Inupiat Eskimos.
    Mr. Chairman, we are at a point in our history where there is a 
very strong national need to access Alaska natural gas for the lower 48 
market at a reasonable price. ASRC supports the development of an 
Alaskan Natural Gas Pipeline.
    In addition to granting the access to much-needed energy for the 
nation, the proposed pipeline would greatly benefit the State of Alaska 
by providing in-state energy infrastructure, generating new capital 
investment and creating new jobs. It would allow for in-state access to 
natural gas that would otherwise be unavailable. It would allow the 
State to realize economic benefits through royalties, severance taxes, 
and property taxes. This additional revenue to the state benefits all 
Alaskans through statewide capital improvements. Closer to home, our 
local borough, the North Slope Borough, would benefit via property tax 
assessments on local natural gas facilities, allowing for an improved 
quality of life for North Slope residents. Because it would provide the 
only vehicle for bringing North Slope Alaskan gas to market, the 
proposed natural gas pipeline has the potential to allow ASRC and the 
State to realize the economic benefits of continued gas exploration and 
development on our lands and on adjacent State leases.
    ASRC's requirements related to North Slope natural gas exploration 
and development can be summed up in one statement: ``We require 
access--access to capacity, access to opportunity, and access to the 
planning process.''

                           ACCESS TO CAPACITY

    As stated above, ASRC is the largest landowner on the North Slope, 
outside of the federal government, with title to more than four million 
acres of surface and subsurface estate. ASRC's lands include more than 
three million acres in the central Arctic foothills, one of America's 
premier natural gas provinces. Together with State-owned lands in the 
central Arctic, there are 11 million acres of land there that may 
contain more than sixty trillion cubic feet of natural gas, which we 
strongly believe should have an avenue to market. Said another way, 
ASRC believes that any natural gas pipeline leaving the North Slope 
should provide capacity to accommodate areas of new natural gas 
production, such as in the central Arctic, in addition to the 
significant identified natural gas reserves around Prudhoe Bay. In this 
respect, we are in agreement and supportive of Governor Knowles' 
efforts to ensure access to ``future'' gas owners.
    For ASRC, and our industry partners currently involved in gas 
exploration, access to a gas pipeline is critical. If we cannot be 
assured of fair and reasonable access to space on a pipeline to carry 
new gas to market, our partners will not explore for or develop natural 
gas outside of Prudhoe Bay, Point Thomson and related fields. This 
outcome would, in effect, condemn more than 11 million acres of highly 
prospective Native- and State-owned lands from future exploration 
potential.
    As it now stands, ASRC is concerned that the three owners of 90 
percent of the existing proven natural gas reserves on the North Slope 
could use the power of this ownership, and presumably ownership of a 
natural gas pipeline, to restrict pipeline access to other potential 
gas shippers. The three owners might utilize excessive capacity ``hold 
backs'' whereby the owners would set aside more pipeline capacity than 
is necessary for their own internal purposes. In addition, the three 
owners would have the opportunity to make transportation capacity 
either completely unavailable or unreasonably expensive to shippers who 
are not able to secure firm capacity under the initial open season 
bidding process. They might also force shippers to sell their 
``stranded'' gas at distressed prices to those that control the firm 
transportation. Finally, the three owners might unnecessarily delay or 
forestall an expansion that would provide additional pipeline capacity 
for new producers who have made new gas discoveries.
    ASRC believes that any new legislation regarding the Alaska gas 
pipeline must look at the capacity requirements of the known stranded 
gas, as well as at the requirements of companies holding acreage that 
is potentially significant to natural gas exploration and development 
in the future.
    ASRC is also concerned the gas-owners could set a high tariff 
structure that would deter any future gas producers from effectively 
purchasing capacity if they were not able to reserve capacity during 
the initial open-season process. Unbundling secondary services, such as 
the CO2 conditioning plant, would allow for a fair tariff 
structure by not burdening low CO2 gas with the cost of 
conditioning. ASRC opposes the creation of special or preferential rate 
schedules that favor the Prudhoe Bay and Pt. Thomson gas owners, 
thereby removing existing incentives for other gas exploration on the 
North Slope. Again, shutting out future natural gas shippers through a 
high tariff condemns our lands from future exploration and development.

                         ACCESS TO OPPORTUNITY

    The construction and eventual operation of a natural gas pipeline 
presents many opportunities to all Alaskans. Jobs in construction, 
engineering, operations and the support of natural gas-related 
processing industries all will be welcomed by all Alaskans along the 
pipeline route.
    We agree with and support Governor Knowles' point that special 
emphasis be placed on recruitment, training and employment of Alaska 
Natives. ASRC, as an Alaskan Native Corporation, with established 
subsidiaries in oilfield construction, surveying and engineering, and 
pipeline operations, has much to contribute to the construction and 
operation of a natural gas pipeline. ASRC and other Alaskan Native 
Corporations have the unique ability to provide a highly skilled, 
Alaskan Native workforce. ASRC is already contributing, for example, in 
the ``front-end engineering and design'' for the gas conditioning plant 
and the pipeline along its proposed route through Canada. We seek 
continued participation in the design, construction, and future 
operations of this major development project. Our companies are 
competent, we have proven ourselves in the industry, and most 
importantly we seek to put our people to work.
    Native hire was also incorporated as a term within the Trans-Alaska 
Pipeline System (``TAPS'') Agreement. Title 29 of that Agreement 
prioritized Native hire. However, as history has shown, the 
implementation of Title 29 fell very short of its intent. Very few 
Alaskan Natives were hired to work on TAPS. ASRC applauds the 
Governor's goal of Native hire and feels that the previous 
disappointment of the TAPS Title 29 experience will be instructive for 
developing similar, but improved, provisions for the Alaska Natural Gas 
Pipeline.

                         ACCESS TO THE PROCESS

    In addition, we do not wish to foreclose any opportunities related 
to an equity position in the Alaska Natural Gas Pipeline or any of the 
related systems. To this day, there has been little discussion on who 
will own the pipeline. While it is assumed that the three majority gas 
owners--ExxonMobil, BP, and Phillips--will be the owners of the 
proposed gas pipeline we feel this is an area still open for 
discussion. Although ownership is still unclear, as it is defined and 
developed, ASRC wants to participate.
    While ASRC is in favor of and supports the development of the 
proposed Alaska Natural Gas Pipeline, we wish to make it clear that our 
support of this important project is independent of our on-going 
support for the opening of the Arctic National Wildlife Refuge 
(``ANWR'') to oil and gas leasing. Both the Natural Gas Pipeline and 
the opening of ANWR are important, yet distinct, issues for our 
Corporation and we wish for this Committee to treat them as such. ASRC 
recognizes that while natural gas development is important to the 
energy needs of our country, it will not replace our dependence on 
foreign oil in the long-term and that only development of the ANWR 
coastal plain will help solve that piece of America's energy puzzle.
    Finally, ASRC would like to join the North Slope Borough, the 
whaling captains of our villages, and many others in supporting an 
overland route for the Alaska Natural Gas Pipeline. In addition to 
avoiding the placement of a pipeline in the Beaufort Sea, a route from 
the North Slope paralleling the Trans-Alaska pipeline would provide 
access to the significant resource base of the central Arctic, opening 
up a significant hydrocarbon province, and provide jobs and revenue to 
all Alaskans. This southern route would also provide natural gas to 
communities dependent on high cost diesel in the interior of the State. 
By routing the pipeline through the State, our urban centers of 
Anchorage and Fairbanks would not only benefit from low cost natural 
gas but also be able attract other industries to the State allowing for 
diversification of the State's economy. ASRC is confident that the oil 
producers will come to the same conclusions after reviewing all of the 
issues related to gas development in Alaska.
    We respectfully encourage the Committee to review all the issues 
related to proposed legislation, and not just the interests of a few 
gas owners, to better understand the impacts that any legislation might 
have on State of Alaska and this important national energy source.

    The Chairman. Thank you very much.
    Mr. Silva, why don't you go ahead.

STATEMENT OF PATRICIO SILVA, ENERGY PROJECTS ATTORNEY, NATURAL 
                   RESOURCES DEFENSE COUNCIL

    Mr. Silva. Thank you, Mr. Chairman and Senator Murkowski, 
for the opportunity to appear before you today on the status of 
proposals to facilitate transportation of natural gas from 
Alaska to the market in the lower 48 States. My name is 
Patricio Silva and I represent the Natural Resources Defense 
Council, which is a nonprofit organization of scientists and 
lawyers and environmental specialists serving a membership of 
over 500,000.
    The key recommendations we would like to share with the 
committee this afternoon are: NRDC can support the proposed 
Alaska Natural Gas Transportation System route following the 
Trans-Alaska Pipeline System and the Alaska-Canadian Highway 
right of ways if a thorough new environmental impact statement 
that complies with all U.S. and environmental laws is prepared. 
The pipeline system must incorporate the best pipeline safety 
and environmental measures. NRDC opposes other pipeline routes 
outside of existing right of ways and development corridors, 
including the over-the-top gas pipeline routes.
    NRDC believes that additional authorizing legislation for 
an Alaskan natural gas pipeline is unnecessary. The Alaska 
Natural Gas Transportation Act is adequate even though ANGS has 
not been completed. Any attempts to expedite permitting of an 
Alaska natural gas pipeline through parallel processes may 
delay, rather than expedite, bringing Alaska natural gas to 
market. Consistent protections must be maintained for sensitive 
onshore and offshore Federal areas, including prohibitions 
against drilling in the Arctic National Wildlife Refuge, the 
existing moratoria on the Alaska outer continental shelf, and 
we also believe that additional moratoria are required for 
other OCS areas off the coast of Alaska.
    The benefits of existing natural gas supplies should be 
maximized by increasing efficiency in end use consumption, 
including incentives for the construction of energy efficient 
buildings and for manufacturing energy efficient heating and 
water heating equipment.
    With that, I am actually going to end my testimony and be 
happy to answer any questions you may have at the end.
    [The prepared statement of Mr. Silva follows:]

    Prepared Statement of Patricio Silva, Energy Projects Attorney, 
                   Natural Resources Defense Council

    Thank you for the opportunity to appear before you today on the 
status of proposals for the transportation of natural gas from Alaska 
to markets in the lower 48 States and legislation that may be required 
to expedite the construction of a natural gas pipeline from Alaska. My 
name is Patricio Silva, and I represent the Natural Resources Defense 
Council.
    The Natural Resources Defense Council is a national nonprofit 
organization of scientists, lawyers, and environmental specialists, 
dedicated to protecting public health and the environment. Founded in 
1970, NRDC serves more than 500,000 members from offices in New York, 
Washington, Los Angeles, and San Francisco.
    Natural gas is a critical part of an environmentally and 
economically sound national energy policy. Natural gas demand in the 
United States is expected to grow in response to increased demand for 
gas-fired electric generation, in addition for commercial and 
residential heating and cooling and as feedstock for petrochemical 
manufacturing. Natural gas use in the United States has grown 
approximately 2.0 percent each year over the past decade. In 2000, 
natural gas consumption reached almost 23 Tcf (trillion cubic feet) 
with gas demand for industrial use representing about 60 percent of the 
new growth.
    According to the Energy Information Administration's (EIA) Annual 
Energy Outlook 2001, by the year 2020, gas demand in the United States 
is projected to increase to 34.7 Tcf per year. Gas consumption used to 
generate electricity is expected increase from 16 percent of generation 
in 2000 to nearly 36 percent in 2020 according to EIA. Additional gas 
gathering, transmission, and distribution infrastructure will be 
required, including infrastructure to bring Alaskan natural gas to 
market.
    Domestic natural gas exploration has rebounded from historic lows 
in early 1999, when 371 natural gas drilling rigs were reported in 
service as gas futures prices fell below $2 per mmBtu. Natural gas 
exploration has surged with 1,032 rotary gas-drilling rigs reported in 
service in August 2001, a 32 percent increase over August 2000.\1\ 
Rising natural gas prices are driving the renewed interest in natural 
gas exploration in existing production regions in Oklahoma, Texas and 
Kansas.\2\ Shortages of skilled labor and reluctance to invest in new 
drilling equipment currently are limiting natural gas production, 
indicating that access to public lands is not a constraint.
---------------------------------------------------------------------------
    \1\ Baker Hughes, Inc. North American Rig Counts (http://
www.bakerhughes.com/investor/rig/rig--na.htm accessed October 1, 2001) 
See also Energy Information Administration, Annual Energy Outlook 2001, 
DOE/EIA-0383(2001) (December 2000), pp. 30-32.
    \2\ Jim Yardley, ``Oil Patch Comes To Life As Natural Gas Prices 
Climb,'' New York Times, December 16, 2000 pp. A1, A16. In December 
2000 some 1,090 drilling rigs were reported in service, with more than 
800 drilling rigs exploring for natural gas, a significant increase 
over a year ago when fewer than 400 drilling rigs were reported in 
service, but still modest in comparison to the 1970s and 1980s when 
more than 4,500 drilling rigs were reported in service.
---------------------------------------------------------------------------
    Now that gas futures prices have settled back below $3 per mmBtu, 
it is unclear what this will mean for gas demand, pricing and drilling 
activity in the short term. The long-term forecast of increasing 
natural gas demand appears to remain accurate.
    NRDC believes that pipelines should be constructed and operated in 
an environmentally sensitive manner, with strong safety measures and 
oversight, and, whenever possible, along existing routes. If Prudhoe 
Bay gas supplies are needed to serve markets in the lower 48 states, 
any Prudhoe Bay natural gas pipeline should follow the Trans-Alaska 
Pipeline System and the Alaska-Canadian Highway right-of-ways; undergo 
a thorough, new environmental impact statement; comply with all U.S. 
and Canadian environmental laws; and incorporate the best pipeline 
safety and environmental measures. Plans to construct an offshore 
pipeline off the Arctic National Wildlife Refuge coastal plain should 
be rejected.

                        EXISTING LAW SUFFICIENT

    Additional authorizing legislation for an Alaskan natural gas 
pipeline is unnecessary. In the mid 1970s, rising natural gas demand in 
the lower 48 states led energy producers to explore the feasibility of 
bring Alaskan natural gas to market through various natural gas 
transportation projects with several filings proposed under the Natural 
Gas Act.\3\ Responding to a perceived need for expedited review and 
approval, Congress enacted the Alaska Natural Gas Transportation Act 
(ANGTA), 15 U.S.C. Sec. 719, to ``provide the means for making a sound 
decision as to the selection of a transportation system for delivery of 
Alaskan natural gas for construction and initial operation by providing 
for the participation of the President and the Congress in the 
selection process, and if such system is approved under this chapter, 
to expedite its construction.''
---------------------------------------------------------------------------
    \3\ Staff Report of the Federal Energy Regulatory Commission on the 
Alaska Natural Gas Transportation Act to the United States Senate 
Committee on Energy and Natural Resources (January 18, 2001).
---------------------------------------------------------------------------
    Under the procedures provided under ANGTA, the President selected 
an Alaskan gas pipeline proposal (ANGTS gas pipeline), which Congress 
approved on November 8, 1977.\4\ To date only portions of ANGTS have 
been constructed and placed into service. It appears that disagreements 
between producers and pipeline proponents over economic and market 
conditions have contributed to the lack of activity in completing 
ANGTS.
---------------------------------------------------------------------------
    \4\ H.R.J.Res. 621 Pub.L. No. 95-158, 91 Stat. 1268, 95th Cong., 
1st Sess. (1977).
---------------------------------------------------------------------------
    ANGTA remains adequate to address all of the issues regarding 
transportation of Alaskan natural gas to market in the lower 48 states, 
despite that ANGTS has not been completed. Any attempt to expedite 
permitting of an Alaska natural gas pipeline by creating other 
permitting processes may result in considerable delay in development 
and construction. Pipeline proponents with existing or potential stakes 
in competing projects would likely litigate their claims, likely 
resulting in significant additional delays, rather than expediting 
construction. It is also unclear what effect additional legislative 
action would have on the two related international agreements between 
the United States and Canada governing international pipeline projects 
and ANGTS in particular.\5\
---------------------------------------------------------------------------
    \5\ Agreement Between the Government of the United States of 
America and the Government of Canada Concerning Transit Pipeline 
(Transit Pipeline Treaty) entered into force October 1, 1922, and 
Agreement Between the United States of America and Canada on Principles 
Applicable to a Northern Natural Gas Pipeline (Agreement on 
Principles), signed on September 20, 1977.
---------------------------------------------------------------------------

                 EXPEDITING ENERGY PROJECTS UNNECESSARY

    While some have proposed streamlining permitting regulations to 
expedite construction of energy projects, natural gas pipeline 
operators have not found existing environmental and public safety 
regulations to be an obstacle to energy development. According the 
Energy Information Administration, natural gas pipeline operators have 
been adding natural gas transmission capacity across the United States 
at a fevered pitch with 1,895 miles of new pipeline constructed in 
2000, 4,300 miles to be completed by end of 2001, and 4,650 miles in 
2002.\6\ There is no indication that the existing environmental and 
public safety regulations have prevented construction and operations of 
ANGTS. Attempts to expedite natural gas transmission pipeline approvals 
by abbreviating or eliminating public review and regulatory oversight 
could lead to unnecessarily compromising public safety and 
environmental protections.
---------------------------------------------------------------------------
    \6\ Joseph Kahn & Jeff Garth, ``Energy Industry Raises Production 
At A Record Pace,'' The New York Times, May 13, 2001, p. 1, 15. See 
also Energy Information Administration, U.S. Natural Gas Markets: 
Recent Trends and Prospects for the Future SR/OIAF/2001-02 (May 2001) 
pp. 16-20.
---------------------------------------------------------------------------

                   MANAGING SUPPLY BY REDUCING DEMAND

    Increased energy efficiency in homes and factories not only would 
lower consumers' energy bills; it would free up large amounts of 
natural gas to help meet the needs of new highly efficient combined-
cycle (combustion and steam turbine) power plants. Stronger and better-
enforced building codes augmented by tax incentives for constructing 
buildings that exceed code requirements would pay a double dividend: 
lower heating and electric bills, and less pollution. For example, tax 
incentives for the construction of energy efficient buildings and for 
manufacturing energy-efficient heating and water-heating equipment 
could save 300 Tcf of natural gas over 50 years.\7\
---------------------------------------------------------------------------
    \7\ Interlaboratory Working Group, Scenarios for a Clean Energy 
Future (Oak Ridge, Tennessee; Oak Ridge National Laboratory and 
Berkeley, California, Berkeley National Laboratory (ORNL/CON-476, LBNL-
44029)) (November 2000). The ``Advanced'' electricity scenario shows 
total gas demand increasing from current levels of about 22 Tcf to 26 
Tcf in 2010, while total CO2 emissions are reduced.
---------------------------------------------------------------------------

            PRESERVING THE ARCTIC REFUGE AND ALASKA OFFSHORE

    It is important to point out that with natural gas the issue is 
less about the need to find new supplies, than the need to develop the 
infrastructure to deliver these supplies to market. Increasingly, it is 
getting the existing gas supplies to the market that is the biggest 
challenge. Development of a safe and environmentally benign pipeline 
infrastructure is critical. NRDC believes that pipelines should be 
constructed and operated in an environmentally sensitive manner, with 
strong safety measures and oversight, and, whenever possible, along 
existing routes. With a thorough environmental impact statement, ANGTS 
fulfills these requirements.
    Some have also suggested that natural gas production is a reason to 
drill in the Arctic National Wildlife Refuge. In reality, industry 
interest in the Artic Refuge is driven by its desire to produce oil, 
not gas. The Arctic Refuge is estimated to contain less than 7 Tcf of 
natural gas resources; about a three-month supply by the time the 
resources could be developed.\8\ By comparison, the Prudhoe Bay 
production area is estimated to contain 32 Tcf to 38 Tcf of natural gas 
resources.\9\ Associated gas produced at Prudhoe Bay fields is re-
injected into the oil field for enhanced oil recovery, or used as fuel 
at production facilities because there is no way to transport it to 
market.\10\
---------------------------------------------------------------------------
    \8\ John Schuenemeyer, USGS, Assessment Results, The Oil and Gas 
Resource Potential of the Arctic National Wildlife Refuge 1002 Area, 
Alaska. USGS Open File Report 98-34 (1999). Chapter RS Table RS14.
    \9\ T.J. Glauthier, deputy secretary of energy, testimony before 
the Senate Committee on Energy and Natural Resources, September 14, 
2000.
    \10\ Emil D. Attanasi, USGS, Economics of Undiscovered Oil in the 
1002 Area of the Arctic National Wildlife Refuge, in The Oil and Gas 
Resource Potential of the Arctic National Wildlife Refuge 1002 Area, 
Alaska. USGS Open File Report 98-34 (1999). Chapter EA p. EA-12.
---------------------------------------------------------------------------
    NRDC is concerned that other Alaska gas pipeline routes may 
endanger sensitive wildlife habitat, including offshore in the Beaufort 
Sea. The Alaskan Outer Continental Shelf (OCS) is home to a rich 
variety of marine life, and lies adjacent to some of the most important 
and spectacular terrestrial public resources in the United States, 
including national parks, wildlife refuges, forests and wilderness 
areas. The Arctic Ocean's Beaufort Sea is home to polar bear, walrus, 
seals, migratory birds, threatened spectacled and Steller's eiders and 
the endangered bowhead whale. This unique natural resource is also a 
place dominated by ice, where temperatures can plummet to -60 degrees 
F, where relatively stable land-fast ice and a mobile icepack interact 
violently in the ice shear zone, and where wind and fog can make air or 
boat travel impossible.
    The Arctic National Wildlife Refuge, with its incomparable wildlife 
and wilderness, lies landward of the eastern portion of the Beaufort 
Sea in the United States. Critical bowhead whale spring migratory 
pathways are located east of Barrow, and fall migratory pathways and 
feeding areas are located offshore the Arctic National Wildlife Refuge. 
These unique natural treasures are sensitive to disturbances caused by 
industrial activities and infrastructure.
    Development off the coast of the Arctic Refuge poses risks to fish, 
polar bears, and migratory birds using the refuge coastline, lagoons, 
and barrier islands. Internationally important polar bear habitats are 
at risk, both within the refuge and off its coast. Protection of polar 
bears and their habitats is a specified purpose of the Arctic Refuge, 
and the Refuge provides the most important onshore denning habitat in 
the U.S.
    Similarly, the National Petroleum Reserve--Alaska (NPR-A) possesses 
extensive critical habitat areas for many species of mammals, migratory 
birds and fish. Until these areas can be fully inventoried and 
appropriately protected we urge that there not be any more oil and gas 
leasing in the NPR-A.
    NRDC is concerned about increasing industrial encroachment across 
the North Slope and Beaufort Sea despite the U.S. commitment to protect 
feeding, denning, and migratory areas in the international treaty, 
Agreement on the Conservation of Polar Bears. Offshore exploration and 
development would cause pollution, aircraft and vessel noise and 
related industrial activity, and potential oil spills would degrade the 
Refuge and threaten the integrity of this protected conservation unit, 
even if there were no construction of infrastructure within its 
boundaries.

                               CONCLUSION

    NRDC can support the proposed Alaska Natural Gas Transportation 
System route following the Trans-Alaska Pipeline System, and the 
Alaska-Canadian Highway right-of-ways already conditionally 
certificated under ANGTA, if a thorough, new environmental impact 
statement that complies with all U.S. and Canadian environmental laws 
and incorporates the best pipeline safety and environmental measures is 
prepared. To ensure that adequate sources of natural gas are available 
in the future, NRDC urges the adoption of aggressive efficiency 
measures that lower the amount energy required for everyday activities 
from heating and ventilation of home and buildings to manufacturing and 
generating electricity. NRDC opposes, and sees no need for, natural gas 
development in sensitive areas or any expedited permitting processes.

    The Chairman. Thank you very much.
    Mr. Sullivan.

     STATEMENT OF BILL SULLIVAN, EXECUTIVE VICE PRESIDENT, 
      EXPLORATION AND PRODUCTION, ANADARKO PETROLEUM CORP.

    Mr. Sullivan. Mr. Chairman, Senator Murkowski, Anadarko 
appreciates the opportunity to testify today on these important 
issues. At Anadarko we are explorers and we have been exploring 
aggressively and successfully in Alaska for many years. Our 
people are among the best in the business and we use the latest 
technology to focus exclusively on exploration, development, 
and production of oil and natural gas.
    As the world's largest independent, we are working hard to 
supply America's energy needs. We are one of the most active 
drillers in North America and we are the fifth largest producer 
of natural gas in North America. One of the most promising 
areas for significant new natural gas finds is Alaska, with 
estimates ranging from 60 to as much as 100 trillion cubic feet 
of undiscovered gas on Federal, State, and private lands on the 
North Slope. That is more than three times the estimated proven 
discovered reserves in existing fields.
    Anadarko has a huge acreage position of Federal, State, and 
private lands with tremendous natural gas potential. We have 
made significant investments in technical, geologic, and 
seismic work over many years and we are ready to explore for 
natural gas, but the costs of exploration and development are 
high without the assurance that we will have access to pipeline 
capacity on equal terms and conditions that do not place us at 
a competitive disadvantage. We may not be able to justify that 
investment.
    That brings us to why we are here today. We understand the 
committee is considering the need for legislation to facilitate 
construction of a pipeline to transport Alaskan natural gas to 
the lower 48. Congress passed such legislation in 1976 when it 
enacted the Alaska Natural Gas Transportation Act. It may be 
that, given the passage of time, further or updated legislation 
is required. In fact, we have three particular concerns which 
should be addressed with new legislation:
    First, that access must be available on equal terms to any 
person seeking to transport natural gas;
    Second, that the tariffs for transportation are 
nondiscriminatory;
    And third, that the pipeline be expanded as supply and 
demand dictate in the future.
    In enacting ANGTA, Congress recognized these principles as 
essential to ensure that Alaska's significant natural gas 
resources, not just those in Prudhoe Bay, would be developed 
and transported to markets through what will undoubtedly be the 
only gas pipeline to transport gas from the North Slope to the 
lower 48. In the interest of time, let me very simply say that 
a lot has changed in natural gas marketing and in 
transportation since ANGTA was passed in 1976. So these three 
principles must be updated in new legislation whether or not 
the pipeline is constructed under ANGTA.
    It is important to know that three producers hold more than 
90 percent of the proven Alaskan natural gas reserves. This 
gives them the position of joint negotiating power to structure 
the open season, the contracts, the tariff terms, potentially 
to competitive advantage. Obviously, unless access to the 
pipeline is made available to all shippers on equal terms and 
unless rates and conditions of service are nondiscriminatory, 
the economics of exploration and production on the North Slope 
may be tilted against companies like Anadarko.
    This would inhibit the exploration and development of 
Alaska's natural gas resources and adversely affect the supply 
of that gas to the U.S. economy and the consumer. We hope that 
these concerns will be resolved by FERC under the Natural Gas 
Act. We are not convinced. At the present time, FERC does not 
try to control the terms and conditions under which capacity is 
allocated on new pipelines during the open season. Clear and 
fair rules must be in place before, not after, capacity is 
awarded.
    FERC has no authority to order an expansion of facilities 
under the Natural Gas Act and, although Congress recognized the 
need for pipeline expansion in ANGTA, it is unclear how FERC is 
to handle such a situation.
    Again, for these reasons we believe the committee should 
consider legislation that: first, directs FERC to issue clear 
rules governing the open season process in which the capacity 
is to be allocated; second, require that tariffs be 
nondiscriminatory so as not to inhibit competition and 
exploration; and third, grant FERC the power to order an 
expansion of pipeline facilities where economically and 
technologically feasible.
    There are those who say that the market should decide who 
will obtain pipeline capacity and what rates will be charged. 
In circumstances where there is open competition, I would 
absolutely agree. However, in this unique circumstance where 
only one pipeline will ever be built and three producers appear 
to be in control of the process, legislation and regulation are 
required to ensure long-term competition.
    U.S. consumers and the economy will benefit from that 
competition, and at Anadarko we intend to be that competition. 
We have the acreage, we have the expertise, we have the 
financial resources, and we have the commitment to explore on 
the North Slope, and we are ready to drill. We need clear 
legislation that ensures a level playing field and access on 
equal terms and conditions.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Let me just ask a few questions. Let me first start with 
any of the three producer representatives from the producing 
companies here. The administration's position as I understand 
it from the previous panel is that they believe it is premature 
for Congress to do anything on this subject. They have no 
position in favor of legislation, they have no position opposed 
to legislation, but they think until actual proposals are on 
the table, it is too early for us to legislate.
    What is your response to that?
    Mr. Marushack. Senator, we are trying to move this project 
along and, speaking for Phillips right now, we are trying to 
move this project along as quickly as we possibly can. 
Certainly we see some economic hurdles there. So we have talked 
about the enabling legislation and fiscal legislation, but we 
think it is critical to have a process for the permitting of 
this pipeline well defined and well understood.
    We are spending collectively about $100 million, Phillips 
about $35 million, which is a large amount of money for us. To 
move to that next phase, we need to have a clear regulatory 
process so that we can move this along as quickly as we 
possibly can.
    We heard Chairman Wood speak earlier this morning and we 
clearly understand that he needs a complete EIS. We intend to 
comply with all the requirements that are out there, but we 
have to have the certainty and the timing so we can move 
forward with this project and continue to spend the kind of 
money to bring this gas to the lower 48 as quickly as possible.
    The Chairman. Mr. Koonce, did you have a comment?
    Mr. Koonce. Yes, Mr. Chairman. The issue here is one of 
risks, I think. We have severe risks in costs. We have talked 
about that. We have risks in the market and we have risks in 
permitting. Those are kind of the major areas. Permitting 
obviously affects timing, which in turn affects the economics.
    So what we have said was we need this legislation to take 
away and mitigate one area of those risks. We continue to work 
on the cost side to try to lower the costs. We continue to 
monitor the market side. There is not a lot we can do about the 
market side, except we continue to study it.
    Now, another factor that is a deterrent to us reducing the 
cost, I think, is the mandating of any route. So we have 
recommended route neutrality in this legislation. Let me just 
bring out a factor, too, about the so-called northern route 
that has not been brought out yet in this hearing. The $2 
billion difference between the north and the south has been 
mentioned and that derives primarily because the northern route 
is about 300 miles shorter than the southern route if you are 
just delivering Alaska gas to the lower 48 and you ignore 
anything going on in the MacKenzie Delta.
    What I would like to bring forward here is the fact that 
there is gas in the MacKenzie Delta. There is a gas project 
that is looking at the feasibility of bringing Canadian gas to 
the lower 48, to Alberta and to the lower 48, and that project, 
which we are part of, appears to be economically viable.
    Now, if that pipeline is built, then here is the scenario 
that can conceivably develop. Now, all you have to do is expand 
that pipeline from maybe 36 inches to 52 inches, build a bigger 
line to accommodate Alaska gas, and lay about 400 or 500 miles 
of line instead of 2,100 to the south. That takes $3.5 billion 
out of the project, more than the $2 billion if you are just 
considering Alaska gas.
    Now, I say that only to say that that is why we are route-
neutral. We just think it is premature to rule out any options 
until we have had the opportunity. We and everyone interested 
in these options has had the opportunity the fully explore 
them. It can even be said of the one I just described that the 
incremental footprint that you are dealing with environmentally 
is only 400 or 500 miles instead of 2,100 miles, and the 
emissions that would be accompanying that scenario would be 
considerably less. So there are even some environmental 
advantages that need to be further explored.
    So I think these are the reasons I think we need some 
legislation to take away that risk of permitting. We will 
continue--we would like to be able to continue to work on the 
cost side and the market side.
    Thank you.
    Mr. Malone. Mr. Chairman, may I add one comment to that of 
my colleagues?
    The Chairman. Yes, go ahead.
    Mr. Malone. For 25 years now, Alaska gas has remained in 
the ground rather than coming to market. There has been a 
routing out through ANGTA which has not been economic to 
commercialize the gas. It is very important as part of the 
studies that we have been doing is to not say that ANGTA is not 
a valid process, but rather allow for others to be able the 
compete to build pipelines that could move this gas to market. 
It is very important to us in order to be able to commercialize 
this that competition, a level playing field, be created.
    The Chairman. My time is about up. Why do you not go ahead, 
Senator Murkowski.
    Senator Murkowski. Thank you, Senator Bingaman.
    We talk--I am talking to producers now primarily--relative 
to the necessity of the proposed legislation, and obviously 
expedited review of the application, a single consolidated EIS, 
establish Federal pipeline director, limited judicial review, 
all of which are certainly reasonable in the request.
    ``Route-neutral'' reminds me of, if there is anything wrong 
in this it is a parallel to the issue of a national energy 
security bill. It is always about ANWR. This particular issue 
is about route selection and route specificity relative to the 
attitude prevailing by action of the House of Representatives, 
which has designated a southern route, and the State of Alaska. 
Clearly, what is in the long-term interest of the State, is it 
more revenue or is it the ability to try and develop that gas 
within the State?
    The problem I have, gentlemen, is we have been advised that 
we have an uneconomic project before us at this time. That is 
significant in the sense that you are saying it is not 
economic. What are we to expect to hear at the end of the year? 
We will simply have to wait until the end of the year while you 
progress with your studies, and that is certainly reasonable.
    You want regulatory clarification. You want assurances from 
the State. Those are negotiated at a time that the State and 
you folks see fit, but as we look at where you are now we can 
consider the merits of a stand-alone legislation on what you 
have requested relative to your proposed legislation and then 
the question is whether the Senate's going to take a position 
on a route such as the House has done.
    But in any event, gentlemen, we do not have an application 
now. When are we going to get an application? That application 
is going to be very definitive relative to the obligation that 
we have to move on the application. We have got a request here 
for legislation to expedite, which is certainly reasonable. Do 
we want to get into the route selection and dictate that, too? 
I have already given you my preference on route selection as a 
consequence of what I feel is in the long-term and best 
interests of the State, and you have heard the Governor.
    From my point of view--and I am speaking from the minority 
position on this--I am willing to take up your proposed 
legislation, but clearly the intent of Alaska is the southern 
route and that is contrary to the position that is taken by one 
of the producers certainly.
    I do not see the necessity of adding this action to a 
national energy security bill which we are promoting 
separately. I think the two should be separate. I am not 
suggesting that gas is not in the national energy security 
interests of the country, but I think we have to take this 
systematically, and until we have the results of your 
evaluation at the end of the year I would think it would be 
very, very difficult to move, if you will, on even your 
proposed legislation now.
    But I am open to that depending on the progress, because if 
you reach the end of the year and this thing is still economic 
or there is still more time needed for more evaluation of 
scarcity of capacity or increases in price, I think it would be 
premature to suggest that the Senate take this up until we have 
a little more clarification relative to the points I have made.
    I have a couple more questions. I am going to take the 
prerogative of the minority, which I used to take as the 
prerogative of the chair, and, since the producers are seldom 
together, I would like to ask you two questions. I would like 
you to respond quickly and I do not think you need a lot of 
detail.
    But this involves the realization that you are the major 
holders of gas and also the major holders of oil and as a 
consequence there is discussion that it would take 10 years to 
develop oil from ANWR. I am going to ask you the question that, 
if you were allowed to go in under an expedited permitting 
process and a major discovery was made, how long it would take 
you to move the oil over the existing Trans-Alaska Pipeline or 
use the Badami line?
    The second question is the allegation that these reserves 
are only a 6-month supply for the Nation, yet the indication 
that the reserves are somewhere between 6.5 and 15 billion 
barrels, how significant is that to the Nation's supply? You 
can take it in any order you want, or is there any volunteers 
or do you want me to call on somebody? There we go, Exxon is 
first.
    Mr. Koonce. I will take it, Senator Murkowski. I will take 
the second one last. I think any quantity of oil is important 
to our Nation today and the best thing we can possibly do for 
our energy security is find additional sources of domestic 
crude oil. So whether it is 6 billion or 16 billion to my way 
of thinking is not the relevant question. If it is there, we 
ought to be going after it.
    Now, in terms of timing, you have to start with 
exploration, of course. If we had a lease sale next week, the 
first thing that would have to be done is to have some modern 
seismic running across ANWR. That would have to be interpreted, 
prospects identified, wells drilled, discoveries made. That 
process would take I would say a minimum of 2 years. It could 
well take 3.
    So 2 to 3 for evaluation, discovery, delineation, 
appraisal. Then if you had a project, if you had a discovered 
reserve that was commercial, it typically takes about 2 years 
to construct the field facilities required in the lower 48 and 
then, as you well know, those have to be brought up around 
Point Barrow in the third year, the construction year. So 
between engineering, construction, engineering design, 
construction in the lower 48, and construction on the North 
Slope, that will probably be 3 or 4 years.
    So now we are talking from now until the time you could 
have something built, in the range of 5 to 7 years. But the 
factor that I have not mentioned at all is permitting. It is 
the same one we are here to discuss today for Alaska gas. Now, 
you have got to add permitting into that equation for all the 
activities.
    Senator Murkowski. You are asking for expedited permitting 
on the gas line.
    Mr. Koonce. I am just saying that if Congress and the State 
could expedite the permitting associated with the activity that 
I just described, then you maybe could be in production in 6 to 
8 years. If you, say, had a very expedited permitting process 
and it took only about 12 months, the normal process--and my 
colleagues can comment on this if they choose, but the normal 
process--we probably allow 3 to 4 years for that permit, which 
would put you up in the 10-year range.
    Senator Murkowski. Well, if you went over the existing 
Badami line that would cut that time down.
    Thank you. Anybody else.
    Mr. Sullivan. Senator Murkowski, if I could briefly. 
Anadarko is maybe not well known as a producer from the North 
Slope, but in fact we are. We have been proud to be a partner 
with Phillips in the exploration and development of the new 
Alpine field, the newest field to start production on the North 
Slope. It was discovered in 1994 and began production in late 
2000, a 6-year time frame from actual discovery to development, 
and, notably, in a unique and new development model that 
mitigated the impact on the surface and the overall 
environment.
    I think there is one window on the potential time frame of 
development in ANWR. On the question of the 6-months supply or 
ultimate potential, the resource potential of ANWR is well 
understood to be significant and I would say, without wanting 
to be cavalier, if as an industry we cease exploring for 
anything that did not have more than a 6 months potential 
supply for the United States we would rapidly cease exploring 
altogether.
    The incremental production potential from ANWR is a 
significant supply source for the United States' security for a 
long time to come.
    The Chairman. Mr. Malone.
    Mr. Malone. Senator Murkowski, Alaska is blessed to be rich 
in energy sources--coal, natural gas, and oil, all of which fit 
into the national energy plan that is being developed and that 
is being discussed. All three are needed in order to meet the 
needs of this country.
    Also, I would concur with my colleagues that the volumes 
are needed and that if we based all our economic decisions on a 
finite time frame many fields would not be developed. It is the 
incremental amount that would enter the United States we 
support.
    As to the time to bring the field on line, again I think 
all our exploration and development experience would be 
similar, but, Senator, if you were to have your seismic and 
your exploration and development and engineering done and then 
you approached this as a Nation the same way we did when we 
tried to put somebody on the moon, when all resources were 
brought to bear, with those two areas completed you could get 
oil to the pipeline and down in 2 to 3 years.
    Senator Murkowski. Thank you.
    Mr. Marushack. Senator, 99.5 percent of my work is 
commercializing gas. But just in general, on the ANWR 
assumption we would use to the extent that we could the Alpine 
model and your assumption is that all the permitting is in 
place already and the discovery has been made, so I would agree 
with my BP colleague that it would take from 3 to 4 years just 
to do the production delineation and production and bring that 
gas on line, which we think is similar to the Alpine model 
which was state of the art.
    Senator Murkowski. Mr. Chairman, I have one more question, 
either on a second round----
    The Chairman. Let me do this. Vice President Cheney is 
going to be speaking to the Democratic caucus at 1 o'clock, and 
I need to excuse myself to attend that. Why do I not just turn 
the hearing over to Senator Murkowski. You go ahead. You have 
one additional panel of witnesses and you can go ahead with 
this panel as long as your questions dictate.
    Senator Murkowski. They have been waiting a long time. I 
appreciate that, Senator Bingaman. Thank you.
    I am curious to know, from the standpoint of the three 
producers what your reserve holdings of natural gas are on the 
MacKenzie Delta? And I am going to follow that up by the 
question, if the northern route were built when and how much of 
that reserve would be developed prior to going into the Alaska 
reserve?
    Any order at all would be sufficient for me.
    Mr. Malone. Just from BP's perspective, we hold no 
delineated reserves in the MacKenzie Delta. We have acreage, 
but it has not been drilled and developed.
    Mr. Marushack. Phillips the same answer. We have no 
reserves in Canada.
    Senator Murkowski [presiding]. Exxon?
    Mr. Koonce. Senator, we estimate there are about 9 trillion 
cubic feet discovered and ready to be developed in the 
MacKenzie Delta, and we hold 60 percent of that interest.
    Senator Murkowski. 60 percent of 9 trillion?
    Mr. Koonce. Yes, sir.
    Senator Murkowski. If the northern route were built, when 
and how much of that reserve would be developed prior to 
pulling down your share of the Alaska reserves?
    Mr. Koonce. Well, we anticipate that the MacKenzie gas can 
be developed, as I indicated in my earlier statement. So we 
think that project will stand alone and will go forward with or 
without Alaska gas. My point was, if they went forward together 
there would be some obvious synergies to both projects.
    Senator Murkowski. You are familiar with the Corps' 
relative generalization concerning the difficulty of permitting 
the northern route and the discussion that has taken place from 
time to time suggesting that merely, is it, 230 miles of marine 
pipeline, or is it 320?
    Mr. Koonce. 240, I think.
    Senator Murkowski. 240, that would be offshore of ANWR, and 
that would be buried 15 feet deep beneath the bottom. Is there 
any place else where we have got that technology, where we have 
the dynamics of ice scouring and the long period of time where 
the ice gives you a situation where you can not pull your 
pipeline or you cannot address it, that there is a long 
framework between compressor stations, with the necessity of 
having total reliability?
    I have heard that you might have to loop that line to 
ensure that you had a backup. Are these considerations that you 
have evaluated?
    I would also like to hear your views on, realistically, the 
difficulty of permitting. We are making some progress, but it 
reminds me of a crab walking down the beach on the issue of 
ANWR. We are moving, but the directions are questionable. I am 
curious to get your evaluation of the realism of permitting.
    You heard the Corps of Engineers reference that, unless the 
State changes its mind, it is going to be dead on arrival.
    Mr. Koonce. Senator, I did not mean to imply that we think 
the northern route or the southern route is without problems. 
They both have a lot of problems that need to be worked through 
by all the constituencies that are interested in them. The 
comment was made earlier about technology and I do not think 
that was an accurate comment. We know how to bury pipeline as 
deep as we need to below ocean bottoms and we do it all the 
time and oftentimes in much deeper water than we are dealing 
with here.
    I am not aware of it having been done in an ice regime to 
this length. We are considering similar kinds of pipelines 
offshore Sakhalin Island in Russia, for example, ExxonMobil is, 
which have similar ice regimes. So we believe the technology 
exists to do this and we think it exists to do it reliably and 
that there would be certainly no need to loop a line. If ice 
scour were the concern, laying two lines would not be any 
better than laying one.
    Basically, if ice was going to scour that line it would 
catch them both. So we do not really see that as a significant 
issue. We think the line can be buried deep enough to get away 
from the ice scour and that the ice scour can be identified 
quite well scientifically.
    Senator Murkowski. Would the three producers be satisfied 
if the committee went ahead separately on the course of regular 
business before the committee to take up the proposed 
legislation covering review and EIS and the pipeline director 
and limited judicial review, subject to your evaluation at year 
end on the status of the project? Because it would be a little 
difficult and highly unusual to approve something that is not 
economic at the end of your study and lends itself to a 
recognition that we still do not have an application, which I 
will leave you with a last question: Do you anticipate anything 
to occur between now and the time you finish your study that 
would lead you to submit an application for this pipeline?
    Mr. Marushack.
    Mr. Marushack. Phillips believes that we have tried to take 
a systematic approach to seeing what we need to move the 
pipeline forward as quickly as possible and we have tried to be 
very realistic. The numbers you have seen quoted out there are 
just reference case numbers. They will change, they will 
absolutely change. Maybe the two routes will come together, 
maybe they will fall apart.
    But one thing is for sure. It is going to be in the upper 
billions of dollars no matter what. So what we have tried to do 
then, given that it is going to be very costly very risky, we 
have tried to chip away and find areas where we could reduce 
that risk, and we tried to do it as early in the process as we 
can so we can get the gas on stream as quickly as possible.
    Our hope is that the combination of the legislative package 
that is available to other parties with the complete 
understanding that a brand-new EIS has to be put together, that 
we hope that there could be enabling legislation, the fiscal 
legislation would be passed so that we could move directly into 
finalizing our preliminary work, our feasibility work, if you 
will, keep our team in place, address all the other concerns, 
and see if there is any other partnership issues we have to do, 
but work forward in a seamless fashion, moving toward an open 
season concept and a filing of the application as quickly as 
possible.
    What you are suggesting, Senator, would probably be a delay 
in some period of time and we would hope that that would not be 
the case. Having said that, we are going to try to work with 
this committee on everything we need to move forward.
    Senator Murkowski. I am not ready to acknowledge a full 
EIS. That depends on route selection. Nevertheless, you are 
telling me that in your recommendation we should go ahead and 
pursue in general the proposed legislation and you would deal 
with the State independently on what you feel the incentives 
there.
    Of course, one of the difficulties that is not usual for a 
committee or a role of government to ascertain is the 
particular request that you folks have to provide relief only 
when market gas prices in the lower 48 fall below the levels 
that would not otherwise support a project of this magnitude, 
and that is a condition of your company as opposed to BP and 
Exxon.
    Mr. Marushack. Sir, Senator, we think it is a realistic 
understanding that this project is still going to be extremely 
risky and extremely difficult to do. What we are trying to do 
is, again if we could have a tax proposal that we think shares 
the costs and benefits amongst all the constituents out there, 
we think that works.
    One thing about our proposal--I wish Senator Thomas was 
still here. He asked about other proposals out there, other 
incentives. There are section 29 credits available. There is 
coalbed methane. There are other things out there for difficult 
reserves. We think this helps make our project also 
competitive.
    The thing we have done is, it only costs the Federal 
Government any money at times when it benefits the consumer. If 
prices were very, very low because of bringing on this huge 
amount of gas, the consumer and the government benefits, and we 
have put a mechanism in there to stabilize that. Under high-
priced scenarios there is no payment from the government, no 
credit from the government whatsoever. So we think it is a win-
win and it does not cost anything in times when prices are 
high. We think it actually gets the project done.
    Senator Murkowski. Mr. Malone, are we going to get an 
application at the end of the year?
    Mr. Malone. Did you say my name?
    Senator Murkowski. We have everything else.
    Mr. Malone. Senator Murkowski, right now I think the answer 
is no. There is going to have to be a lot of work done in order 
to meet that deadline. In my statement I mention that we have 
an opportunity to maybe get all the interested parties together 
and begin to try working to make this an economic project and 
address the many concerns that are out there.
    I think there is a great deal of misinformation. There is a 
lot of rhetoric out there, and at a time when the Nation needs 
to be looking at its energy sources I think the catalyst by 
this committee to get us together and see what we can do to 
make this an active project, that may still allow for time to 
move this in legislation, and maybe we could have an answer, a 
more positive answer to having an application by the end of the 
year if we could all get together and see if we can resolve 
this.
    Mr. Koonce. Senator, I would say it is unlikely that there 
will be an application by the end of the year. However, I would 
encourage this committee to continue to consider this 
legislation. It gets to be a little bit of a chicken and an egg 
problem. If the legislation is in place, then that at least 
eliminates the risk associated with permitting. If it is not in 
place and it takes someone a year or 2, 3, to find an economic 
project, then when that happens we have to start this process 
all over again.
    I think as long as the legislation is route-neutral that it 
makes some sense, because it allows us, it allows the private 
sector whoever that may be--producers, pipeliners, whoever--to 
try to find an economically viable project that can move 
forward, and the permitting then does not stand in the way and 
actually the view of these economics improves with that 
legislation in place, because you now know within some much 
more prescribed limits how long that permitting process will 
take.
    Mr. Sullivan. Senator Murkowski, I might make one brief 
comment about timing, with your permission. We hope, like you 
do and I think like most people do, that the pipeline will go 
ahead, and we believe that it will in one form or another; and 
absent updated or new legislation to address some of the more 
commercially oriented terms that I mentioned earlier, those 
frameworks may be set very, very early in the process, 
potentially to the disadvantage of companies like Anadarko that 
hold significant potential for reserves yet to be discovered.
    So that we would suggest some attention be given to those 
issues as tariffing, open season access to capacity, and 
expandability be considered earlier in the process rather than 
later.
    Senator Murkowski. I want to thank the panel. It would be 
my intention to encourage the leadership, Senator Bingaman and 
the majority to bring this legislation before the Energy 
Committee, recognizing it as a step in the continued and 
necessary progress of bringing this gas line into a real 
project.
    I think it is an investment and a responsible investment in 
the process, and the recognition of the testimony here relative 
to your continued review, continued work and expenditure of 
money in addressing the economics. Probably 3, 4 months ago the 
economics were a little different because the price of gas was 
different. As we pull down available gas, why, the price may go 
back up again. So the economics cannot change, but some will 
want to end the necessity of pursuing this without an 
application.
    But I can certainly see the justification for it as part of 
the process. I hope we have cleared the air pretty much on the 
issue of subsidies, because I do not want my colleagues to 
reflect on this as a subsidy issue for the industry, because 
that is not going to fly and we all know it.
    So again, it would be my hope--and I indicated this earlier 
in my opening remarks--at the end of this hearing that we will 
have advanced the process by this hearing today and that work 
with the legislature, the Governor, and hopefully we can work 
collectively, again in perhaps a less formal manner, to advance 
the process, as I said before, either here or in Alaska. I 
pledge to you my willingness to help in any manner I can.
    Thank you very much, gentlemen.
    I would call on the next panel and you can come up slowly 
because I am going to be right back.
    [Recess from 1:13 p.m. to 1:15 p.m.]
    Senator Murkowski. I want to thank you for staying with us 
and I apologize for the delay. We are not going to have one of 
these every day and we are very pleased at that.
    You may proceed in any manner that you wish. I have got the 
second page of the witnesses here somewhere. I got it, I got 
it. Anybody have to catch an airplane?
    [No response.]
    Senator Murkowski. I guess not. National is still closed, 
so everyone does not have to worry about that.
    I guess Mr. Mark Aron of CSX is listed first here. If you 
want to proceed. We are alphabetical, so let us do it that way. 
Is that fair enough? Please proceed.

  STATEMENT OF MARK ARON, VICE CHAIRMAN, CSX CORPORATION, ON 
              BEHALF OF YUKON PACIFIC CORPORATION

    Mr. Aron. My name is Mark Aron. I am vice president of CSX 
Corporation. By way of background, CSX has long involvement 
with Alaska. We own and operate CSX Lines, formerly Sealand, 
which we believe is the premier Jones Act carrier for Alaska. 
It has been a wonderful relationship. We are proud of our 
service and the dedication of our many people in Alaska.
    In addition, for about the last 15 years we have also been 
the proud sponsor and the driving force behind the Yukon 
Pacific project, which is intended to bring gas via pipeline 
from the North Slope, liquefy it at Valdez, and then transport 
it by ship either to Asia or the West Coast. We have 
accomplished a lot. We have assembled the blueprint for the 
project, all the major permits, in addition to accumulating a 
massive storehouse of knowledge about this pipeline.
    We are not here to cast stones on any alternative project. 
For the sake of the Nation, for the sake of Alaska, we would 
like to see the gas move, regardless of whether it is to our 
project or to another. Obviously, we would like to see it move 
over our project, but I think economics and other broad 
considerations will decide what route it will take.
    But my main point here is that if the Congress moves 
forward with legislation we simply ask that we not be forgotten 
or disadvantaged. We simply would like a level playing field 
that would apply to all projects, whether it be the northern 
project, the southern project, or the Yukon Pacific project.
    I will say with all due respect there are aspects of our 
project, the Yukon Pacific project, that make us attractive. We 
are an all-American pipeline in an existing corridor. That 
makes us quite secure.
    Secondly, we have the flexibility to serve both foreign and 
domestic markets. I know the committee is aware that the 
economics of those markets differ. By being able to serve both 
markets, you increase the viability of the project.
    Thirdly, we serve the local Alaskan population. I believe 
our project would pass by about three-quarters of the 
population of Alaska. I have included some cost studies in our 
testimony and we believe we are at least cost competitive.
    Lastly, we have completed the great majority of the 
permitting process and therefore we could expedite 
construction.
    In summary, we are here, we are ready to serve and ready to 
cooperate to make the gas flow.
    Thank you.
    [The prepared statement of Mr. Aron follows:]

    Prepared Statement of Mark Aron, Vice Chairman, CSX Corporation

    Mr. Chairman, Members of the Committee:
    My name is Mark Aron. I am Vice Chairman of CSX Corporation.
    I am here today to testify on behalf of Anchorage-based, Yukon 
Pacific Corporation, a business unit of CSX and sponsor of the 
TransAlaska Gas System (``TAGS'').
    You have asked for an update on the status of TAGS and for comments 
regarding proposed legislation that may be required to expedite the 
construction of a pipeline from Alaska to the lower 48.
    Our business unit, Yukon Pacific Corporation was formed in 1982 to 
sponsor the TransAlaska Gas System. This system is designed to 
transport conditioned North Slope natural gas from Prudhoe Bay to 
Valdez via an 800 mile, chilled, high pressure pipeline buried in the 
existing Congressionally-dedicated TransAlaska Pipeline Corridor. This 
corridor currently supports that TransAlaska oil pipeline. In Valdez 
the gas will be chilled to its dew point at 260 degrees and thereby 
converted to liquid form. It will then be shipped as LNG to markets in 
Japan, The Republic of Korea and The Republic of China on Taiwan and, 
if needed, to the West Coast of North America. Because it would be 
wholly-within Alaska TAGS offers the benefits of supplying needed-gas 
to Alaskan communities and optimum pipeline security.
    Yukon Pacific holds the major permits, authorizations and licenses 
for the construction and operation of TAGS. These include Presidential 
Approval to export Alaskan natural gas pursuant to the Alaska Natural 
Gas Transportation Act, a Department of Energy Export License, the 
Federal Right-of-Way required to cross federal land, a conditional 
Right-of-Way from the State of Alaska, Federal Energy Regulatory 
Commission approval of the export site in Valdez and a clear definition 
of FERC's role and jurisdiction and a Facilities Air Permit (PSD) for 
the LNG and marine facilities. TAGS has undergone two full-blown NEPA 
reviews.
    In sum, TAGS has completed almost all of its major permitting work. 
A more detailed description of all of the various permits and approvals 
held by Yukon Pacific is attached as an exhibit.* The remaining major 
permit is the Corps of Engineer 404 permit and Yukon Pacific is 
currently engaged in a three-year field program to obtain that permit.
---------------------------------------------------------------------------
    * The exhibits have been retained in committee files.
---------------------------------------------------------------------------
    As a result of the considerable information and engineering 
required to obtain these permits and authorizations, Wilbros 
Engineering, a major international engineering firm, has produced an 
investment grade quality cost estimate for the pipeline and Kellogg, 
Brown and Root, which designs and constructs over 95% of the world's 
LNG facilities, has produced a cost estimate for the LNG and marine 
facilities. I have included with my written testimony a chart that 
shows the costs in relation comparison to ultimate project size. Thus, 
the cost for the Alaskan facilities to produce 9.2 million tons of LNG 
per year is 6 billion dollars and to produce 18.4 million tons per year 
of LNG will cost 8.3 billion dollars.
    More important, however, are the cost of service figures for 
delivering Alaska North Slope natural gas to West coast markets and to 
Asian markets. One of the advantages of TAGS is the capability of 
serving multiple markets. This has the advantage of allowing the 
project to base its economics on long term 25 year contracts with its 
Asian customers (who traditionally pay much higher prices than we do in 
the United states) while still being able to meet the needs of the much 
less stable and relatively short term West Coast natural gas demands. 
West Coast markets can be served via LNG tankers to western Mexico with 
a portion of that gas moved via pipeline to southern California. In the 
alternative, tankers could deliver LNG directly to the western United 
States. Several major companies have recently proposed building new LNG 
receiving terminals in California. In either case, LNG can be delivered 
to the U.S. on a cost-effective basis.
    Comparing a four billion cubic foot a day LNG project with a four 
billion cubic foot a day overland pipeline yields the following 
results: The cost of service for the overland line to the US/Canadian 
border is approximately $2.07 MMBTU. Similarly, the cost of taking LNG 
to the west coast is $2.01 MMBTU. I have included as an exhibit to my 
testimony a discussion of the methodology for reaching these cost of 
service numbers.
    In short, Mr. Chairman, the demand of natural gas in the Asia 
markets we seek to serve in the form of LNG is approximately 60 million 
tons per year. We see an additional 30 million tons per year potential 
demand in Baja and western Mexico and the western United States. While 
TAGS is not an overland pipeline through Canada, we believe it has 
markets which enable it to meet economies of scale and that it will 
make a major contribution to providing natural gas to Americans via a 
shorter, all American system.
    CSX and Yukon Pacific are not opposed to any of the other proposed 
projects being discussed and believe that the marketplace will and 
should decide which project will proceed. Nor are we asking for 
specific legislation as we believe TAGS is ready to go and can stand on 
its own. However, it is important that TAGS not be placed at an 
artificial competitive disadvantage vis-a-vis other proposals, 
including overland pipelines. In this regard, I urge that the Committee 
ensure that any legislative incentives developed to encourage 
commercialization of Alaska's North Slope natural gas apply to and 
allow for the option of delivering that gas via an LNG project such as 
TAGS.

    Senator Murkowski. Thank you very much for that statement.
    Mr. Heyworth, the Chairman, Citizens Initiative for the 
All-Alaska Gasline.

STATEMENT OF SCOTT HEYWORTH, CHAIRMAN, CITIZENS INITIATIVE FOR 
                    THE ALL-AMERICAN GASLINE

    Mr. Heyworth. Thank you, Senator Murkowski. I wish to thank 
you and Senator Bingaman for inviting me to testify here today.
    My name is Scott Heyworth. I was born in Alaska. I am 
currently serving as a public safety commissioner for the 
municipality of Anchorage under our mayor, George Wuerch. I am 
a former port commissioner under then-mayor Tony Knowles. I am 
also the chairman of the Citizens Initiative for the All-
American Gasline, which is the subject of my testimony here 
today. I have been a member of the Anchorage Independent 
Longshore Union for 28 years and all my fellow union brothers 
and sisters mourn the losses of our fellow union policemen and 
firefighters, along with military and civilian casualties, and 
strongly support the work of the construction crews, the fire, 
medical, police and rescue volunteers, as do all Alaskans.
    We have our corporate boardrooms, our economic forecasts 
and the various gas pipeline scenarios, our hearings, our 
jurisdictions, our political parties. Yet we also need to look 
at our rock-bottom principles of democracy which brought forth 
this great country, this capital, and this very room at this 
precise moment in time.
    One of those principles which our forefathers fought and 
died for is the right of citizens to petition their government. 
The Alaska State Constitution, section 6, Declaration of 
Rights, reads as follows: ``The right of the people peaceably 
to assemble and to petition the government shall never be 
abridged.''
    Giving oil companies Federal incentives, tax breaks, tax 
credits, accelerated depreciation, special interest 
considerations, are not the answer to the United States' energy 
problems. Changing the ANGTA treaty is just one of the myriad 
problems. It is not an answer.
    The answer is to build the one project you have heard so 
little about today, the all-American LNG route to Valdez 
paralleling the Trans-Alaska Pipeline System, which this 
committee has the jurisdiction over. Which would you rather 
have control over, a 3,000-mile gas pipeline in a foreign 
country, Canada, or two parallel 800-mile pipelines going down 
the exact same corridor in the United States of America? It is 
simple, defensible, and in the best interest of all Americans.
    Alaska State Constitution, article 8, section 2, gives 
Alaskans a say in the commercialization of their State's 
natural resources, and Alaskans are strongly saying they want 
their natural gas to be commercialized in their State and 
therefore in America, not Canada.
    In March, May, and June of this year, I commissioned three 
statewide polls and they all show that the majority of Alaskans 
support the all-American route to Valdez by over a two to one 
margin. In our largest city alone, Anchorage, they favored the 
all-American route by a 65 percent margin. I am told that a new 
poll has just come out last week that shows the statewide 
number is now in the high sixties.
    Alaska's Lieutenant Governor Fran Ulmer recently certified 
our citizens initiative petition that allows us to begin 
gathering signatures to place the initiative on the November 6, 
2002, ballot. The petition to have the State of Alaska build 
and secure financing for this all-American project is now 
circulating statewide. In the first 18 days since 
certification, we have collected over 25 percent of the 
necessary signatures. The citizens of Alaska are signing it in 
record numbers. The response can only be deemed phenomenal.
    Alaskans have this issue patriotically figured out. Despite 
being distracted over concerns over the threat of terrorism 
this country is now facing, building a gas pipeline in America, 
not Canada, is their choice. They support the one project that 
is already permitted, already engineered, is environmentally 
sound, and has signed project labor agreements with most 
Alaskan unions. It brings the most jobs to Americans, provides 
the most revenues to our State treasury, provides in-State gas 
use of our own resource, something any Canadian route does not 
do, and provides gas to our own U.S. West Coast cities where 
the real energy shortages are.
    El Paso Natural Gas has proposed five LNG receiving 
terminals on the West Coast which could receive Alaskan LNG. 
There are no gas shortages in the Midwest or Chicago. Cheaper 
Canadian and domestic gas is closer to that area than any 
3,900-mile gas pipeline from Alaska.
    These are extraordinary times and it takes extraordinary 
vision to see past ancient political myths. It is time to 
reevaluate oil industry special interest legislation, sever our 
dependence on Mideast natural resources, and protect oil and 
natural gas reserves on the North Slope. We cannot build this 
gas pipeline through Canada just because it is economically 
beneficial to the oil companies. We need to put Alaska's energy 
interests first.
    Unlike the Governor's or the producers' proposed 
legislation, the Citizens Initiative, which establishes a State 
gas authority, does not need any Federal legislation to build 
this all-American project because it would be a publicly owned 
entity.
    Finally, Senators, if any of us advocating to open ANWR to 
lessen our dependence on foreign or Mideast oil and gas 
supplies, then I am sure, using the same logic, that we would 
also advocate to build the all-American gasline to Valdez to 
avoid going through a foreign country for security reasons. I 
believe Americans today understand this very simple concept.
    Thank you very much.
    [Attachments submitted by Mr. Heyworth have been retained 
in committee files.]
    Senator Murkowski. Thank you, Mr. Heyworth.
    Our next witness is Mr. Mike Stewart and Dennis McConaghy, 
co-chair executive officers of Foothills Pipe Line. We have 
brought up Foothills a good deal today. We look forward to your 
statement and testimony and some clarification. Particularly, I 
would like you to address the status of the alleged $4.2 
billion liability associated with your filing with FERC, and 
where is it and what is the disposition of it likely to be, 
because it seems to have continually come up in numerous 
discussions and I have yet to hear a resolve finally being put 
to bed one way or the other.

  STATEMENT OF MICHAEL STEWART AND DENNIS McCONAGHY, CO-CHIEF 
EXECUTIVE OFFICERS, FOOTHILLS PIPE LINES LIMITED, ON BEHALF OF 
    THE ALASKA NORTHWEST NATURAL GAS TRANSPORTATION COMPANY

    Mr. Stewart. We will try to do that, Senator. Thank you for 
the opportunity to appear in front of you today. I am co-chief 
executive officer of Foothills and also an executive vice 
president with Westcoast, Inc. With me is Dennis McConaghy, the 
other co-CEO of Foothills and an executive vice president of 
Trans-Canada Pipelines. I will deliver the oral statement and 
Mr. McConaghy will take the lead on any Q's and A's.
    Foothills is jointly owned by Westcoast and Trans-Canada, 
the two major pipes in the Canadian natural gas business. 
Foothills is the operator of the Alaska Northwest Natural Gas 
Transportation Company, a U.S. partnership formed to construct 
and operate the Alaska portion of the Alaska Highway pipeline 
project. Foothills and Trans-Canada are the two current active 
owners of the Alaska partnership.
    In addition, Foothills is the Canadian sponsor of the 
Alaska Highway project and the majority owner and operator of 
the Canadian portions of the pre-built eastern and western legs 
of the project. I would just note that today those pre-built 
legs are delivering over 30 percent of the natural gas that 
comes from Canada into the United States today.
    I would also note that we are the company that has kept the 
Alaska Highway pipeline project alive over these past few 
years.
    Senator, at the outset I want to state something 
emphatically: No new Federal legislation is required to 
expedite the construction of a pipeline to deliver Alaskan 
natural gas to markets in the lower 48 States. A comprehensive 
legal, regulatory, and diplomatic framework specifically 
designed to expedite construction of the pipeline is already in 
place. That framework consists of ANGTA, President Carter's 
decision and report of 1977 to Congress selecting the Alaska 
Highway pipeline project as the superior project to deliver 
Alaska gas to market, the agreement on principles between 
Canada and the United States, which has the force and effect of 
an international treaty, the joint resolution by which Congress 
approved the President's decision, and the U.S.-Canada 
agreement, the Northern Pipeline Act in Canada which granted 
certificates of public convenience and necessity to Foothills 
for the construction and operation of the Canadian segment of 
the project, and finally, the certificate of public convenience 
and necessity issued by FERC to the Alaska partnership.
    The ANGTA framework has not been modified, repealed, or 
diminished in either the United States or Canada. It is as 
viable today as it was when it was initially enacted. It 
provides a regime that is flexible enough to accommodate the 
expeditious construction of a competitive, efficient, and 
modern natural gas transportation. Simply put, ANGTA ain't 
broken, so do not try to fix it.
    The next point I want to emphasize is, not only is new 
legislation not required, any legislation that attempts to 
create an alternative or parallel regulatory process to ANGTA 
will delay increase of the pipeline for several years by 
reopening contentious debates over routes and projects. Such 
legislation will take the progress of developing an Alaska gas 
pipeline back to square one.
    Let me amplify. New legislation will require FERC to spend 
substantial time to determine whether or not to issue 
certificates to new applicants, it is inconsistent with the 
existing Canada-U.S. agreement and more than likely will 
invalidate that treaty. If a new project or route were 
selected, new legislation would have to be enacted in Canada 
and a new agreement between the United States and Canada would 
have to be negotiated.
    New legislation will require the time-consuming preparation 
of new comprehensive environmental impact statements, as 
opposed to updating the substantial environmental assessment 
work that has already been done for the Alaska Highway project.
    Finally, new legislation would allow the filing of an 
application for alternative projects that will not have the 
level of support of the Alaska Highway project.
    The next point I want to make is, while we are opposed to 
legislation that attempts to create a parallel or alternative 
regulatory regime, we do not oppose other legislation intended 
to improve the economics of the project or address concerns of 
other stakeholders. We believe that the Alaska Highway project 
can be financed in the capital markets without incentives or 
support from the Federal Government. However, such support, if 
properly structured, could improve the economics of the project 
to the degree that the producers would be willing to commit the 
gas to the marketplace.
    Likewise, we are not opposed to legislation that addresses 
labor, source of steel, access to the pipeline for new gas 
producers, or other similar issues, provided such legislation 
does not undermine the ANGTA framework or does not impair the 
ability to develop and/or finance a viable project.
    As the holder of the priority right to construct the Alaska 
natural gas pipeline, we are proceeding on several fronts to 
remobilize the project. Over the past 3 years we have 
undertaken a comprehensive effort to modernize all aspects of 
the project based on the extensive engineering, terrain, 
environmental and other information available from prior work. 
This effort has convinced us that a fully modern and 
economically viable project is doable.
    We are engaged in a concerted effort to re-enlist several 
major U.S. energy companies who were formerly partners in the 
Alaskan partnership. The negotiations with these companies have 
been productive and are ongoing.
    Finally, Mr. Chairman, we have pursued discussions with the 
producers of North Slope gas for the last several months and 
are currently in the process of developing a commercial 
proposal to present to them before the end of the year.
    Senator, if this committee's objective is to expedite 
construction of the Alaska natural gas pipeline, then the most 
important thing that you can do is to endorse the ANGTA 
framework and the Alaska Highway project. The ANGTA framework 
was specifically adopted by the United States and Canada to 
expedite the construction of the Alaska Highway project when 
market conditions justified the cost of delivering Alaska gas. 
We believe those market conditions will soon be in place.
    We implore you and the committee from considering 
legislation that would undermine this framework. We share 
Chairman Wood's sentiment that it would be most helpful for the 
interested parties to collaborate on a single project of 
sufficient scope to enable our focus to be on getting the gas 
to market than on spending time on litigation.
    Our goal remains as it has been for the past 25 years, and 
that is to get this pipeline built. Thank you.
    [The prepared statement of Mr. Stewart and Mr. McConaghy 
follows:]

 Prepared Statement of Michael Stewart and Dennis McConaghy, Co-Chief 
            Executive Officers, Foothills Pipe Lines Limited

                              INTRODUCTION

    Mr. Chairman, Senator Murkowski and Members of the Committee, thank 
you for the opportunity to appear today before the Committee.
    We are the Co-Chief Executive Officers of Foothills Pipe Lines Ltd. 
(``Foothills'').
    Foothills is jointly owned by Westcoast Energy Inc. (``Westcoast'') 
and TransCanada PipeLines Limited (``TransCanada''), the two major 
players in the Canadian gas pipeline business. Foothills is the 
operator of the Alaskan Northwest Natural Gas Transportation Company 
(the ``Alaska Partnership''). The Alaska Partnership is a U.S. 
partnership formed to construct and operate the Alaska portion of the 
ANGTS. Foothills and TransCanada are the two current active owners of 
the Alaska Partnership. In addition, Foothills is the Canadian sponsor 
of the ANGTS, and the majority owner and operator of the Canadian 
portions of the Eastern and Western Legs of the ANGTS.
    We are appearing today on behalf of the Alaska Partnership and 
Foothills.
    Our testimony today will discuss the current status of the Alaska 
Natural Gas Transportation System (``ANGTS'' or ``Alaska Highway 
Project'') and will address the question of whether any federal 
legislation is required to expedite the construction of a natural gas 
pipeline from Alaska.

               NO NEW REGULATORY LEGISLATION IS REQUIRED

Legislation To Expedite Construction Already Exists
    No new federal legislation is required to expedite construction of 
a pipeline to deliver Alaska North Slope natural gas to markets in the 
lower-48 states. A comprehensive legal, regulatory and diplomatic 
framework, specifically designed to expedite construction of the 
pipeline, is already in place. This framework provides the most 
effective means to ensure expeditious development of the pipeline.
    This framework consists of the following:

   Alaska Natural Gas Transportation Act of 1976 (``ANGTA''). 
        The express purpose of ANGTA is to ``provide the means for 
        making a sound decision as to the selection of a transportation 
        system for delivery of Alaska natural gas to the contiguous 
        States . . . and . . . to expedite its construction and initial 
        operation . . .'' To that end, ANGTA established a process 
        through which the Alaska Highway Project was designated by the 
        President and approved by the Congress as the superior project 
        for the delivery of Alaska gas. The Alaska Highway Project was 
        selected after an exhaustive consideration of several 
        alternatives, including a project which would have proceeded 
        east from Prudhoe Bay connecting with a Mackenzie River Valley 
        pipeline in Canada and an LNG project proposing to deliver LNG 
        to southern California. In addition, ANGTA imposes specific 
        requirements on federal agencies to expedite decision making on 
        permit applications for the Alaska Highway Project and places 
        limits on judicial challenges to agency decisions.
   Decision and Report to Congress on the Alaska Natural Gas 
        Transportation System, (``President's Decision''). The 
        President's Decision advised the Congress of the President's 
        selection of the Alaska Highway Project as opposed to the other 
        competing projects, detailed the reasons for that selection, 
        and enumerated comprehensive terms and conditions for the 
        construction and initial operation of the project.
   Agreement Between Canada and the United States of America on 
        Principles Applicable to a Northern Natural Gas Pipeline 
        (``U.S.-Canada Agreement''). The U.S.-Canada Agreement 
        designates the Alaska Highway Project as the superior project 
        and states specific terms and conditions under which the 
        project would be built with the joint cooperation of the U.S. 
        and Canadian governments.
   Public Law 95-158. Through this Joint Resolution, the 
        Congress approved the President's Decision and the U.S.-Canada 
        Agreement.
   Northern Pipeline Act (``NPA''). Through the NPA, the 
        Canadian Parliament granted certificates of public convenience 
        and necessity to Foothills for the construction and operation 
        of the Canadian segment of the ANGTS. The Act also established 
        the Northern Pipeline Agency and gave it the authority to 
        oversee the construction of the system in Canada.
   FERC Certificate. A certificate of Public Convenience and 
        Necessity was issued by the Federal Regulatory Energy 
        Commission to the Alaska Partnership for the construction and 
        operation of the Alaska Highway Project.

    Pursuant to the ANGTA framework, the Alaska Partnership has 
acquired a right-of-way across all federal lands in Alaska, the 
necessary Clean Water Act Section 404 wetlands permits for the 
pipeline, and numerous permits, authorizations and rights-of-way for 
the construction of the pipeline in Canada. In addition, a significant 
amount of environmental assessment work has occurred for the ANGTS.
    The ANGTA framework has not been modified, repealed or diminished 
in either the U.S. or Canada. It is as viable today as it was when 
initially established. It provides a regime that is flexible enough to 
accommodate the expeditious construction of a competitive, efficient 
and modern natural gas transportation system.

New Legislation Will Delay Construction
    Because of the ANGTA framework and the actions that have already 
been taken pursuant to the framework, no new federal legislation 
addressing the authority of federal agencies is required to expedite 
construction of the Alaska gas pipeline. In fact, any new legislation 
that attempts to create an alternative or parallel regulatory process 
to ANGTA would have the opposite effect.
    Consideration of any legislation that would create an alternative 
or parallel regulatory regime to ANGTA will have a significant 
detrimental impact on the efforts to expeditiously construct an Alaska 
natural gas pipeline. It is our view that such legislation will 
undermine the ANGTA framework and will delay construction of the 
pipeline for several years by triggering a new competition between 
different projects and routes.
    FERC would have to spend substantial time and effort to determine 
whether to issue certificates to new applicants. Such legislation will 
be inconsistent with the U.S.-Canada Agreement and, more than likely, 
invalidate that treaty. If any new project or route were selected, new 
legislation would have to be enacted in Canada, and a new agreement 
between the U.S. and Canada would have to be negotiated. Likewise, 
updating the environmental assessment work that has been done for ANGTS 
will be far less time consuming than preparing new comprehensive 
Environmental Impact Statements for any new project or route.
    Such legislation could also result in the filing of an application 
for alternative projects that will not have the level of support that 
the Alaska Highway Project enjoys. For example, an ``over the top'' 
route through the Beaufort Sea would encounter significant opposition 
from the State of Alaska, Alaska Native groups, the Yukon Territory and 
all of the national environmental organizations. A project over this 
route may not be able to acquire necessary environmental permits.
    Any federal legislation that establishes a new regulatory regime 
for the construction of an Alaska gas pipeline will take the whole 
process of developing such a pipeline back to ``square one'' by 
reopening the contentious debates over routes and projects. In 
addition, it is highly unlikely that the expedited permitting and 
limited judicial review provisions of ANGTA could be replicated in 
federal legislation enacted today. As such, any project developed under 
a new regime would encounter significant delays in the permitting and 
authorization stage.

Any New Legislation Should Do No Harm to the ANGTA Framework
    Proposals have been made for legislation that would provide federal 
fiscal support to improve the economics of an Alaska natural gas 
pipeline. Moreover, different stakeholders have called for federal 
legislation addressing other related issues, such as the use of Alaska 
and union labor, the use of North American steel, and access to the 
pipeline for new gas producers. This Committee may determine that 
legislation addressing some or all of these issues will help expedite 
construction of the Alaska gas pipeline.
    With respect to fiscal legislation, we believe that the Alaska 
Highway Project can be financed in the private markets without 
incentives or support from the federal government. However, such 
support, if properly structured, could indeed improve the economics of 
the transportation system in a way that generates a greater net back to 
the producers of the gas. A greater net back could result in more 
willingness on the part of the producers to commit the gas to the 
marketplace.
    The Alaska Partnership is not opposed to legislation that addresses 
labor, source of steel, access to the pipeline for new gas producers or 
other similar issues provided such legislation does not undermine the 
ANGTA framework and does not impair the ability to develop and/or to 
finance a viable project.

                  STATUS OF THE ALASKA HIGHWAY PROJECT

    As the holder of the priority right to construct the Alaska natural 
gas pipeline, the Alaska Partnership has been focused on several 
related areas of activities as it proceeds to remobilize the ANGTS--
Project Design, Engineering and Development; Partnership Expansion; and 
Producer Engagement.

Project Design, Engineering and Development
    Over the past three years, the Alaska Partnership has undertaken a 
comprehensive study aimed at modernizing all aspects of the project. 
This study was possible because of the extensive amount of engineering, 
terrain, environmental and other information available along the route 
of the pipeline as a result of the prior work of the sponsors. This 
work has convinced us that a fully modern and economically viable 
project is doable. In part, as a result of this effort the Alaska 
Partnership decided earlier this year to request the State of Alaska to 
continue its review of the application for right-of-way on state lands 
in Alaska. We are now working closely with the Joint Pipeline Office 
established by the State of Alaska to update the information previously 
filed with the State so the authorities can complete their analysis and 
issue the grant of right of way.

Partnership Expansion
    In the initial stages of the Alaska Highway Project, numerous U.S. 
energy companies were partners in the Alaska Partnership. However, 
during the decades of the 1980's and 1990's when the producers of 
Alaska natural gas were unwilling to commit that gas to lower 48 
markets because of the generally low energy prices, all of the U.S. 
partners withdrew from the Alaska Partnership. Now that long-term 
market conditions, primarily projected supply and demand balances, 
appear to be favorable, Foothills and TransCanada, as the two remaining 
partners, have offered to the current holders of the withdrawn partner 
interests an opportunity to rejoin the Alaska Partnership. The 
negotiations with these companies have been productive and are ongoing.

Producer Engagement
    An important first step toward commercial viability of an Alaska 
gas pipeline is a commercial agreement between the producers and 
potential shippers who, in turn, enter into transportation contracts 
with the owner and operator of the transportation system. In this 
regard, the Alaska Partnership has pursued discussions with the 
producers for the last several months. After several discussions with 
the producers over the last year, it has been agreed that we will 
develop a commercial proposal to present to the producers before the 
end of this year.

                               CONCLUSION

    Mr. Chairman, we share this Committee's objective to expedite 
construction of the Alaska natural gas pipeline in order to make 
Alaska's immense natural gas resources available to consumers in the 
lower 48 states. As the holder of the priority right to construct and 
operate that pipeline, the Alaska Partnership is doing everything 
possible to make this project a reality.
    The Alaska Highway Project is economically and environmentally 
superior to any alternative project. Since it parallels an established 
transportation corridor, construction will present far less 
environmental risk and disruption than a pipeline through undisturbed 
areas and will be much less challenging from a technological 
perspective. The ease of access to the right-of-way, less environmental 
risk, and lack of technological challenges translate directly into 
lower costs of construction for the Alaska Highway Project. In 
addition, we have acquired many of the major certificates, 
authorizations and permits needed to begin construction.
    These are not the only advantages we enjoy, however. Unlike any 
other project, the Alaska Highway Project has been designated and 
approved by the Congress and the Government of Canada after careful 
consideration of competing projects and routes. By virtue of that 
status, we have available to us all of the expedited permitting 
provisions of the ANGTA framework.
    No new federal legislation is required to expedite construction of 
the Alaska Highway Project. All of the necessary legal, regulatory and 
diplomatic provisions already exist in the context of the ANGTA 
framework. Any legislation that attempts to create a parallel framework 
or to create so-called competition to the ANGTA approach will only 
confuse, complicate and delay the project.
    The ANGTA framework was specifically adopted by the United States 
and Canada to expedite the construction of the Alaska Highway Project 
when market conditions justified the cost of delivering Alaska gas. We 
believe those market conditions will soon be in place. We implore you 
and the Committee to refrain from considering legislation that would 
undermine this framework.

    Senator Murkowski. I gather, Mr. McConaghy, you are going 
to respond to the questioning. I asked a question relative to 
the filing that you have done with FERC. You have accumulated 
about $4.2 billion relative to--I assumed that was going to be 
in the response, but it did not come about.
    Mr. McConaghy. Let me be more specific about exactly where 
we sit in that presently. I am happy to inform you that we have 
the agreement of all the former withdrawn partners to be in a 
process to have them re-enlist back into the Alaskan 
partnership that is specifically cited within the ANGTA 
statute. We are on a time frame to have that re-enlistment, as 
represented by an MOU, a memorandum of understanding, completed 
ideally within the next month, and with that as a foundation 
the commercial proposal that Mike referred to, we would hope to 
be able to generate and have placed before the producers before 
year end. That is an ambitious schedule, but that is the 
process that Foothills, Trans-Canada, Westcoast, and the six 
others, one of whom is also represented here this afternoon, 
Williams, is part of.
    That is where we sit in the specifics of solving that. The 
condition of their re-enlistment, of course, would be 
essentially release from that accumulated liability, and we 
have some confidence that we will be successful in that. That 
would set the ground for the commercial coming together of the 
holder of the certificates and the producers, a long-awaited 
event.
    Senator Murkowski. If you were to initiate that, would that 
result in refiling with FERC and basically releasing that filed 
liability, which is now considered to be a cost of the project 
by some producers?
    Mr. McConaghy. What I would anticipate is that, with the 
re-enlistment completed, we would engage with the producers to 
look for a commercial basis with a negotiated tool. That would 
be the subject of the filing. It would be my expectation that 
that historic cost would not form part of that.
    Senator Murkowski. What I am getting at is obvious. This 
4.2 has been filed. Would that filing be dropped?
    Mr. McConaghy. That is our goal, to have that done, yes.
    Senator Murkowski. Mr. Hoglund and then Mr. Bailey.

  STATEMENT OF FORREST HOGLUND, CHAIRMAN AND CHIEF EXECUTIVE 
               OFFICER, ARCTIC RESOURCES COMPANY

    Mr. Hoglund. Mr. Chairman, I am here representing Arctic 
Resources, a special purpose company that has been formed the 
build a natural gas pipeline from the North Slope of Alaska to 
the MacKenzie Valley in Canada and then bring the gas to U.S. 
and Canadian markets. We are proposing this as the shortest, 
most economic, and most environmental route, and under the 
right conditions certainly it can be the fastest. This is also 
the one that will tap into most of the future reserve potential 
in both countries.
    We are not asking for any subsidies or tax breaks in our 
project, just help in getting the right route picked and a 
speed-up in the environmental process. This route also clearly 
fills the need of our Canadian neighbor to the North.
    I think, as you will also see, I am here representing the 
interest of every U.S. energy consumer, every U.S. taxpayer, 
and, maybe surprising to some people, even the economic 
interests of the State of Alaska. Let us look at the options. 
You heard a lot today about the currently preferred route of 
the State, the ANGTS route. One of the main problems with that 
route is that a second pipeline is needed to tie in the 
Canadian reserves, so we call this the two-pipeline option. 
This approach immediately creates conflict between the United 
States and Canada: Which line is going to go first? The first 
line can lower the value of the reserves connected by the 
second line, delaying the need for the gas, possibly for a long 
time.
    The Alaskans have always assumed that their line would go 
first, but two-thirds of their line goes through Canada and 
Canada will most likely have the ultimate say in which line 
goes first. I think it is hard to imagine Canada making a 
decision that is going to lower the value of their resources.
    Now, let us look at the best solution. This is the one-
pipeline solution, so-called ``over-the-top route,'' because 
from Prudhoe Bay offshore to the MacKenzie Delta, then up the 
MacKenzie Valley to the pipeline interconnects starting near 
Edmonton, Alberta. Our approach calls for laying a 36-inch 
pipeline from the MacKenzie Delta to Edmonton, followed by a 
36-inch line from Prudhoe Bay to the MacKenzie Delta. That 
would be followed by a second 36-inch pipeline up the MacKenzie 
Valley and a second 36-inch pipeline offshore to Prudhoe Bay.
    This approach has great cost and market advantages. Since 
the equipment to construct a 36-inch pipeline is available, 
many mills, including those in the United States and Canada, 
can supply that pipe. Also, the volumes would be staged into 
the market rather than come all at once. This route certainly 
gets away from the Canadian conflict also.
    Well, let us compare the economics and environmental impact 
of the two pipeline options versus the over-the-top route. We 
have a chart that we are putting up. Based on comparative third 
party analysis, the capital construction cost of the ANGTS 
route is in the $10 billion range. It has to go 2140 miles to 
get to Edmonton. The route goes through 900 miles of mountains. 
It also does not traverse any future major exploration 
potential areas. It is supposed to be 48 inches in diameter and 
carry 4 BCF per day.
    The MacKenzie Valley line would be 1,350 miles long and 
would cost $3.5 billion to get to Edmonton. It would be 30 
inches in diameter and carry 1.2 BCF. So together the two 
pipelines cost $13.5 billion and cover some 3,500 miles.
    Our route, the over-the-top route, would be only 1,700 
miles long and would not go through any mountains and would go 
close to or through the future major exploration areas and 
would cost $7.8 billion. About 90 percent of the line would be 
in Canada, where costs are lower and utility corridors and 
pipeline right of ways are in place on a lot of the route.
    The most telling difference in the approaches is the 
producer realization after all transportation costs are 
deducted. This is what really sets the value of the resources. 
In my testimony in front of this committee last September I 
said that the high gas prices at that time would not hold and 
that we need to look at this project in the $2 price range.
    This illustration shows a netback closer to today's price, 
$2.50, which is more like the futures price in Chicago. The 
ANGTS route is clearly uneconomic, with very little to no value 
at the wellhead under this scenario. It would take very large 
subsidies, probably in the $5 or $6 billion range, to make it 
attractive and you would still have the Canadian conflict 
situation. The producer netback in the over-the-top route is in 
the 75 to 90 cents per MCF.
    Now, Alaska's preference towards the ANGTS route is easily 
understood. If all things were equal, it is more desirable 
politically to have the pipeline come down through the State, 
provide gas to Fairbanks, provide more short-term construction 
jobs within Alaska. The problem is that all things just are not 
equal. Two pipelines at twice the cost cannot beat one.
    Also, the State will make about $100 million more per year 
off the taxes and State royalties with the over-the-top route, 
and they will receive the maximum possible value for their 
reserves. That is what will help to create permanent jobs in 
the State and provide a big boost to the Alaskan economy.
    There is a clear choice for the best way to do this project 
and it is the most important energy project that we have in 
North America. One pipeline at half the cost of the alternative 
is the best approach and a political consensus between the 
United States and Canada and eventually Alaska can be achieved. 
It is a truly international project and joint discussions 
between the United States and Canada as to which project should 
be considered, along with what is the best way to get the 
project moving.
    How does the United States benefit? The over-the-top route 
provides the largest supply of natural gas at the lowest cost, 
and it can be the fastest project constructed. It will not be 
shut in periodically due to high tariffs, thereby denying the 
consumers of the much-needed gas, and the U.S. Treasury alone 
should make $5 to $10 billion more in income taxes off that 
route due to the higher value of the reserves.
    We have seen our country come together in the past few 
weeks and I think we can see it come together on this project. 
It is about the future of the United States and Canadian 
economies, and the best answer for the U.S. Senate would be not 
to take any actions that would artificially limit U.S. support 
of this project. I feel Canada will play a pivotal role in the 
decision and I am sure they would find that kind of action 
either puzzling or threatening.
    We fought this same battle 25 years ago and did not get a 
project built, and we cannot afford to do that again. Mr. 
Chairman, we are only asking for a fair playing field, a 
provision to speed up the regulatory and review process, and 
the equivalent of any economic support that might be offered to 
any other pipeline.
    Thank you.
    [The prepared statement of Mr. Hoglund follows:]

  Prepared Statement of Forrest Hoglund, Chairman and Chief Executive 
                   Officer, Arctic Resources Company

    Mr. Chairman, Members of the Committee:
    I am here representing Arctic Resources Company (ARC), a special 
purpose company formed to develop and build a natural gas pipeline 
connecting the natural gas reserves of the North Slope of Alaska and 
the Canadian Northwest Territories for delivery to Canada and the lower 
48 states. The route we are proposing is the shortest, fastest and most 
economic option. This route, which is often referred to as the ``Over-
the-Top'' route, will also tap into the enormous future reserve 
potential of Alaska and the Canadian Arctic, and is the most 
environmentally responsible route to achieve that objective.
    I understand from your letter of invitation, Mr. Chairman, that the 
purpose of this hearing is to receive testimony on the status of 
proposals for the transportation of natural gas from Alaska and on 
legislation that may be required to expedite the construction of a 
pipeline from Alaska. I will provide the Committee with a status report 
on our project; but first, let me address the second expressed purpose 
of this hearing.
    To expedite the construction of a natural gas pipeline from Alaska, 
I suggest that Congress pass legislation to set timetables for 
regulatory and environmental approvals and consider legislation for a 
government guarantee of debt to allow for additional capacity to be 
built and to give incentives for producers to commit their gas to the 
project. I firmly believe that we can complete the ``Over-the-Top'' 
route without either of these actions; but, that type of legislation 
would undoubtedly speed the process and lower the risks of the project.
    ARC does not need subsidies or tax breaks to implement the northern 
gas pipeline project. We need more than legislation from Washington. 
What we need and what the country needs is for government to let the 
markets work and allow the natural gas and associated industries in 
Alaska, Canada and the lower-48 United States to develop the pipeline 
project in an economically rational manner. We need those who would 
mandate routes to stand down from their efforts, and instead, focus on 
providing a clear opportunity for expeditious permitting of the most 
cost effective route.
    Current market conditions should foster the expeditious development 
of an economic pipeline. We believe that the market will support the 
development of the ``Over-the-Top'' route and that route can fulfill 
the needs of Alaskans, the needs of our Canadian neighbors, and help 
meet the growing natural gas demand in the lower-48. To be successful 
however, the U.S. and Canada must work closely together. The two 
governments must be committed to the lowest cost system and accessing 
the largest supply base. Government decision-makers and business, 
civic, social and environmental leaders must not limit their 
perspective to a 25-year-old, second best answer. We must be open to 
consideration of a third party consortium of interested parties to 
oversee the project in order to overcome the many real and imagined 
challenges to this project.
    As you will see in my testimony, we have been working hard in the 
development of our project to take into consideration the interests of 
every U.S. energy consumer, every U.S. taxpayer, the economic interests 
of Alaskan citizens and the State of Alaska, the interests of our 
Canadian neighbors, the interests of non-governmental organizations 
that are concerned with social and environmental issues, and even the 
interests of natural gas producers at Prudhoe Bay and in northern 
Canada. I realize that some of these interested parties may have some 
questions about our efforts, but I urge each of you to give the ``Over-
the-Top'' route the opportunity to succeed. It is the only route that 
is economically viable in the foreseeable future.
    How important is the project? The reserves are enormous and 
constitute the only major proven new supply of natural gas that has a 
chance of growing our natural gas supply. Let's look at the numbers: 
proven reserves of 35 Tcf on Alaska's North Slope and up to 9 Tcf in 
the Mackenzie Delta region of Canada. That gas was found roughly 30 
years ago looking for oil. The exploration potential for each area is 
very large: 100 Tcf in Alaska and 60 Tcf in Canada.
    [Chart 1] *
---------------------------------------------------------------------------
    * The charts have been retained in committee files.
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    How can we tap that potential? The most economic pipeline system 
must be built. The lower the cost of the system, the more natural gas 
will be found and produced. The ``Over-the-Top'' pipeline is today the 
only pipeline project that is economic. This is the most important 
energy project that we know of to supply significantly larger volumes 
of clean-burning natural gas within the next 7 to 15 years. Without 
these new sources, the U.S. economy will most likely have to endure 
short supplies of natural gas and rely on coal, imported oil and LNG to 
meet new demand. I have often likened the importance of this project, 
the first transportation system for Arctic natural gas, to the first 
railroad built to California for the U.S. or to the West Coast for the 
Canadians. Let's look at the options.

Two-Pipeline Option
    [Chart 2]
    You will hear a lot today about the currently preferred route of 
the State of Alaska, the Alaska Natural Gas Transportation System 
(ANGTS). That system parallels the Alyeska oil pipeline right-of-way to 
Fairbanks then follows the Alaska Highway to northeastern British 
Columbia. That is not far enough to get to the main hub of existing gas 
pipelines for take-away capacity, so it will need to extend to 
interconnects near Edmonton, Alberta. One of the main problems of the 
ANGTS route is that a second pipeline will be needed to tie in the 
Canadian reserves. This immediately creates conflict between the U.S. 
and Canada. Which line goes first? The first line can lower the value 
of the second line by delaying the need for the gas, possibly for a 
very long time. The Alaskans have always assumed that their line would 
go first, but think about this--approximately two-thirds of their line 
goes through Canada and you can be assured that Canada will have the 
ultimate say in which line goes first. It is hard to imagine our 
Northern friends making a decision that would lower the value of their 
own natural resources.

``Over-the-Top'' Route
    Now let's look at the best solution. That is the one pipeline 
solution, the so-called ``Over-the-Top'' route, or as we refer to it as 
the Northern Gas Pipeline Project (NGPP). This one pipeline solution 
enables both Prudhoe Bay gas and Canadian Arctic (NWT, Yukon and 
Nunavut) gas to be tapped. The line goes from Prudhoe Bay, offshore 
[Chart 3] to the Mackenzie Delta, and then up the Mackenzie Valley to 
the pipeline interconnects near Edmonton, Alberta. Our approach calls 
for a phased implementation of the project. In Phase 1 we would lay an 
initial 36-inch pipeline from Edmonton, Alberta north to the reserves 
in the Mackenzie Delta. In Phase 2 we would extend the initial 36-inch 
line over to the Prudhoe Bay unit allowing staging of the volumes into 
the markets. That would be followed by Phase 3--a second 36-inch 
pipeline from Edmonton up the Mackenzie Valley. In Phase 4 we would lay 
a second 36-inch line over to the Prudhoe Bay unit, allowing for a full 
deliverable capacity of 4 BCFD. This would be an open-access line with 
spare capacity for the volumes from new exploration finds. This project 
has great cost, supply reliability and market advantages, since 
materials, equipment and construction services are available to 
construct 36-inch pipelines and many pipe mills, including mills in 
Canada and the U.S., can supply this size of pipe.

Economics
    Let's compare the economics and environmental impact of the two-
pipeline option versus the ``Over-the-Top'' route, using released or 
third party numbers.
    [Chart 4]
    The capital construction cost of the ANGTS route is estimated at 
$10 billion and it is 2,140 miles long from Prudhoe Bay to 
interconnects near Edmonton and crosses approximately 900 miles of 
pristine mountains. Furthermore, it does not go through the major 
future exploration potential areas. Current industry proposals suggest 
a pipeline 48 inches in diameter carrying 4.0 BCFD. The associated and 
necessary Mackenzie Valley only line would be an additional 1,350 miles 
long with an added cost of $3.5 billion to get to pipeline 
interconnections near Edmonton. It would have a diameter of 30 inches 
with a design capacity of 1.6 BCFD. Together, the two pipeline projects 
would cost $13.5 billion and would have a combined length of 3,500 
miles, leaving two environmental footprints.
    The ``Over-the-Top'' route would be approximately 1,700 miles 
long--approximately 350 miles offshore and 1350 miles onshore--and 
would not cross any mountains. Furthermore, it would go close to or 
through all present and future exploration areas in the regions. 
Approximately 90% of the line would be in Canada.
    The most telling difference in the two approaches is how much of 
the eventual proceeds will be available to the producer. That is 
defined as the wellhead netback, proceeds after all transportation 
costs are deducted. In my testimony before this Committee last October, 
I said that the high gas prices of that time would not hold and that 
the project needed to be looked at in a $2.00/Mcf price environment. 
Illustration No. 4 shows the wellhead netbacks at today's futures price 
that are closer to $2.50/Mcf in Chicago. Spot prices have slumped even 
further in recent weeks. The ANGTS route is clearly uneconomical, as is 
the Mackenzie only pipeline, with essentially no wellhead netback. It 
would take very large subsidies--perhaps $5 to $6 billion--to make the 
two pipeline approach work financially. And, you still have the 
Canadian conflict situation and there remains a higher chance of cost 
overruns. It has been estimated that if both of the pipelines were to 
be constructed at the same time, construction costs would be 20% to 30% 
higher due to lack of construction resources, materials and equipment. 
The bottom line: economics do matter and they point overwhelmingly to 
``Over-the-Top''.

Alaska's Situation
    Alaska's preference of the ANGTS route is easily understood. If all 
things were equal, it is clearly more desirable to have the pipeline 
come through the state, provide gas to Fairbanks and other communities 
along the Alaska highway, and possibly even to Anchorage some day, and 
to provide more short-term construction jobs in Alaska. The problem, 
though, is that all things are not equal. Alaska is pushing for a 
system that is uneconomical, will require two pipelines to be built, 
and creates conflict with Canada, where approximately two-thirds of 
their pipeline and additional takeaway capacity lines must be approved 
by and go through that nation. I do not believe Canada will approve the 
ANGTS route, lower the value of Canadian reserves and require the 
construction of a second line to deliver the Mackenzie Valley gas to 
market.
    I cannot understand why Alaska desires to trade short-term 
economics when it knows that at today's prices, it will make about $100 
million or more per year off of higher taxes and state royalties with 
the ``Over-the-Top'' route. The ``Over-the-Top'' will enable the State 
to receive the maximum possible value for their existing and future 
reserves. That should be the overriding objective of the State of 
Alaska.
    It is quite clear to us that the one pipeline approach is the best 
on all counts. We have noticed that Alaska has tried to use its 
Congressional political muscle to outlaw the ``Over-the-Top'' route, 
but that may work against them in the end and U.S. consumers and the 
citizens of Alaska will suffer as a result.
The Myths of ``Over-the Top''
    The major myths associated with the ``Over-the-Top'' route fit in 
the following categories:
    First Myth: Arctic offshore construction is unproven and risky 
environmentally.
    There are currently offshore pipelines in similar environments, and 
more recently off Prudhoe Bay, and no major construction companies or 
major oil companies have said it is not feasible. Canada already has 
regulations in place for pipelines of this nature. The present design 
calls for the pipeline to be buried approximately 15 feet below the 
ocean floor. Historical ice scour data for the proposed area of 
construction is in the 1 to 2 foot range. This will be a conditioned 
natural gas pipeline. If a leak or rupture ever occurred, the gas would 
vaporize into the air and would not leave a spill like an oil pipeline. 
It is important to note that with current metallurgical and pipeline 
test standards, it is unlikely that a pipeline carrying conditioned 
natural gas would suffer such a structural failure.
    The real environmental problems lie with the two-pipeline approach. 
Two environmental footprints, scarring of 3,000 miles versus 1,700 
miles, while also scarring 900 miles of mountains, rather than a single 
purpose pipeline from Prudhoe Bay up the Mackenzie Valley, would occur 
with this approach. The major environmental problem is not getting the 
gas to flow due to economics, thereby requiring the U.S. to use more 
coal and imported oil rather than clean-burning natural gas.
    Second Myth: It will hurt the whaling industry.
    Migratory Bowhead whales pass through this area twice each year. 
Present construction methodology has the offshore portion of the 
pipeline being laid during the winter and summer seasons. When summer 
construction is carried out, it would be scheduled around whale 
migration and other wildlife or subsistence issues. The line would be 
buried below the ocean floor, with no surface structures to impede the 
movements of the whales or other mammals in the area. Once laid, the 
pipeline is out of sight and out of mind.
    Third Myth: The pipeline is a step toward opening up ANWR for 
drilling.
    This project has no bearing on the ANWR question. One is either in 
favor of or against the development of ANWR. This pipeline project is 
designed to connect existing Prudhoe Bay reserves and related future 
exploration areas where leases are available.
    Fourth Myth: Existing regulatory and international agreements 
prohibit the ``Over-the-Top'' route.
    The Federal Energy Regulatory Commission and the Department of 
Energy have testified that that is not true.
How To Do the Project
    The real question is not which route. The real question, I believe, 
is what is the best way to get the project built? There are basically 
two approaches, the ARC approach or a project led by the major oil 
companies. Let me first discuss the ARC approach.
    Twenty-five years ago, the same two routes were considered. The 
industry fought for 3 years and spent around $750 million in this 
effort. The major oil companies wanted an ``Over-the-Top'' onshore 
route similar to the ``Over-the-Top'' offshore route, but the Canadian 
Government placed a ten-year moratorium on pipelines up the Mackenzie 
Valley and blocked it, due to unsettled Aboriginal land claims. I was 
Vice President of Natural Gas for Exxon at that time and in that effort 
learned a lot about how not to get projects done.
    ARC at this time is the only company sponsoring the ``Over-the-
Top'' route. Our approach is twofold: create the most economical 
project, and eliminate as many roadblocks as possible. We know this 
approach is not conventional, and do not expect to get the immediate 
support of the major reserve holders. However, it is the best way to do 
the project. The 4 main features of our proposal are: (Chart 5)
    1. The best route--best economics. This feature has been covered.
    2. Significant Northern Canadian Aboriginal ownership. This is 
perhaps one of the most controversial parts, but we consider it very 
important. The Northern Canadian Aboriginals own part of the lands 
through settlement of their land claims with Canada and they are in a 
position to help the project considerably. We wanted to include them up 
front and in a meaningful and significant way. They have formed a 100% 
Aboriginal owned Pipeline Company, which is named Northern Route Gas 
Pipeline Corporation (NRGPC). This company would issue the debt for the 
pipeline. Arctic Resources Company (which is planned to be a consortium 
of the founders, the major reserve holders, the major gas customers, 
and the Aboriginal for profit groups, pipeline companies, NGO's and 
other interested parties) through its Canadian affiliate, ArcticGas 
Resources Corp., would be the program manager for NRGPC. ARC would 
oversee the project development, financing, engineering, construction, 
and ongoing operations; and would be in place to manage the repayment 
of the bond obligations.
    3. Our financing concept is to use municipal type, taxable, non-
recourse revenue bonds, with the revenue stream guaranteed by shippers 
throughput agreements at a negotiated toll level agreed to by U.S. and 
Canadian regulatory authorities. This is very similar to many 
infrastructure projects in place today. Some examples are toll ways, 
stadiums and airports. This will be 100% debt financed and by not 
having the more costly equity component, the project is able to pay the 
Aboriginal landowners sufficient land use fees and still keep the 
overall toll low. This approach is the best way to eliminate roadblocks 
and keep the lowest toll possible. It has the added benefit of creating 
a revenue stream for the Aboriginals that will end up helping their 
progress dramatically. The same type of approach can be used in Alaska, 
also.
    4. The major oil companies have said on several occasions that this 
is a world-class project and a world-class company is needed to run it. 
Once they and others join the consortium, ARC will truly become a 
world-class company and a world-class international consortium. In the 
meantime, we are telling our story, gathering Aboriginal support, and 
preparing to file our project with the NEB in Canada.
Summary
    There is only one clear choice for the best way to do this project 
the most important energy project of this new century for North 
America. (One pipeline at half the cost is the best approach.) (Say 
this upfront also.) A political consensus between the U.S. and Canada, 
and eventually Alaska, can be achieved. It is truly an international 
project and we believe that joint discussions between the U.S. and 
Canada as to the best project, and the best way to get it approved, 
should be encouraged. The ``Over-the-Top'' route provides U.S. 
consumers with the opportunity to benefit from the largest supply of 
natural gas from both Alaska and Canada. It can be the fastest project 
because it will not be shut in due to high tariffs as gas prices fall. 
Additionally, the U.S. will make at least $5 to $10 billion more on 
income taxes. Alaska will also benefit by $100 million or more per year 
for the same reason.
    We have seen our country come together in the past few weeks after 
a terrorist attack and we should see it come together with our Northern 
ally on this project. This is about the economic future of the U.S. and 
Canada. It is about the best answer for U.S. and Canadian gas consumers 
and taxpayers. We ask that the U.S. Senate not take any actions that 
would artificially limit our options for delivering Alaskan and 
Canadian natural gas to market. The recent adoption by the House of 
Representatives of an amendment prohibiting a ``certain pipeline 
route'' in the Saving America's Future Energy Act (SAFE Act), H.R. 
4,was an affront to our neighbor Canada and, if ultimately enacted, a 
financial roadblock to the delivery of Arctic natural gas to U.S. 
markets.
    We are only asking for a fair playing field, a provision to speed 
up the regulatory and review process and the equivalence of any 
economic support that might be offered to any other project. The U.S., 
Canada and Alaska will all benefit from the most economic project that 
will provide for the greatest exploration incentive for new reserves.

    Senator Murkowski. Thank you very much. I appreciate that 
statement, Mr. Hoglund.
    Mr. Keith Bailey, we appreciate your participation and the 
fact that you have come down on relatively short notice, and, 
hopefully, having sat through this process, you have either 
reaffirmed or testimony or changed it. So please proceed.

            STATEMENT OF KEITH E. BAILEY, CHAIRMAN, 
                     THE WILLIAMS COMPANIES

    Mr. Bailey. Well, I will try to be brief in my oral 
comments and appreciate the fact that the pretrial testimony 
will be incorporated in the record.
    Senator Murkowski. Without objection.
    Mr. Bailey. Obviously, in light of the hour and the fact 
that much of what can be said has been said, I am going to try 
also not to retrace too much of the path that we have been 
around.
    Williams certainly is not at odds with the producer point 
of view that whatever answer comes out of this, if the private 
sector is going to be involved, will have to be market-driven, 
it has to meet the economic tests that stimulate the capital 
investment necessary to build the facilities. But our bottom 
line at this point is that we question the need for additional 
legislation. Again, that is at this point in time. Obviously, 
there may come a point in time when some targeted legislation 
would make sense. We simply do not believe that that is now.
    Frankly, when and if that time comes, it would be our hope 
that the legislation is just enough and not too much. I will 
come back to that thought in a moment.
    We also believe that as a practical matter, for all of the 
reasons that have been recited today, the original ANGTS route 
is the one and the only one that is being considered which 
offers as a practical matter a timetable that has the potential 
for completion to have gas in the lower 48 when it is needed to 
sustain the country's economic growth.
    Finally, we would urge caution in consideration of any 
legislation that is prescriptive in nature as to the sourcing 
of either materials or labor.
    I want to flush out each of these thoughts. You have heard 
the producers talk about their preliminary assessment that 
indicated that, based on current estimates, the pipeline would 
only return a 10 to 11 percent return, which from their 
perspective was inadequate economic incentive to move forward 
on the project, and if at the end of the day that in fact is 
the sort of return being offered we would share their view.
    But what they did not say, but what I suspect they would 
conclude, is that if those expected returns were in the 13 to 
14 percent range that the conclusion that they reached would be 
the same, simply because the rates of return that companies 
like Phillips and Exxon and BP look for typically are in the 
high teens.
    But for those of us in the regulated gas pipeline business, 
returns at or slightly below 15 percent can be acceptable so 
long as we have appropriate balancing of the risk and the 
project structure, and that is what we would be working to 
achieve in meeting that market-based test.
    So it would seem to us to make sense to concentrate on a 
route that already enjoys the support of a broad spectrum of 
the pipeline community, simply because much of the investment 
we believe will need to come from the pipeline community 
because of the economic realities of the project. Again, that 
project is the original ANGTS route.
    There is a second reason, and again it has been talked 
about to some degree today, to a lot of degree today: because 
much of the time-consuming preliminary work with regard to 
permitting and siting the pipeline route has already been done 
and, while some of that may need to be refreshed, I think it is 
clear from the testimony today and from some of the material 
you shared with the committee, that the ability to do that, 
whatever the difference, is substantial with regard to time and 
it is likely to be measured in years instead of months from any 
other route versus the one that is already permitted and sited.
    We also believe time is of the essence. Our analysis 
suggests that Alaskan gas will be needed and it will be needed 
along with an expanded LNG import capability to meet the needs 
of our economy this decade, and that is even if the exploration 
and development of the remaining growth basins in the United 
States and in Canada fully live up to their promise. Again, we 
recognize that the economy has a very strong linkage in the 
scale of the economy to energy consumption. It is much easier 
to look at the physical demand and look at the balance of that 
equation than it is to look at the price volatility. It is that 
physical requirement that we base our judgment on.
    Finally, we suggest that the committee be very cautious 
about prescriptive legislation regarding the sourcing of 
materials and labor, because this style of legislation risks 
potential litigation by those what want to use it for their 
particular advantage and that sort of litigation results in 
both delays and cost increases, neither of which are a luxury 
that this project is going to be able to afford.
    Remember, then, the sheer magnitude. As earlier witnesses 
pointed out, this project will consume, I have heard one 
estimate that it will consume the world's steelmaking capacity 
for a full year, and that there are only a small handful of 
manufacturers who can produce either the type of steel or the 
diameter of pipe that the producers' studies have suggested are 
most economic, and none of those are currently in North 
America.
    It is clear that a lot of pieces do need to come together. 
There is little margin for error and in the best of cases all 
the participants are going to need to move forward in good 
faith and at the outside limit of their risk tolerance. I do 
not think this can become something that has multiple 
objectives and that you begin hanging Christmas tree ornaments 
on, because it could easily collapse of its own weight.
    We ought to have one objective. That is to move Alaskan gas 
to the lower 48 in the most economic way possible, and we are 
in support of that and we believe that that can be 
accomplished. We believe that the most likely way it will be 
accomplished is through a renewal and a reemergence of the 
original ANGTS project.
    Thank you.
    [The prepared statement of Mr. Bailey follows:]

Prepared Statement of Keith E. Bailey, Chairman, The Williams Companies

    Williams appreciates the opportunity to submit comments for the 
hearing record in the Committee's consideration of Alaska natural gas 
pipeline issues. We believe it is imperative that industry, government, 
and other affected parties work together to make the long-discussed 
Alaskan natural gas pipeline system a reality.

Summary
    Williams and its predecessors have been involved in the effort to 
make the Alaskan natural gas pipeline a reality since the 1970s. Based 
on our experience, it will require the cooperation of all interested 
parties--industry and government--to accomplish this goal. Williams was 
instrumental in developing the Alaska Natural Gas Transportation System 
(ANGTS) project, serving as the U.S. lead for that project until the 
mid 1990s. Williams believes that the framework created by the Alaska 
Natural Gas Transportation Act (ANGTA) still offers the best hope for 
developing a successful project and doing so in the least amount of 
time. We urge the Committee to preserve the ANGTA framework and to give 
the parties involved the opportunity to move forward under it prior to 
considering any additional legislation.

Introduction
    Williams is a diversified, asset-based energy company active in 
most aspects of the petroleum and natural gas industries. We are a 
transporter, gatherer and processor, refiner, producer, retailer, and 
marketer of natural gas and petroleum products and ethanol. Over the 
last 15 years, Williams has had more experience building large 
diameter, cross-country pipelines than any other company in North 
America. We are currently constructing the Gulfstream pipeline, the 
first deepwater, long haul transmission pipeline in North America. In 
fact, we believe this $1.6 billion project is the largest energy 
infrastructure project under development in the country.
    In addition, Williams has a large presence in Alaska. Williams owns 
and operates the largest refinery in the State, located near Fairbanks, 
and supplies much of the jet fuel and other petroleum products consumed 
in the State. We also own a small percentage of the Trans-Alaska oil 
pipeline system. We have approximately 500 employees and assets of 
approximately $500 million in the State. We understand what it takes to 
build and operate energy facilities in a northern climate. In addition, 
we have a substantial presence in the natural gas transportation and 
natural gas liquids industries in Canada, allowing us to understand the 
Canadian perspective on the gas pipeline.

Background
    Williams and its predecessors have been deeply involved in the 
Alaska natural gas pipeline project since it was first conceived in the 
1970s. A subsidiary of Williams, Northwest Pipeline, led the 
development of the Alaska Natural Gas Transportation System (ANGTS) 
proposal that was selected, pursuant to the Alaska Natural Gas 
Transportation Act (ANGTA) of 1976, as the project to receive expedited 
regulatory approval. At its peak, Williams had more than 750 people 
working on the project. Frankly, we believe Williams knows more about 
the Alaska Highway route, particularly the Alaska portion, than any 
other company in the industry.
    The collapse of natural gas prices in the wake of deregulation in 
the early 1980s was good for consumers, but it also rendered the 
Alaskan natural gas pipeline project uneconomic and it languished for 
many years. However, advances in technology, growing natural gas demand 
and a stronger price outlook for natural gas are again combining to 
make a project feasible. In fact, it is Williams' opinion that Arctic 
supply will be needed during this decade in order to satisfy North 
American demand for natural gas. The North Slope producers have 
initiated new studies of various alternatives and project sponsors are 
updating their analyses. At Williams, we have activated our Arctic gas 
project team, with representation across North America. We have 
initiated a number of studies to update project economics and to 
identify unique value-added project opportunities. We have also 
participated in numerous meetings with the producer group, other 
pipeline companies, U.S. and Canadian Federal governments, provinces, 
territories, the State of Alaska, and native communities in an effort 
to advance an Arctic gas pipeline project.

ANGTA
    In Williams' view, the framework established by ANGTA, and the 
Alaska Natural Gas Transportation System (ANGTS), that was designated 
as the preferred alternative under the ANGTA process, still represents 
the best path forward for building an Arctic gas pipeline. Although 
there are a number of commercial issues associated with the ANGTS, 
including the status of withdrawn partners, that must be addressed, the 
parties involved have recently initiated discussions aimed at resolving 
these issues. We believe that prior to undertaking the passage of 
additional legislation these parties should be given an adequate 
opportunity to revive the partnership and allow the ANGTS project to 
move forward. If that effort fails, Congress can still act to allow 
alternative projects if that is deemed appropriate or necessary, and 
little time will have been lost. We have concluded that the ANGTS 
option, and particularly the Alaska Highway route, represents the most 
promising alternative for several reasons:

   The ANGTS route, the Alaska highway route, is known.

    The Arctic pipeline project will be the largest, most complex 
pipeline project ever undertaken in North America and, consequently, 
the issues it will face are significant. The highway route has been 
studied extensively and is well understood. Utilizing the knowledge 
gained and the work previously done on the ANGTS route makes good 
business sense and, in our opinion, good public policy. In our view, 
any successful project must follow this route if it is to be built this 
decade, or for that matter, ever.

   The highway route has overwhelming political support.

    No Arctic pipeline will be built without the support of both U.S. 
and Canadian governmental authorities. To radically change the route 
will, at a minimum, delay the project potentially for years. Certainly 
Alaskans have made it abundantly clear that the highway route is 
preferred.

   The ANGTS project has obtained some of the required permits.

    Although updating some of the ANGTS permits will be necessary, a 
new project would require much greater regulatory review and 
consideration, a process that could cause considerable delay, even 
under an ``expedited'' review process.

   The highway route provides greater flexibility and 
        opportunity for complimentary projects in Alaska.

    The amount of gas and possibly gas liquids flowing through a gas 
pipeline down the Alaska Highway would provide an opportunity for 
further economic development in the State of Alaska. Whereas a gas-to-
liquids project or LNG export project likely do not make commercial 
sense on a stand-alone basis, these and others may make sense as a 
compliment to the main gas pipeline through the State. Further, 
communities along the route could potentially benefit through access to 
their State's natural gas, an option they have not previously had. It 
would be unwise to choose a route that eliminated this flexibility, for 
it is highly unlikely that two pipelines originating from the Alaska 
North Slope will ever be built.

   The highway route allows for the potential development of a 
        synergistic petrochemical industry in Alaska.

    Demand growth for olefins and polyolefins is strong. We think it is 
possible to build a gas processing facility near Fairbanks, along with 
an ethane cracker and a polyethylene plant. This would allow the 
shipment of polyethylene pellets to Anchorage via the Alaskan railroad 
for export to world markets. It would also facilitate the development 
of additional natural gas infrastructure in the State. There is more 
that needs to be known before we can conclude that such a development 
is economically feasible. World petrochemical markets are competitive, 
costs tend to be higher in Alaska, and the ultimate composition of the 
gas will affect the economics of any such project. Williams has such a 
review well underway, but even if this option isn't feasible today, 
following the highway route will keep it as an option for the future. 
If another route is chosen, this option is lost forever.

Next Steps
    Although we believe the ANGTS project offers the most immediate 
chance of success, it is not without challenges. The relative costs of 
a pipeline along the Alaska Highway route compared to one following an 
over-the-top route are still unknown, and producers have a legitimate 
interest in trying to obtain the highest price for their gas as is 
possible. Also, while certain commercial issues with the long dormant 
ANGTS partnership have to be resolved, Williams is optimistic that 
these issues can be resolved, and in a reasonable timeframe.
    We believe the Federal government can and should help facilitate 
the development of an Arctic gas pipeline, for it is clearly in the 
national interest to see this project become a reality. The State of 
Alaska has stepped up its activity in this regard within the last year, 
and we hope the Department of Energy will want to help facilitate a 
resolution. Indeed, hearings such as this reinforce our awareness that 
Congress is interested in seeing this process move forward, and that is 
helpful.
    Some have suggested that Congress should pass new legislation that 
would make expedited regulatory approval available to other projects 
that might be proposed. We believe this is premature. ANGTA was 
developed through an extensive process that took into account the 
various interests of all of the parties involved, and the basic facts 
that led to the creation of ANGTA have not fundamentally changed. If 
all parties work together we believe that the ANGTS project can 
successfully be developed under the existing ANGTA framework. Recently 
discussions among the various parties with an interest in the project 
have accelerated in an attempt to resolve outstanding issues and move 
the project forward. While the commercial interests of the companies 
involved will inevitably create the normal tensions that exist in any 
such negotiation, the ANGTS framework establishes a set of parameters 
within which we can all operate, allowing market forces to work, but on 
an expedited basis.
    In our view, if the Committee desires to aid the process, the 
better approach at this point would be to reaffirm that the ANGTA 
framework is still operable and to encourage all involved to reach 
agreement. If such an agreement should require additional governmental 
action to update or augment ANGTA, then that would be an appropriate 
time for legislation.
    If the parties are unable to reach agreement and it becomes clear 
that no project can be built under the ANGTA framework, then Congress 
should evaluate other options and act accordingly.

Conclusion
    The dream of an Alaskan natural gas pipeline is once again alive 
and much work is being undertaken to make that dream a reality. For 
that to happen, the interests of many parties will need to coalesce 
around a single project, perhaps a project that no one party believes 
is ideal from its perspective. When the Federal Power Commission and 
President Carter selected the ANGTS project as the designated project 
under ANGTA, they reached conclusions that are still valid today. The 
United States government and the Canadian government have worked 
together to make the project possible. What is needed now is time and 
support for the various parties to work together toward commercial 
arrangements that will make this project a reality.

    Senator Murkowski. Thank you very much.
    I will be very brief, because we have been at this since 10 
o'clock. Mr. Aron and Mr. Heyworth, your presentations are 
appreciated, and the CSX effort has been long under way and it 
continues to be a consideration, and obviously it is directed 
at the export market and the export market has been evaluated 
relative to what it would cost to develop the CSX liquification 
at Valdez and export it into primarily the markets of Asia and 
found to be a continuing potential. But the reality of signing 
contracts has always been one subject to the economics of that, 
as opposed to Mr. Heyworth's proposal that this gas be utilized 
in the United States in the form of LNG, which presents us with 
the difficulty of permitting LNG terminals in the United 
States.
    It is not an impossible process, but it is not an easy 
process, either. That of course is competing with foreign gas 
potentially coming into the United States that enjoys the 
exemption of not having to comply with the Jones Act.
    I thought it was reassuring, the testimony we had from 
Foothills relative to clarification of the status on contingent 
liability, and I want to compliment you on that. Your 
reflection from time to time on the potential litigation if the 
project does not come your way, I will leave the lawyers to 
speculate because that is kind of outside our jurisdiction.
    With regard to statements I made previously, though, I want 
to clarify. When I said I was going to recommend to the 
majority that we proceed with legislation, it would not be--it 
would not in any way diminish the status of the Foothills 
permits that are in existence now and coordinated by the 
Canadian government as proposed by former President Carter. I 
would see the necessity of moving in an effort to expedite 
permitting and judicial review, pipeline directors and so 
forth.
    But I am not suggesting by any means that the legislation 
as proposed, which would put the producers basically in the 
same position as Foothills as far as expediting permitting, is 
necessarily an appropriate function of this committee until 
such time as we have an economically viable project and/or an 
application, because it kind of puts this committee in the 
position of potentially, potentially, eliminating one of the 
participants. That is my current reading, at least.
    I also want to--I hope I do not get too many questions on 
what that means. But I also want to recognize Mr. Hoglund's 
statement. I believe that your interest is in promoting the 
project, as opposed to having any Canadian Arctic gas; is that 
correct?
    Mr. Hoglund. Right.
    Senator Murkowski. Finally, Mr. Bailey, in your testimony, 
which I did read--and I did read all your testimonies last 
night--you proposed the feasibility potential of taking gas 
liquids out in Alaska and marketing them in the markets of the 
Pacific Rim. Could you elaborate a little more on that 
potential? Is that an economically viable prospect in your 
opinion? You folks are in the business of refining and pipeline 
and gas liquids and a lot of things.
    Mr. Bailey. Well, one of the issues you ultimately need to 
deal with is converting the wellhead gas into pipeline quality 
gas. You can certainly build systems that run a wet gas system 
and take it over long distances, as Alliance pipeline recently 
demonstrated. But it is more expensive and it does affect the 
economics.
    Our thought had been that, with the ANGTS route or an 
Alaskan route that you have the ability at any point across 
Alaska of treating and processing the gas, and at the point 
that that occurs it represents some additional potential, we 
believe, for petrochemical development, which again would seem 
to be consistent with some of the economic development goals of 
the State.
    Senator Murkowski. Does that complement your refinery 
operation to some extent or could it?
    Mr. Bailey. It could be complementary, but it is not 
necessarily. Again, we suggested Fairbanks as the place that it 
would be done because it is an existing complex, towers and 
others already there. But it could be done at other points as 
well.
    Senator Murkowski. I have no further questions.
    Dennis.
    Mr. McConaghy. Yes, I would just like to qualify one point 
from our earlier remarks, which was the nexus between the ANGTS 
and ANGTA legislation and the Canadian treaty, and just to 
emphasize the point that any new legislation would have to 
begin that process again in Canada to coordinate a Canadian 
response to any new legislation.
    Again, I just wanted to emphasize in our record that the 
ANGTS formulation does bind the two countries together and that 
is unique to that formulation. Thank you.
    Senator Murkowski. I want to thank all of you. I think we 
have advanced the process a little bit and I look forward to 
working with the producers and the other interested parties in 
a follow-up here, perhaps not in a formal hearing, but a more 
informal setting.
    I wish you a good day.
    [Whereupon, at 1:55 p.m., the hearing was adjourned.]

                                APPENDIX

              Additional Material Submitted for the Record

                              ----------                              

             Interstate Natural Gas Association of America,
                                Washington, DC, September 25, 2001.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, Dirksen Office 
        Building, Washington, DC.
    Dear Mr. Chairman: I want to thank you in advance for holding a 
hearing regarding construction of an Alaskan natural gas pipeline. We 
believe that tapping the natural gas resources on the Alaskan North 
Slope is key to meeting gas demand anticipated by 2015. For this 
reason, INGAA strongly supports the construction of an Alaskan natural 
gas pipeline that would be able to deliver supplies to the Lower 48 
States before the decade is out.
    The INGAA Foundation recently commissioned a report outlining some 
of the issues involved in the construction of a pipeline from Alaska. I 
ask that the enclosed report, entitled Future Natural Gas Supplies from 
the Alaskan and Canadian Frontier, be made of part of the record of 
your hearing on October 2nd. The report assesses the commercial 
feasibility of a pipeline project to transport natural gas from Alaskan 
and Canadian ``frontier,'' and finds that such a project can be built 
with minimal environmental impact and substantial long-term economic 
benefits to both the frontier region and North America as a whole. 
While the report does not favor or recommend any specific pipeline 
project, INGAA does believe that routing issues should be resolved as 
soon as possible so that construction can begin.
    The INGAA Foundation report finds that proven frontier natural gas 
reserves represent more than 10 percent of the North American natural 
gas reserve base of 375 Trillion cubic feet, a proportionately greater 
amount than the Alaskan oil reserve base that existed when the 
TransAlaska Oil Pipeline was built in the 1970s. Any ``frontier'' 
pipeline project remains viable with prices at between, $3 and $4 per 
million Btu (MMBtu) delivered into Chicago, the report says. Assuming 
timely approval, frontier gas could be flowing into the North American 
natural gas grid by 2007.
    One key point raised in the report is the need for additional 
pipeline capacity beyond just building an arctic frontier pipeline. Any 
such pipeline would have to interconnect with existing systems in 
Alberta. These existing pipelines, however, are already operating at 
levels close to maximum capacity. Therefore, thousands of miles of 
additional pipeline capacity within Canada and United States will need 
to be constructed so that natural gas delivered through a new pipeline 
can flow beyond its terminus in Alberta, and into major U.S. markets.
    Please let me know if you have any questions. Thank you for the 
opportunity to make this report a part of the October 2nd hearing 
record.
            Respectfully,
                                       Jerald V. Halvorsen,
                                                         President.
                                 ______
                                 
                      Northern Alaska Environmental Center,
                                 Fairbanks, AK, September 27, 2001.

    Dear Senator Bingaman: On behalf of the Northern Alaska 
Environmental Center, I would like to submit these comments as written 
testimony for the Senate Energy and Natural Resources Committee's 
hearing on natural gas. The Northern Center is a non-profit 
environmental organization, based in Fairbanks, whose mission is to 
protect wilderness, natural habitats, and the quality of life in 
Interior and Arctic Alaska through advocacy and education. The Northern 
Center has been an active participant in discussions regarding the 
development of Alaska's North Slope natural gas--both within the 
Alaskan environmental community and within the Fairbanks Chamber of 
Commerce.
    Below is our statement on natural gas development on Alaska's North 
Slope. Of particular importance to note are (a) our non-opposition to 
natural gas development and transportation--provided certain conditions 
are met; (b) our opposition to any pipeline development in frontier 
areas such as offshore of the Arctic National Wildlife Refuge; and (c) 
our contention that the project go through a new and complete 
Environmental Impact Statement process with no regulatory short cuts in 
the issuance of permits. It is also important to note that we do not 
support any specific pipeline route at this time.
    The Northern Alaska Environmental Center believes that the United 
States, as a member of the world community, must aggressively reduce. 
Its dependency on fossil fuels, through energy conservation, transition 
to cleaner burning fuels, and increased development and use of 
renewable sources of energy. To prompt this transition, the Northern 
Center believes the State of Alaska should adopt an aggressive policy 
of energy conservation standards for new building construction and 
vehicle purchases, and should launch a new program using state funds to 
support rural, alternative energy development, emphasizing renewable 
energy.
    The Northern Center also recognizes that natural gas is a cleaner-
burning fuel than are others used in the Fairbanks area and in many 
parts of the world. As such, the Northern Center considers natural gas 
a transitional fuel source in the move toward reduced and more 
conservative use of fossil fuels in favor of renewable energy 
resources.
    The Northern Center recognizes that energy is a strategic resource, 
required by all Alaskans and essential to their physical and economic 
well-being. With this consideration, the Northern Center believes the 
development of North Slope natural gas reserves to be a reasonable 
certainty. However, unplanned and poorly conceived development, as 
abetted by comparatively low energy prices, can cause significant long-
term environmental, economic and health damage, particularly for the 
pollutant-prone Fairbanks bowl and the fragile interior Alaska 
environment. Therefore, the Northern Center wishes to remain as 
involved as possible in the public debate and dialogue on natural gas 
and its impacts on the Alaskan and Fairbanks North Star Borough 
environs and seeks to participate and provide assistance throughout the 
process of permitting and construction.
    If Alaska's proven North Slope natural gas reserves are developed, 
the Northern Center believes the following conditions must be met:

   Any project must minimize deleterious impacts on local 
        communities and traditional lifestyles and respect the basic 
        human right to a clean, safe, and healthy environment.
   The pipeline should remain as close as possible to present 
        utility corridors (excluding RS 2477 rights-of-way). No 
        pipeline development should traverse wilderness frontier areas 
        including offshore of the Arctic National Wildlife Refuge.
   The State of Alaska should develop a comprehensive energy 
        production and management policy as a precondition to its 
        issuance of a permit for construction of the pipeline.
   The State and federal government should conduct studies that 
        assess all reasonably anticipated impacts accruing from the gas 
        pipeline, including the degree of pressure on the Arctic Refuge 
        that may be expected from the addition of the pipeline to the 
        North Slope.
   The project must go through a new Environmental Impact 
        Statement process. There must be no regulatory short cuts in 
        the issuance of permits.
   Any project must include Best Available Technology and Best 
        Management Practices including, where environmentally 
        appropriate, Seasonal Construction Techniques. (can we provide 
        a citation of reference for these?)
   There must be a permanent, adequately funded, and 
        independent, formal citizen advisory council for the gas and 
        oil pipelines that includes representation by conservation 
        organizations, as well as local citizens, and that reports 
        directly to the Governor.
   The project must escrow sufficient funds for Dismantling, 
        Removal and Restoration (DR&R) of all project facilities and 
        impacts in a way that regulatory agencies can ensure that the 
        original ecosystem characteristics of the corridor have been 
        restored as facilities are taken out of service. This ``return 
        to original condition standard'' and the escrow of DR&R funds 
        must be stipulated in all permits and reviewed in the EIS.
    Thank you for this opportunity to provide comments to your 
committee.
            Sincerely,
                                             Arthur Hussey,
                                                Executive Director.
                                 ______
                                 
                              Alaska Conservation Alliance,
                                 Anchorage, AK, September 28, 2001.
Hon. Jeff Bingaman,
Energy and Natural Resources Committee, Dirksen Senate Office Building, 
        U.S. Senate, Washington, DC.
    Dear Chairman Bingaman: The Alaska Conservation Alliance, on behalf 
of our member groups, wishes to provide this statement of our position 
on the development and transportation of Alaska's North Slope gas for 
consideration in your Committee hearing on Alaska Natural Gas 
Pipelines. The Alaska Conservation Alliance is a statewide coalition of 
conservation groups and businesses representing over 35,000 individual 
members.
    While our complete position statement on this complex issue covers 
a wide and diverse array of issues, the following best sum up our basic 
position:

          We strongly oppose all proposed natural gas lines from 
        Alaska's North Slope that invade frontier wilderness ecosystems 
        with new routes and infrastructure where it presently does not 
        now exist, including the offshore Arctic National Wildlife 
        Refuge or across the Arctic or Yukon Flats National Wildlife 
        Refuges. We are concerned also about impacts on the Porcupine 
        Caribou Herd prime habitat winter range presented by the 
        Dempster lateral route. Further, we support a full public EIS 
        process to examine the environmental impacts of all proposed 
        plans, routes, siting, and stipulations for such projects 
        within the existing established transportation routes.

    You will note that we are strongly opposed to the so-called ``over-
the-top'' route in the Beaufort Sea off the coast of the Arctic 
National Wildlife Refuge. Of the routes currently under active 
consideration, this route has the greatest potential for adverse 
environmental impacts and will be vigorously opposed by the state and 
national environmental communities.
    Also, please note the Alaska Conservation Alliance is not at this 
time supporting any specific gas project or pipeline route, though any 
project must meet all state, federal and Canadian environmental laws as 
well as implement ``best available technology and procedures'' in order 
to minimize environmental, public health, and safety concerns.
    We look forward to providing further input to your committee to 
protect Alaska's environment. We would appreciate this statement being 
included in the formal hearing committee report.
            Sincerely,
                                               Kevin Harun,
                                                Executive Director.
                                 ______
                                 
                                          PG&E Corporation,
                                     Bethesda, MD, October 1, 2001.
Hon. Jeff Bingaman,
Chairman, Senate Committee on Energy and Natural Resources, Washington, 
        DC.
    Dear Mr. Chairman: The Senate Committee on Energy and Natural 
Resources will hold a hearing on October 2, 2001, to look into the 
status of proposals to build a pipeline system accessing the vast 
Alaska natural gas reserves. I understand the committee may also 
discuss the potential for legislation to expedite the construction of 
an Alaskan pipeline.
    PG&E Corporation has a direct interest in the development of the 
Alaska natural gas pipeline system. A subsidiary of the corporation is 
one of the original partners in the Alaska Natural Gas Transportation 
System (ANGTS). Our Pacific Northwest pipeline, Gas Transmission 
Northwest, is the Pre-Build Western Leg for ANGTS that was constructed 
in 1980. The corporation also owns significant pipeline assets in 
California, which connects to the Pacific Northwest system. So, in 
total, PG&E Corporation's pipeline infrastructure will play a critical 
role in delivering Alaskan gas to major markets in the West. It is with 
that role in mind that I would like to provide our views on the issues 
before your committee.
    We believe new legislation is not necessary at this time. The 1976 
Alaska Natural Gas Transportation Act and subsequent regulation provide 
an adequate legislative and regulatory framework for the various 
interested parties to move forward with the development of this 
important infrastructure. In addition, a 1977 agreement between the 
United States and Canada (Agreement Between the United States of 
America and Canada on Principles Applicable to a Northern Natural Gas 
Pipeline, 29 U.S.T. 3581, 1977, T.I.A.S. 9030) is essentially a bond 
with our Canadian neighbors necessary because any delivery of gas to 
the United States requires connecting pipelines in Canada.
    The primary focus today must be the commercial framework for the 
project, not new legislation that revisits issues already decided by 
Congress. To that end, the original ANGTS partners are reinstating the 
partnership. We expect to engage in commercial discussions with 
producers and others as soon as it is practical to establish a business 
framework for moving ahead with the project. We are very concerned that 
additional legislation now, and the regulatory proceedings that follow, 
would impede these business discussions and ultimately delay the Alaska 
gas pipeline project.
    PG&E Corporation is committed to being a part of the effort to move 
the Alaska pipeline project forward. As you know, natural gas is 
produced as a byproduct at fields, like Prudhoe Bay, where there 
already is active oil production. Because infrastructure is not in 
place to transport that natural gas to market, most of it is reinjected 
into the ground. These supplies could produce a reliable domestic 
source for our nation. We need to work together in a timely way to 
create the pipeline system that will enable us to access them.
    I greatly appreciate your interest in this issue. Please feel free 
to contact me with questions or if I can be of assistance at any time 
in the future.
    Thank you.
            Sincerely,
                                            Thomas B. King,
                                             Senior Vice President.
                                 ______
                                 
          Association of ANCSA Regional Corporation
                                   Presidents & CEOs, Inc.,
                                    Anchorage, AK, October 2, 2001.
Hon. Jeff Bingaman,
Committee on Energy and Natural Resources, U.S. Senate, Washington, DC.

Re: Testimony to the United States Senate Committee on Energy and 
        Natural Resources
    Dear Senator Bingaman: On behalf of the Association of ANCSA 
(Alaska Native Claims Settlement Act) Regional Corporation Presidents & 
CEOs, I appreciate this opportunity to provide written testimony on the 
proposed Alaska gas pipeline. This is one of the most important issues 
facing Alaskans today.
    While this Association has been in existence for a number of years, 
it was formalized in 1998. The membership is comprised of all the 
Presidents and CEOs of the Thirteen Regional Native Corporations formed 
under the Alaska Native Land Claims Settlement Act of December 18, 
1971. Our Mission is to promote and maintain ANCSA, ANILCA (Alaska 
National Interest Lands Conservation Act), and economic enterprise 
through cooperative efforts and advocacy in order to foster the 
continued growth and economic strength of the regional corporations on 
behalf of their shareholders.
    We believe it is imperative that an Alaska gas pipeline be built 
following the Alaska Highway route. This project would follow a route 
previously designated by Congress and certified by international treaty 
and would clearly be the speediest response to the current North 
American demand for natural gas.
    Most importantly, a highway route would keep development onshore. 
Alaska Natives and their leaders strongly oppose the so-called ``over-
the-top'' route--an offshore pipeline underneath the unstable ice of 
the Beaufort Sea. The culture and livelihood of the Inupiat people of 
Alaska's North Slope depend on hunting the bowhead whales that migrate 
through the Beaufort Sea. Because these whales are extremely sensitive 
to noise and seismic activity, offshore development through the 
Beaufort Sea would permanently threaten the Inupiat subsistence 
culture. This is not acceptable and we believe an ``over-the-top'' 
route should not be considered as an option.
    It is also important to our shareholders that Alaskan communities 
be given access to gas, not only in Fairbanks and Cook Inlet, but in 
rural communities where energy costs are persistently high. It's 
unthinkable we would ship natural gas out of our state without Alaskans 
being able to use it for residential energy needs as well as economic 
development opportunities.
    The Native corporations of Alaska support opportunities for 
additional participants in the pipeline project. There are several 
major Alaska companies, including the Arctic Slope Regional 
Corporation; Cook Inlet Region, Inc.; NANA Regional Corporation and 
Doyon, Limited, which are capable and interested in being pipeline 
partners.
    Certainly, one of the most important issues to our shareholders is 
that any federal legislation provide for Alaska hire and Alaska Native 
hire, as well as the use of Alaska businesses. Alaskan Natives will 
benefit from access to good-paying, long-term jobs in construction, 
engineering, operations and natural gas related process industries. An 
``over-the-top'' route would diminish these opportunities. Many of 
Alaska's Native Corporations and their subsidiaries are already well 
established in arctic oilfield engineering and pipeline operations and 
have significant expertise to contribute to this project. We believe 
any federal legislation should include strong provisions stating Alaska 
residents and contractors should be employed when they are available 
and qualified. The gasline sponsors should also be required to enter 
into an agreement to provide for employment and training of Alaska 
Natives.
    It is important to our corporations that federal legislation 
include provisions for future access to the pipeline. Alaska Native 
Corporations own title to millions of acres of land on the North Slope, 
including land in the Central Arctic Foothills, one of America's 
premier natural gas provinces. Lands in the Yukon Flats and Nenana 
Basins also have potential. We need access to the pipeline to move 
discoveries to market. Through ANCSA provision 7(i), the natural 
revenues from these discoveries will benefit all Native corporations 
and their shareholders.
    Last but not least, the CEOs of Alaska Native Corporations want to 
ensure that we have at least one seat on any gas pipeline oversight 
committee that is formed.
    In closing, I have enclosed copies of our report recently released 
entitled ``Native Corporations--Building a Foundation for Alaska's 
Economic Destiny'' for the Committee's information and thank you for 
the opportunity to submit this testimony today.
            Sincerely,
                                                Vicki Otte,
                                                Executive Director.
                                 ______
                                 
                                        City of Valdez, AK,
                       Office of the City Manager, October 5, 2001.
Senator Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Senator Bingaman: On behalf of the City of Valdez, I would 
like to provide comments on what the City of Valdez sees as a viable 
option for construction of a pipeline for getting Alaska's North Slope 
gas to markets. Attached is testimony that the City of Valdez would 
like to submit to your committee for inclusion in your deliberations 
concerning development of Alaska's North Slope gas.
    The City would like to request that if the United States Senate 
does determine that incentives are necessary to allow a private venture 
to construct a pipeline that any depreciation provisions will apply 
only to the federal income tax provision. Depreciation of any 
industrial asset has a very negative effect on a local community's 
ability to collect ad valorm property tax.
    For the City of Valdez, the ad valorm property tax is our main 
revenue generator. These property taxes are used to fund education, 
public safety, health care, snow removal, garbage collection and 
disposal. A prematurely declining or depreciating asset still has the 
same impact and demand for services as a new facility.
    Again, if the United States Senate determines that tax incentives 
are needed to facilitate the construction of a natural gas pipeline by 
a private entity, accelerated depreciation should effect only to the 
federal income tax provisions.
    If you should have any questions concerning the City's comments, 
please do not hesitate to contact me.
    Thank you for providing the City this opportunity.
            Sincerely,
                                              David Dengel,
                                                      City Manager.

         Comments on Proposal for a Natural Gas Pipeline From 
                       the North Slope of Alaska

    On behalf of the City of Valdez, Alaska, I would like to submit 
comments on the status of proposals for the transportation of natural 
gas from Alaska to the lower 48 states.
    The City of Valdez has been instrumental in the formation of the 
Alaska Gasline Port Authority (Port Authority). The City of Valdez, the 
Fairbanks North Star Borough and the North Slope Borough formed the 
Port Authority in 1999.
    The mission of the Port Authority is to enable the development of 
Alaska's North Slope gas to the maximum benefit of all Alaskans. 
Ownership of the pipeline by this type of organization will 
substantially lower the effective cost of transporting gas from the 
North Slope to market and improve the economics of such a venture to a 
degree necessary to make the development of the North Slope gas 
resources financially viable.
    The goal of the Port Authority is to facilitate the maximum use of 
Alaska's natural gas both within Alaska and exported to other markets 
including the continental United States.
    The Port Authority has formed a team with international experience. 
The Port Authority has retained Bill Walker of Walker Walker and 
Associates, LLC as General Counsel and Rigdon Boykin of O'Melveny & 
Myers, LLP, an international law firm with substantial experience with 
tax-exempt entities, project financing and the oil industry, as Special 
Project Counsel.
    The Port Authority entered into a Memorandum of Understanding with 
the Bechtel Corporation. As part of that MOU, Bechtel undertook to 
develop cost estimates for the gas conditioning plant, pipeline and LNG 
facilities. In addition, the Port Authority retained the services of 
financial advisors Taylor-DeJongh and Merrill Lynch to perform the 
financial modeling and act as financial advisors to the Port Authority.
    The original premise of the Port Authority was to support the 
construction of a project that would take natural gas from the North 
Slope of Alaska to Valdez, make LNG and sell it to Asia. As a result of 
the work performed by Bechtel, Taylor DeJongh-Merrill Lynch and 
O'Melvany & Meyers, the Port Authority has a very comprehensive model, 
which includes conservative estimates for all aspects of the project 
including construction, financing and operations. The costs include 
development costs, permitting costs, the various financing fees, and 
interest during construction, working capital, six months debt service 
reserve, insurance, etc. In a similar fashion the construction cost 
estimates are all inclusive i.e., all equipment, capital spares, 
construction, freight, catalysts and chemicals for initial fill, 
commissioning and start up costs, engineering services, escalation of 8 
to 10% depending on the facility, contingency (approximately 10%), 
insurance, licensing fees and contractor risk, overhead and fee.
    At the beginning of May, 2000 Bechtel completed its EPC study based 
on the above premises and Taylor-DeJongh completed modeling the results 
of that study. This initial base case study was very valuable for the 
Port Authority because it gave them a ground up ``new look'' 
construction cost estimate (based on 55,000 man hours of Bechtel time) 
for the gas processing facility, pipeline and LNG facility construction 
elements which could serve as a basis for modeling other alternatives. 
In addition, it gave the Port Authority a realistic and conservative 
financial model for looking at alternative solutions to improving the 
project economics.
    The Port Authority has reached two basic conclusions: First, the 
economics of the project are clearly affected by the amount of liquids 
both in the form of NGL's separated out on the Slope and inserted into 
the oil pipeline and the amount of propane separated out as liquid 
propane gas (``LPG'') in Valdez. The value of these liquids as 
demonstrated in the financial runs is substantial. Second, this project 
needs to be combined with other potential projects in order to share 
the huge cost of the pipeline and gas conditioning facilities.
    Based on the cost information developed by Bechtel, the financial 
modeling and the changing world market for gas and LNG, the Port 
Authority now believes the most economic and beneficial project to both 
Alaska and the producers is a two-project Y line with one branch going 
to the Lower 48 along the Alaskan highway route and the other branch 
going to Valdez along the Alyeska pipeline route. In addition, there 
would be a spur line from Glennallen to Anchorage.
    The Port Authority believes that using one or both of these routes 
substantially reduces the potential for environmental issues, which 
could cause significant delays and increased costs. In addition, the 
project realizes huge economies of scale by combining a Lower 48 
project with an LNG project. The Port Authority believes the Y line 
combination project effectively reduces the pipeline cost for each 
project from $7.0 Billion to $4.85 Billion--a savings of $2.15 Billion 
in construction costs for each project or a total savings of $4.30 
Billion.
    The concept of the Two Project Line contains the following 
components:

   A Conditioning Plant on the North Slope which would have the 
        capacity to condition sufficient gas to insert 6 billion cubic 
        feet per day (bcfd) into a pipeline
   A 550 mile 56" diameter pipeline operating at 2220 maximum 
        pounds per square inch from the North Slope to Delta Junction
   A 150 mile 44" diameter branch line carrying 3 bcfd to the 
        Canadian Border along the Alcan highway (The Foothills Route)
   A fractionation plant in Calgary (or in the U.S.) to extract 
        the liquid propane gas from the Lower 48 branch of the line
   A 256 mile 46" diameter branch line carrying 3 bcfd to 
        Valdez
   A spur line to Anchorage from Glennallen
   A fractionation plant to extract the liquid propane gas in 
        Valdez
   A 15 Million Ton per year LNG Plant (at full ramp up) and 
        port facilities in Valdez
Construction Cost
Conditioning Plant (assuming no efficiencies from existing plant)--$4.2 
Billion
Pipeline (including the two branches)--$9.7 Billion
LPG Fractionation Plant--$450 Million
LNG Plant and Port Facilities--$3.65 Billion
Construction Cost Total--$18.0 Billion
(includes escalation and $1.8 Billion contingency)
Soft Costs
Interest during construction--$4.9 Billion
Owners contingency--$900 Million
Debt service reserve--$1.0 Billion
Financing fees, working capital, etc.--$1.0 Billion
Total--$7.8 Billion
Minus pre-completion revenue---$3.2 Billion
Total Financing required--$22.6 Billion

For both LNG Project and pipeline to Alaskan-Canadian border for Lower 
48 sales.

    The Port Authority is not claiming that this represents the best or 
only project that should be developed. The Port Authority has offered 
to make our research and numbers available to any qualified user and 
hopes further optimization of the design and costs will yield better 
results. The financial modeling performed by the Port Authority has 
demonstrated that this design and cost structure (as conservative as it 
may be) is financially viable and should be economically attractive to 
the Producers, Alaskans and the State of Alaska.
    Obviously the financial returns of any project depend on cost 
assumptions, interest rates and the projected sales price of gas, LNG 
and LPG. Outlined below are an estimate of the range of returns for the 
various parties involved based on the Bechtel numbers and the Taylor-
DeJongh modeling using conservative historical numbers for the price of 
gas, LNG and LPG for the bottom of the range and a percentage of 
today's prices as the upper part of the range. These benefits also 
include the revenues from the Propane, which is transported down the 
line in a gaseous form and extracted as a liquid at the end of the 
line.

Producers--$2 Billion to $3 Billion per year
State (royalties, severance tax, corporate income tax and share of $370 
Million)--$750 Million to $980 Million
All communities in Alaska divided by population with the smallest 
receiving a minimum of $50,000--$111 million per year
For the construction of infrastructure to deliver gas to non-pipeline 
corridor communities--LNG tank trucks and barges--or to lower the cost 
of alternate fuels--$37 million per year

    The Port Authority believes that its ownership of the Project will 
result in eight primary benefits:
    1. Income from the venture will be tax-exempt as a result of an IRS 
ruling received by the Port Authority in January, 2000. Substantial 
cash--Billions of Dollars--which would otherwise be used to pay income 
taxes in this project would be available to pay debt.
    Dr. Pedro Van Meurs, energy consultant to the State of Alaska, has 
stated that the benefit of the tax exemption may range in the order of 
magnitude of $10 to $20 Billion on an undiscounted current dollar 
basis.
    2. Financing structure:
          a. The Port Authority believes it can finance this facility 
        with virtually 100% debt;
          b. The Port Authority will have a substantially lower hurdle 
        rate for capital employed than a private organization would 
        require;
          c. Some of the debt would be financed with tax-exempt bonds;
          d. The project's debt would be non-recourse to the State, the 
        founding municipalities and the producers.

    3. The Port Authority has substantial political advantages both 
within and outside Alaska.
    4. Income to the state and communities--The enabling ordinances 
establishing the Alaska Gasline Port Authority sets forth that income 
of the Port Authority shall be distributed as follows:
          a. 60% to State of Alaska;
          b. 30% to all Alaska municipalities on a per capita basis. 
        The goal of the Port Authority is that under normal operating 
        conditions, this would produce a minimum of $148 million to be 
        split each year among the municipalities;
          c. 10% to be retained by the Port Authority which will be 
        used for infrastructure to provide gas to non-pipeline corridor 
        communities or to lower the cost of alternate fuels for remote 
        communities.
    5. There will be more certainty of gas for in-state usage.
          a. The Port Authority will insure that a spur line will be 
        built to allow the Cook Inlet/Anchorage area, etc. access to 
        North Slope Gas.
          b. The Port Authority can use retained revenues to develop 
        LNG transport to other communities accessible by road or water.
    6. More control over price to consumer of in-state gas usage.
    For example, gas to Anchorage or Fairbanks could be in the $1.80 
per mmbtu range.
                  $3.00 Chicago price
                  -$1.20 Tariff from Canadian Border to Chicago
                  $1.80
    7. No need to give up tax revenue, royalties, etc. to subsidize the 
project.
    The port authority concept has been used for other large 
infrastructure projects in this country. These quasi-public entities 
have constructed ports, airports, roads and other infrastructure.
    Representatives of the City of Valdez and the Port Authority are 
available to meet with you and members of your committee and your 
staffs to answer questions and to go into greater detail about the 
financial viability of the Port Authority to move North Slope gas to 
market.
    For more information or questions please contact: David Dengel, 
City Manager City of Valdez, Alaska (907) 835-4313 
[email protected]
                                 ______
                                 
         Statement by American Iron and Steel Institute (AISI)

    AISI is a non-profit association of North American companies 
engaged in the iron and steel industry. The Institute is comprised of 
39 member companies, including integrated and electric furnace 
steelmakers, and 155 associate and affiliate members who are suppliers 
to or customers of the steel industry. For more news about steel and 
its applications, view American Iron and Steel Institute's website at 
http: //www.steel.org.
    We appreciate the opportunity to comment on supply issues 
surrounding the construction and permitting of new pipeline capacity 
from Alaska through Canada and into the lower forty-eight states. 
Natural gas is a clean and abundant energy source and raw material and 
we believe that it is in the interests of the United States, and also 
of Canada, to expedite the construction and operation of the pipeline.
    The U.S. steel industry has the capacity and expertise, and 
certainly the need, for a project of the magnitude proposed to move 
Alaska gas to markets.
 north american producers have the competence to supper steel and pipe
    The North American oil and natural gas pipeline industry has 
developed an extensive network of pipelines servicing the integrated 
energy market on this continent. The vast majority of the steel line 
pipe used in that network has been produced by North American 
manufacturers, in both the USA and Canada, who have consistently 
developed the sophisticated capability using high strength steels to 
meet and exceed the needs of the energy transmission industry. North 
American producers pioneered steels for Arctic Grade line pipe in the 
early 1970's and since that time have provided thousands of miles of 
large diameter pipe for high pressure energy pipeline systems. In the 
late 1970's, after careful design of the pipe line, extensive testing 
and international bidding, two North American producers were awarded 
contracts to supply all of the pipe for the selected Alaska gas pipe 
line project. At that time the pipe specified was highgrade steel line 
pipe up to 56 inches in diameter. Since that time, the capabilities of 
North American suppliers have continued to develop, becoming more 
sophisticated based on continued experience and extensive investment.
    Pipe supply for the currently proposed project would extend over 
several construction seasons and with appropriate planning, the 
capacity of steel and pipe producers in North America could be 
harnessed to manufacture the quantities required. As recently as 1999/
2000, three North American steel pipe producers supplied over 1,000,000 
tons of steel for the 2,000 mile Alliance Pipeline running from 
Northern British Columbia to Chicago. This was both the most 
technologically advanced and largest pipeline construction project ever 
in North America.
    Collectively, North American steel and pipe producers have the most 
extensive experience supplying sophisticated steel and pipe for 
projects on this continent.

    THERE ARE SIGNIFICANT BENEFITS IN THE SUPPLY OF STEEL AND PINE 
                           FROM NORTH AMERICA

    The benefits of sourcing North American materials and particularly 
steel for a North American project are many, including:

   Security of supply
          Multiple sources of pipe, particularly from the same 
        continent would add to the supply capability for the project. 
        This is a major project and a number of supply sources will be 
        required to meet delivery deadlines.
   Significant economic spin-off effects
          The economic activity generated within North America from the 
        supply of steel and the fabrication of pipe and related 
        services will have a significant multiplier effect.
   Employment generation
          Depending on the route and quantities of steel and pipe 
        required, there would be up to 10,000 work years of direct 
        employment from North American steel supply. In addition almost 
        4,000 additional work years would be used to manufacture the 
        pipe from steel.
   Ease of obtaining regulatory approval
          In the past a significant factor in the Canadian regulatory 
        approval process has been the economic benefit for Canada. 
        Supply opportunity for steel and pipe, probably the major 
        supply component for the project, would expedite this 
        objective.
   Potential generation of new investment
          Given sufficient opportunity, steel and pipe producers are 
        likely to invest in enhancing their supply capability on the 
        basis of this project.
   Cost competitiveness
          In project after project, North American producers have 
        demonstrated full commercial competitiveness on sophisticated 
        pipeline projects.

    Some of the pipeline designs proposed would be significant steps 
beyond designs utilized in major pipeline systems to date. The history 
of the North American steel and pipe supply industry is to be a leader 
in such developments, with a major spin-off benefit being the 
subsequent commercialization of this technology for use in other cold 
temperature applications, energy industry fabrication (offshore 
platforms, etc), off-road transportation, military and other 
sophisticated uses.

                             STEEL INDUSTRY

    The North American steel industry is currently experiencing a 
crisis, driven by a global steel glut that has resulted in 
unprecedented imports of steel into the USA and Canada. Based on the 
serious damage being done to the USA steel industry, President Bush 
initiated a series of initiatives aimed at curbing the worldwide over-
capacity in steel products. A key part of the President's steel 
initiative was the implementation of a Section 201 safeguard 
investigation that is currently underway at the International Trade 
Commission. The depth of concern about this issue is evidenced by the 
more than forty congressional and state witnesses that have appeared 
before the ITC seeking relief for US steel producers.
    It is difficult to imagine a major continental infrastructure 
project proceeding without every effort being made to ensure that 
already world class North American steel producers be given every 
opportunity to bid to provide the product. For the benefit of the 
economy, the steel industry and not least, the natural gas industry, 
steel for this project should be melted, poured and processed into pipe 
in North America.

                    RECOMMENDATIONS TO MOVE FORWARD

    Past projects have shown that for any given volume of natural gas 
required to be transported a number of possible pipe designs are 
possible. In the late 1970's Foothills Pipelines won the right to 
construct the Alaska Highway Pipe Line Project in part by designing a 
line that could in fact use steel and pipe manufactured by North 
American producers in contrast to the competing proposal. These options 
still exist.
    It is our contention that all design options capable of meeting the 
throughput needs of the project and yet providing North American steel 
and pipe suppliers with the best opportunity to supply, should be 
considered. Put another way, a pipeline should not be designed in a 
manner that excludes a significant number of capable suppliers. Not 
only would an inclusionary approach provide more commercial options to 
the pipeline builders but would also offer additional security of 
supply through broadening the supply base, avoiding the risk of foreign 
trade disruptions, greater economic spin-off benefits to the North 
American economy and presumably ease the process of obtaining 
regulatory approval, particularly for that portion of the project in 
Canada. It is apparent that the interests of the USA would best be 
served by:

   Facilitating the early construction of this important energy 
        project.
          A secure and plentiful natural gas supply is necessary for 
        the continued growth of the US economy.
   From the initial conception through to final design stage, 
        considering options that allow the maximum participation by 
        North American suppliers of materials and services.
          To garner the maximum benefits for the North American 
        economy, domestic steel and pipe supply considerations must be 
        considered and nurtured at the earliest stages of project 
        development.
   Adopting a procurement process for the supply of materials 
        that encourages North American supply on a fully competitive 
        basis.
   Ensuring sufficient lead-time in awarding supply contracts 
        to allow any proposed investments to be moved to completion.
          Given the opportunity, it is entirely possible that 
        experienced steel and pipe producers in North America would 
        invest in enhanced capability to meet the requirements for this 
        important project. The benefits to the pipeline industry and 
        the North American economy would be huge.

    We appreciate the opportunity to comment on the importance of this 
project to the economy and in particular to the North American steel 
industry and its workers.
                                 ______
                                 
   Statement of Stephen J. Wuori, Group Vice President--Planning and 
                       Development, Enbridge Inc.

                           EXECUTIVE SUMMARY

    Enbridge Inc. employs approximately 6,000 people in Canada and the 
United States. We operate the world's longest crude oil and liquids 
pipeline system, which includes Enbridge Pipelines Inc. We also operate 
and have an interest in Enbridge Energy Partners in the United States, 
and have interests in the Alliance and Vector natural gas pipeline 
systems.
    As a leader in energy transportation, distribution and services in 
North America and internationally, Enbridge is keenly interested in 
assisting the development of a cost effective transportation 
infrastructure for northern natural gas.
    With a large and growing North American demand for natural gas 
expected to reach 30 tcf annually, it is essential that the industry 
develop the most innovative, efficient and reliable transportation 
infrastructure to deliver northern natural gas to market. Northern gas 
development is a logical extension of our business, as Enbridge is the 
only Canadian pipeline company that has constructed, owns and operates 
a major buried pipeline in northern permafrost.
    Enbridge has consulted closely with the Alaska North Slope and 
Mackenzie Delta gas producers. Based on our work to date, Enbridge's 
main perspectives on northern pipelines are as follows:

   The projects must be producer driven and economically 
        robust.
   All stakeholders must be included.
   Clear rules are needed for the regulatory reviews.
   Co-operative decision-making by Canada and the United States 
        will be required.
   Enbridge has maintained route neutrality. However, based on 
        our studies and discussions, an overall comparison favours the 
        northern route based on its widely acknowledged lower cost 
        advantage of approximately US$ 2 billion or approximately 30 
        cents/mcf lower transportation cost from Prudhoe Bay to 
        Alberta.

    Enbridge calls for the best project to be selected based on a 
complete assessment of its merits. Enbridge urges the United States 
Senate Energy and Natural Resources Committee to oppose any 
intervention to prematurely preclude a northern route from Prudhoe Bay. 
Such a move could jeopardize accessing Prudhoe Bay natural gas because 
of inferior economics on a southern route, it would remove the decision 
from the producers who will be exposed to the greatest financial risks, 
and it could strand Mackenzie Delta gas for many years to come.

                              INTRODUCTION

    Chairman Bingaman, Ranking Member Murkowski, thank you for the 
opportunity to provide testimony for the record on behalf of Enbridge 
Inc. on the proposed Alaska Natural Gas Pipeline.
    Enbridge Inc, as a leader in energy transportation, distribution 
and services in North America and internationally is keenly interested 
in assisting the development of cost effective transportation 
infrastructure for northern natural gas. Enbridge employs approximately 
6,000 people in Canada and the United States, and we are Canada's most 
diversified energy pipeline and distribution company.
    Enbridge operates the world's longest crude oil and liquids 
pipeline system. We own and operate Enbridge Pipelines Inc. and 
affiliated pipelines in Canada that ship crude oil from Edmonton, 
Alberta to the Toronto, Ontario area and from Montreal, Quebec to 
Sarnia, Ontario. The American segment of Enbridge's system is Enbridge 
Energy Partners, L.P. in which Enbridge owns a 14.5 per cent interest. 
It runs southeast from the Canada-USA border in Manitoba to the 
international border near Marysville, Michigan with an extension across 
the Niagara River into the Buffalo, New York area. Together, these 
pipeline systems have operated for over 50 years and now comprise 
approximately 9,000 miles of pipeline. They carry almost three-quarters 
of Canada's crude oil production and they deliver approximately 2.2 
million barrels of crude oil and liquids per day.
    Enbridge's natural gas transmission business is carried on through 
the Alliance and Vector pipeline systems. We own a 21.4 per cent 
interest in Alliance Pipeline that carries 1325 mmcf/d of natural gas 
2,200 miles from northeast British Columbia to the Chicago hub. 
Enbridge also operates and owns 45 per cent of Vector Pipeline that 
delivers natural gas from the Chicago area to southwestern Ontario.
    The energy industry in Canada and the United States has long 
operated on a continental North American basis, and the transportation 
sector has been developed in a way that supports this structure. Last 
May, Enbridge took a major step toward expanding our North American 
footprint and scale of operations by completing the acquisition of 
Midcoast Energy Resources. Midcoast is a Houston-based pipeline company 
with regional offices in Texas, Alabama, Kansas, Louisiana, Mississippi 
and Alberta. Midcoast transports, gathers, processes and markets 
natural gas and other petroleum products through more than 80 company-
owned pipelines across 4,100 miles in 10 states, the Gulf of Mexico and 
Canada.
    Enbridge owns and operates Canada's largest natural gas 
distribution company, Enbridge Consumers Gas, which distributes gas to 
1.5 million industrial, commercial and residential customers in 
Ontario, Quebec and New York State. Enbridge Consumers Gas has been in 
business for over 150 years. Enbridge is currently developing a natural 
gas distribution network in New Brunswick. We are also involved in the 
distribution of electricity and we have invested in the development of 
new technologies and renewable energy through businesses engaged in 
fuel cells and wind power.

                           NORTHERN PIPELINES

    With a large and growing North American demand for natural gas 
expected to reach 30 tcf annually, it is essential that the industry 
develop the most innovative, efficient and reliable transportation 
infrastructure to deliver northern natural gas to market.
    Enbridge has the experience, expertise, technology and 
infrastructure to design, build, own and operate liquid hydrocarbon and 
natural gas pipelines. While the North presents unique challenges to 
pipelining, we believe Enbridge has developed the expertise to meet the 
demands. Indeed, northern gas development is a logical extension of our 
business.
    Enbridge is the only Canadian pipeline company that has 
constructed, owns and operates a major buried pipeline in northern 
permafrost. Enbridge Pipelines (NW) has carried crude oil 550 miles 
from Norman Wells, Northwest Territories along the Mackenzie River 
valley to northern Alberta since 1985. More recently, Enbridge built a 
small diameter pipeline to deliver natural gas from the Ikhil field to 
the residents of Inuvik, which is the principal community in the 
Mackenzie Delta. The company has also built and operates the natural 
gas distribution system in Inuvik, which is north of the Arctic Circle. 
This project successfully applied the buried pipeline, chilled gas 
concept to protect the environment, which will most likely be used for 
major gas transmission systems in the North. We are confident we have 
developed leading-edge environmental protection techniques and pipeline 
integrity technologies that are unique to northern permafrost 
conditions.
    Enbridge has consulted closely with the Alaska North Slope and 
Mackenzie Delta gas producers to offer our insights and suggestions 
about their feasibility studies.
    We have undertaken several technical studies and we have responded 
to the producers' requests for information. These are extremely large 
and complex projects, which we believe will require the participation 
of both producers and a pipeline company.
    Based on our work to date, Enbridge's main perspectives on northern 
pipelines are summarized below:

1. The Projects Must Be Producer Driven and Economically Robust
    Enbridge sees itself as a service provider for the producers, and 
not yet a proponent of one project or another. Our fundamental premise 
is the projects must be economically viable from the standpoint of the 
producers. They have earned the rights to the gas from long-term, 
expensive and ultimately successful exploration programs. They bear the 
largest risks, which entitles them to determine the projects' key 
design, routing and financing elements. Pipeline and other companies 
who will become involved will only do so if the project economics are 
inherently robust.

2. All Stakeholders Must Be Included
    Enbridge's experience with northern pipelines reinforces our strong 
belief that all northerners must be included in decision-making and 
must share in the opportunities, benefits and risks. In Canada, this 
fundamental point was firmly established 25 years ago at the time of 
the last great effort to promote a northern pipeline. The need for 
inclusiveness is not in doubt. Northerners have every right to protect 
themselves from potential negative impacts and to share in the benefits 
generated, provided they also add value to the overall process of 
energy commercialization.
    The settlement of land claims and the establishment of northern 
boards and agencies have dramatically transformed the ability of 
northerners to be represented at the decision-making table. These 
developments have fostered a fundamental change in attitude among 
northerners toward pipeline development. Indeed, most northern 
aboriginal groups in the Mackenzie Delta Valley have negotiated a 
memorandum of understanding with a core group of Mackenzie Delta 
natural gas producers to create an opportunity for equity participation 
in a stand alone Mackenzie Valley pipeline project. Future agreements 
will ensure all northerners share the benefits, as would be expected of 
any landowner in the proximity of a major resource development.

3. Clear Rules Are Needed for the Regulatory Reviews
    Northern pipelines bring together a unique array of technical, 
environmental, economic, social, cultural and political factors. The 
potential for multiple regulatory reviews (there are up to 17 
regulatory agencies involved in Canada) causes concerns about pipeline 
development. However, all parties have publicly committed to 
establishing a streamlined review process. Enbridge is confident the 
efforts by all levels of government in Canada will produce an efficient 
and responsible regulatory process.

4. Co-operative Decision-Making by Canada and the United States Will Be 
        Required
    Northern natural gas development needs to be a continental solution 
to a continental energy problem. As such it requires continental 
decision-making. Canada and the United States will each make their 
decisions on the basis of their own country's needs. But the sheer size 
of the reserves, the proximity of the fields, and the combined demand 
in southern markets make it clear that decisions on northern pipelines 
will have to be made in an unprecedented cooperative, perhaps 
continental, fashion.
    Canadian and American regulatory systems were not designed for 
projects of this complexity. Both governments must therefore work 
closely together to coordinate reviews and approvals so that the 
project(s) can be evaluated in a timely and efficient manner.

5. Route Neutral--With Observations
    Enbridge believes northern natural gas should be brought to market 
as a strategic North American initiative if it can be done economically 
and in a manner that is environmentally safe and respects the rights of 
northerners. The energy security and economic benefits to all North 
Americans will be very significant. As President Bush has stated, the 
key imperative is that northern gas be developed.
    Enbridge believes that either the southern or northern routes would 
bring enormous benefits. As a service provider to producers, Enbridge 
is route neutral. However, based on our studies and discussions, an 
overall comparison favours the northern route based purely on its 
widely acknowledged lower cost advantage of approximately US$ 2 billion 
or approximately 30 cents/mcf lower transportation cost from Prudhoe 
Bay to Alberta.
    The following summarizes our key findings on a route comparison:

   Reserves access. Both routes would connect the 30 tcf of 
        proven reserves at Prudhoe Bay, but only the northern route 
        would include the 610 tcf of proven reserves in the Mackenzie 
        Delta in a single pipeline system. This is the most significant 
        proven but undeveloped natural gas asset in Canada, and 
        decisions to exploit or defer it will have very important 
        strategic impacts on Canada and, by extension, on the United 
        States' energy picture. Enbridge believes it is unrealistic to 
        build two massive independent northern pipelines in the same 
        time frame, one from Prudhoe Bay via the southern route and a 
        stand alone Mackenzie Delta Valley pipeline.
   Both routes are technically feasible. The southern route 
        crosses five mountain ranges and numerous rivers, and by virtue 
        of its added length, its environmental footprint would be much 
        larger. But there is no question as to the technical 
        feasibility of constructing and operating a pipeline along this 
        route.

    On the northern route, there is no mountain terrain and fewer river 
crossings. Enbridge has taken a careful look at the subsea challenges 
and we believe a ``near shore'' pipeline (approximately 4-5 miles from 
land) can be safely and economically constructed, operated, and 
maintained. We would propose installing the pipe 6 feet below the 
seabed in a water depth of 10-15 feet where the ice is seasonal (winter 
construction) and where the bottom is not subject to ice scour.

   Timing of regulatory approvals. While the Alaska Highway 
        route has a right-of-way and approvals from the earlier reviews 
        in the 1970s, it will not be clear until the North Slope 
        producers unveil their proposed project whether and how much 
        these approvals will require ``refreshing''. The northern route 
        would require a greenfield review process, as would a pipeline 
        up the Mackenzie Valley. We estimate it would take 
        approximately three years to complete a full regulatory review 
        and obtain government approvals, followed by another three to 
        four years of construction until start-up.
   Socio-economic benefits. Any northern pipeline project would 
        provide significant benefits to the people living in the 
        regions through which they would pass. The Alaska Highway route 
        would arguably offer greater economic benefits from 
        construction and operation to northerners on the basis of its 
        greater length and cost. Moreover, it could facilitate the 
        distribution of natural gas in certain areas of Alaska, such as 
        Fairbanks.

    On the other hand, a lower cost northern route would presumably 
generate offsetting benefits by increasing Alaskan royalty revenues 
from higher wellhead netback prices.

                               CONCLUSION

    Let the best project be selected based on a complete assessment of 
its merits. Enbridge urges the United States Senate Energy and Natural 
Resources Committee to oppose any intervention to prematurely preclude 
a northern route from Prudhoe Bay. Such a move could jeopardize 
accessing Prudhoe Bay natural gas because of inferior economics on a 
southern route, it would remove the decision from the producers who 
will be exposed to the greatest financial risks, and it could strand 
Mackenzie Delta gas for many years to come.
    Honourable Senators, this is an historic moment in North America's 
energy future that comes around once in a generation. Enbridge urges 
the United States to take the long-term view of what is best for both 
countries by waiting for all the facts as presented by the project 
proponents in the weeks and months to come.
    Thank you.
                                 ______
                                 
  Statement of the Yukon Territory Regarding the Proposed Natural Gas 
              Pipeline From Alaska to the Lower 48 States

    In these times, many people do not want a natural gas pipeline in 
their backyards. However, the Yukon would be happy to have the proposed 
natural gas pipeline from Alaska to the lower 48 States run through its 
backyard if it serves the interests of the United States.
    That was our view before September 11, and it is our stronger view 
today.
    In a real sense, this is a national security issue for the United 
States. The proposed pipeline, carrying 4.5 bcf per day, would allow 
the United States to back out 820,000 barrels of imported crude oil per 
day, much of that coming from the Middle East. Recall that in July 
2001, the United States imported an average of 697,000 barrels of crude 
oil per day from Iraq.
    The time for action is now.
    The proposed Alaska Highway Route offers these unmatched 
advantages:

   It is the route designated in the treaty between Canada and 
        the United States.
   The gas wells already have been drilled and are producing 
        natural gas which is largely re-injected into the ground.
   The rights-of-way already have been secured by Foothills in 
        the Yukon and parts of Alaska.
   The permits have been issued.
   Outstanding native claims are being resolved.
   The environmental studies have been done and demonstrate the 
        least damage to the North American environment.
   It offers the quickest relief because it involves the 
        cutting of no new transportation corridors, no new construction 
        access highways, no LNG liquefaction or regasification plants, 
        and construction can begin simultaneously from twenty or more 
        facings along the existing highway. Before September 11, it was 
        estimated that this pipeline could be constructed within 36 
        months. With a national security priority, we are confident 
        that it now could be constructed in far less time.
   It brings a wealth of jobs to the Canadian and United States 
        construction, petroleum and steel industries, among others.
   It has been endorsed by the National Governors Conference, 
        the Pacific Northwest Economic Region, the Natural Resources 
        Defense Council and the State of Alaska.
   It brings $22 billion in tax revenue to the United States 
        with no increase in taxes. That $22 billion would cover the 
        amount which this Congress has just authorized to help rebuild 
        from the devastation in New York.

    Why, then, are we not proceeding at once? It is the view of the 
Yukon Territory that the ownership of the proposed pipeline is the 
issue that needs to be addressed most urgently. The pipeline companies 
and the big oil producers are jockeying for position.
    Foothills, which owns the rights-of-way and the permits for the 
project, claims reimbursement for sunk costs that already have been 
written off. That position hardly serves the urgent needs of the United 
States for gas.
    Some of the oil producers, in trying to squeeze out Foothills, are 
suggesting alternate routes:

   Their proposed ``over-the-top'' route already has been 
        blocked by the State of Alaska and never will be constructed 
        because of the enormous threat it poses to the environment. 
        This route would require an underwater line in the Beaufort Sea 
        from Alaska's North Slope, alongside the Arctic National 
        Wildlife Refuge, to the MacKenzie Valley, through waters that 
        lie beneath several feet of ice for much of the year. A rupture 
        of this line could send 220,000 barrels of natural gas liquids 
        into the arctic environment every day until it was repaired or 
        shut down for many months.
   The MacKenzie Valley Route involves a project in which not a 
        single producing well has been drilled, none of the rights-of-
        way have been secured, native claims are unresolved, and for 
        which a new transportation corridor would be required. Its 
        completion would take many years longer than the Alaska Highway 
        Route, and that delay would not serve the interests of the 
        people of the United States who need this gas for their 
        electric plants in California and their homes and factories in 
        the Great Lakes area.
   Finally, and most incredibly, some of the major producers 
        are exploring an entirely new project along the Alaska Highway, 
        which would require all new permits, all new native agreements 
        and entirely new environmental studies. Such an approach could 
        delay the project for many, many years. After September 11, is 
        there really time for such a maneuver?

    To get this project moving, the Senate can act quickly and 
decisively to resolve the ownership issue as well as the routing issue. 
We suggest that the Senate promptly pass a simple Senate Resolution 
containing just two points:

   First, the United States and Canada should honor their 
        treaty and build a common-carrier natural gas pipeline along 
        the Alaska Highway Route.
   Second, it is the sense of the Senate that the ownership 
        issue should be resolved as soon as possible. The Senate will 
        not consider any financial incentives or tax benefits for the 
        project until the owners of the pipeline are known.

    Simply put, the United States government should not be providing 
financial benefits to the owners of the pipeline until those owners are 
known. It may well be that some of those with whom you are discussing 
legislation right now--such as Exxon-Mobil and BP--will not have any 
interest in this pipeline when it is built and operated. Perhaps it 
will be built by others, such as Foothills, Duke, El Paso, Williams or 
Enron. Duke Energy already has announced its intention to acquire 
Westcoast Energy, which owns fifty percent of Foothills Pipe Lines 
Limited.
    Like most Americans, the Yukon does not care who ends up building 
or owning this pipeline. But, like our Alaskan neighbors, we believe 
that the pipeline should be built as soon as possible. By enacting such 
a Senate resolution, you will have taken a major step toward protecting 
the security of the United States and the interests of its citizens and 
consumers.
    Respectfully submitted on behalf of the Yukon Territory:

                                   William E. Wickens,
                                   Joseph S. Hoover, Jr.,
                                           Miller Thomson Wickens & 
                                               Lebow LLP.
                                 ______
                                 
     Statement of the Minister of Resources, Wildlife and Economic 
   Development, Government of Northwest Territories, Yellowknife, NT 
                                 Canada

                        INTRODUCTION & OVERVIEW

    The Government of the Northwest Territories is grateful for the 
opportunity to provide these comments to the United States Senate 
Energy and Natural Resources Committee as it reviews the status of 
proposals for the transportation of natural gas from Alaska to the 
lower 48 states and considers legislative proposals to expedite the 
construction of a pipeline from Alaska.
    The Government of the Northwest Territories fully respects the 
right and obligation of the United States Congress to establish 
appropriate national energy policy within the framework of its 
bilateral and multinational trade agreements. Moreover, the Government 
of the Northwest Territories appreciates both the current national 
security and economic context in which the Committee is considering 
these issues. Accordingly, the views expressed herein are intended to 
be advisory in nature, and offered with deference to the prerogatives 
of this Committee as it weighs the issues involved in optimizing 
development of Alaska's natural gas resources.
    The Government of the Northwest Territories submits that there are 
a number of critical factors that should be thoroughly analyzed in 
making any governmental decision--to the extent it should be a 
governmental decision--with regard to the relative merits of alternate 
routes for bringing natural gas from northern Alaska to U.S. markets. 
Among these factors are (1) the economic costs of the pipeline, (2) the 
energy security implications, (3) the environmental impacts and risks, 
(4) the potential for other issues to cause delay, (5) the potential 
for development of future additional natural gas resources, and (6) the 
implications for economic development along the route and national 
economic benefit.
    The position of the Government of the Northwest Territories on 
these matters is that a sufficient analysis of these factors has not 
been performed to summarily preclude, as a matter of law, one of the 
most promising routes. In this light, the Northwest Territories 
expresses its serious concerns with respect to Section 701 of H.R. 4, 
and urges this Committee to refrain from taking similar action.
    Indeed, the weight of the analysis available to the Government of 
the Northwest Territories provided by producers, researchers, and 
policy analysts supports the view that the Beaufort Sea/Mackenzie 
Valley option is the most promising, least costly option to get Alaskan 
natural gas to the U.S. market place sooner, rather than later. Insofar 
as the Government of the Northwest Territories fully expects that a 
stand-alone project from the Mackenzie Valley will be built, the true 
incremental economic and environmental costs associated with connecting 
Alaskan gas to the Mackenzie corridor is significantly less than any 
alternative currently under review.
    Regrettably, there is a significant amount of misinformation with 
respect to the Beaufort Sea/Mackenzie Valley route. The purpose of this 
document is, in part, to address some of the erroneous claims and to 
provide the Committee additional facts that should be part of the 
record for the Committee's decision-making process.

          ALTERNATE PIPELINE ROUTES MAY LEGALLY BE CONSIDERED

    As a threshold issue, it is important to establish that 
consideration of pipeline routes other than the ANGTS route is not 
legally precluded or mooted by prior government approvals or 
agreements.
    There has long been an acknowledgement of the need for American gas 
to flow from the producing regions of that country through Canada to 
American consumers. Such an acknowledgement resulted in the signing of 
the Agreement between the Government of Canada and the Government of 
the United States of America concerning Transit Pipelines (the Pipeline 
Transit Treaty) in 1977.
    This Treaty provides for the unobstructed flow of hydrocarbons 
between the two jurisdictions. It is a treaty of general application 
and, as such, deals with any transit pipeline, not a specific pipeline 
route or project. This characterization of the general nature of the 
Treaty was confirmed by Prime Minister Chretien in a letter to Premier 
Stephen Kakfwi of the Northwest Territories dated January 25, 2001 in 
which the Prime Minister wrote:

          The Alaska Natural Gas Transportation System (ANGTS) is a 
        viable option to transport Alaskan gas, if gas producers choose 
        this route for commercializing their gas resources. The Canada-
        U.S. Agreement on ANGTS, however, does not preclude the 
        possibility of alternative projects being developed, including 
        an offshore Beaufort Sea/Mackenzie Valley option.'' [Attached 
        as Attachment 1] *
---------------------------------------------------------------------------
    * All attachments have been retained in committee files.

    This position was reiterated as recently as September 5, 2001 in a 
letter from Ambassador Kergin to Secretary Abraham. In this letter, 
written in response to Section 701 of H.R. 4, an attempt to prohibit an 
offshore Beaufort Sea pipeline route, the Ambassador argued that 
``industry should not be restricted in its assessment of [pipeline] 
routing proposals, that government should not foreclose routing options 
prior to industry completing its assessment, and that all routes should 
be afforded equal, fair consideration.'' [Attached as Attachment 2]
    In addition to the Pipeline Transit Treaty, there exists a project-
specific agreement between our two countries, the Agreement Between 
Canada and the United States of America on Principles Applicable to a 
Northern Natural Gas Pipeline. Unlike the Pipeline Transit Treaty, this 
Agreement speaks to a specific pipeline project to bring Alaskan gas 
from Prudhoe Bay through Canada to markets in the United States. The 
details of the routing are well known and need not be repeated here. 
Proponents of the Alaska Highway route have made much of this Agreement 
and have argued that its very existence precludes the consideration of 
any other route. As outlined above, the Government of Canada does not 
subscribe to this view.
    The Staff Report of the Federal Energy Regulatory Commission, 
submitted to the Senate Committee on Energy and Natural Resources last 
January, detailed a number of concerns relating to the purported 
exclusivity of the ANGTS routing and the continued application of the 
approvals granted to that routing in 1977.
    In its Report, FERC concluded that the mere existence of the Alaska 
Natural Gas Transportation Act (ANGTA), the legislation that covers 
ANGTS, does not preclude an application for a proposal to transport 
Arctic natural gas being filed under the terms of the Natural Gas Act. 
Thus, the ANGTA ``does not bar proposals that might compete with 
ANGTS.''
    One may safely conclude, then that neither the Treaty nor the 
Alaska Natural Gas Transportation Act precludes an alternative route 
from being considered and approved by regulatory authorities.

               EXISTING APPROVALS MAY NO LONGER BE VALID

    Not only is it perfectly legal and appropriate to consider 
alternate routes for Alaskan gas, it is also unclear whether the prior 
authorizations can be utilized for the project currently being proposed 
on the Alaska highway route in view of the many changes from the 
original project. It is worth noting that many of the same advocates of 
the immutable nature of the Agreement are not adverse to amending it if 
required by their interests. Merely because the revived ANGTS project 
follows the earlier route does not mean that it is the project 
originally approved for that route--indeed, it appears to be quite a 
different project:

   The Alaskan Joint Committee on Natural Gas Pipelines 
        recommends in its proposals to Congress that the Dempster 
        Lateral route be eliminated from consideration under ANGTA 
        (Proposal # AH 1) and that a package of tax incentives 
        including accelerated depreciation, investment tax credits and 
        downside tax credits be provided in support of the ANGTS line 
        (Proposal # T2). As the Agreement clearly envisages both a 
        Dempster Lateral pipeline (a portion of which was to be paid 
        for by American shippers through their participation in the 
        cost of service of this leg) and the private financing of the 
        project, the amendments proposed by the Joint Committee would 
        result in a substantially different project from the one 
        approved by both governments in 1977.
   There is certainly a proposed change in the ``capacity'' of 
        the ANGTS as presently being presented by its proponents. The 
        original capacity of the line was for 2.5 billion cubic feet 
        (bcf) per day, with an eventual increase to 3.2 bcf. The line 
        as currently modeled is expected to ship some 4 bcf per day, a 
        significant capacity change.
   It is notable, moreover, that the project was clearly 
        intended to move Alaskan gas through Canada to lower 48 markets 
        with both a ``western'' and an ``eastern'' leg established 
        under the Agreement to carry the gas to California and mid-west 
        markets. There is no provision within the Agreement that allows 
        for the removal of any significant volumes of product from the 
        line during trans-shipment through Canada. The sponsors of the 
        revived ANGTS-route project appear to have omitted the critical 
        downstream system connections the original project mandated.

    In its own report, FERC noted that many of the elements of the 
ANGTA, and hence FERC's conditional approval granted in 1977, may not 
apply in the current regulatory environment. The Commission began by 
observing that in order to facilitate the construction of the ANGTS 
line to meet the perceived energy crisis being experienced in the 
United States:

          Congress established special procedures, and modified certain 
        aspects of the regulatory process, such as streamlining 
        environmental review, consolidating certain Federal authorities 
        that would otherwise be exercised by various executive branch 
        departments and agencies, curtailing the opportunity for 
        competition in transporting Alaska natural gas supplies, and 
        sharply limiting judicial review.

    FERC questioned whether such limitations on environmental review, 
competition and judicial recourse would be acceptable in today's 
environment. Next, the Commission considered the specificity of the 
approvals granted and noted that the President's Decision approving 
ANGTS describes the project with ``some specificity'' and has, by 
virtue of its approval by Congress, the force of law. FERC then raised 
the question as to the applicability of the original approvals and 
noted that ``to the extent a proposal is made that differs in route or 
capacity from that envisioned in the Commission's report, the 
conclusions therein might no longer be valid.''
    While FERC does not directly say so in its analysis, it is obvious 
that the proposed pipeline project designed today would differ 
significantly from one designed twenty-five years ago. The Report's 
conclusions, while not determinative, undercut the attempted 
prohibition of alternative routes for Alaskan gas and raise the issue 
of the specificity of the original approvals and their continued 
application.

             KEY FACTORS THAT SHOULD WEIGH IN THE DECISION

The Commitment to Market-Driven Energy Decision-Making
    The Government of the Northwest Territories is committed to the 
application of market-based principles in the development of the 
north's petroleum resources.
    In this, we are consistent with the position expressed by the Right 
Honourable Jean Chretien, Prime Minister of Canada, in an address to 
the Canadian Association of Petroleum Producers in April of this year. 
In his speech, the Prime Minister noted that Canada's energy 
development

        . . . will be governed by an unswerving commitment to 
        competitive markets and fair regulation.

    The GNWT further believes that it is the duty of governments to 
facilitate the investment decisions of producers through the 
establishment of regulatory processes that are fair, inclusive and 
timely. It is not the duty of governments to interfere in market-based 
decisions, as any such interference will almost surely result in an 
economically inefficient outcome.
    In this conclusion we are also consistent with that of the 
Honorable Pat Wood III, Chairman of the Federal Energy Regulatory 
Commission, who was quoted in a September 22 article in the Los Angeles 
Times as saying:

          Government tends to corrupt because it picks winners and 
        losers, as opposed to letting them be picked by customers who 
        vote with their dollars.

    Such an embracing of markets as the most effective vehicle for 
ensuring energy supplies is occurring throughout the world as countries 
that once were firmly committed to central planning and government 
intervention have come to realize the benefits of market competition 
over government mandate.
    In the context of this Committee's work, this means that the key 
economic stakeholders should not have their views of their own self-
interest superseded by a government decision that does not take costs 
fully into account. The most credible study of the relative costs is 
probably that performed by Purvin & Gertz, an independent and renowned 
engineering consultancy and not a project sponsor seeking to justify 
the conclusions that best serve its own interest, for a group of 
industry participants. Although the entire study remains confidential 
and proprietary, Purvin & Gertz has granted permission to quote the 
portion of the executive summary which addresses relative project 
economics:

          Assuming that similar volumes of gas are transported, the 
        Beaufort Sea/Mackenzie River Valley pipeline route costs 
        approximately 30% less than the competing TransAlaska/Alaska 
        Highway Route. Total project costs for the Alaska Highway route 
        are estimated at $12.0 Billion in comparison with the $8.3 
        billion for the Beaufort Sea/Mackenzie River Valley route.
          Building a `piggyback' route, that allows gas from the 
        Mackenzie Delta to combine with gas originating at Prudhoe Bay 
        on its way to the continental gas market, presents the lowest 
        cost pipeline investment option. Assuming that 2.5 Bcfd of 
        Alaska gas originating in Prudhoe Bay is combined (or 
        piggybacked) with 1.5 Bcfd of Mackenzie gas for a total of 4 
        Bcfd, the total pipeline investment is $7.1 billion. This value 
        is almost 15% lower in comparison with the case that transports 
        4 Bcfd of gas solely from Prudhoe Bay via the Beaufort Sea/
        Mackenzie River Valley route.
          Assuming 4 Bcfd of gas is transported to Fox Creek, Alberta, 
        for delivery into the continental market, the transportation 
        unit cost of service for 4 Bcfd of Prudhoe Bay gas via the 
        Alaska Highway route is $US 1.41 per MMBtu versus $1.14 for 4 
        Bcfd for the mixed gas (Prudhoe Bay/Mackenzie Delta) via the 
        Beaufort Sea/Mackenzie River Valley route. .
          The Alaska producer gas netback price for the 4 Bcfd Alaska 
        Highway route is $0.50 per MMBtu (excluding any NGL credit). 
        This assumes a gas market price of $US 2.59 per MMBtu and a 
        price differential of $US 0.68 per MMBtu between Fox Creek and 
        Henry Hub. . . . The Alaska natural gas producer gas netback 
        price for the 4 Bcfd Beaufort Sea/Mackenzie River Valley route 
        is $0.77 per MMBtu. This assumes no additional credit as a 
        result of piggybacking of Canadian gas is assigned to the 
        Alaska producer. [Purvin & Gertz, Inc., Alaskan Gas Development 
        Strategies, October, 2000, Page V-30]

    As a result of this work and the follow-on analyses by companies 
involved, the Government of the Northwest Territories fully expects 
that commitments will be made to the construction of a pipeline from 
the MacKenzie Delta to Alberta in the near term, with or without any 
commitment of Alaskan gas throughput. Of course, if Alaskan gas were to 
be linked to this route for transportation to market, the size and 
extent of the pipeline would be different, and both Alaskan and 
Mackenzie Delta producers would benefit from improved transportation 
economics.
    A Mackenzie Valley pipeline would travel some 1,140 miles from the 
Delta to connect with the existing western Canadian pipeline system. 
Should the route include Prudhoe Bay gas, the line would enter the 
Alberta system at or near Gordondale. Absent this gas, that is with the 
need to transport only 1.2 bcf of Delta gas, the line would enter the 
system some 186 miles farther north at or near Zama, Alberta. Access at 
this more northern receipt point would, of course, reduce the capital 
cost of the pipeline from current estimates.
    Delivery of Mackenzie Delta gas to the market, perhaps years in 
advance of Alaskan gas, is likely to change continental gas market 
dynamics. There is a risk that, if Alaskan gas is not economically 
linked to the same transportation system, the supplies of Mackenzie 
delta gas would be sufficient to provide the market's needs to the 
point that any proposal to bear the incremental capital costs of a 
later Alaska pipeline could not be supported.

Security Issues
    In these sad days of recognizing that we must pay heightened 
attention to the security of key energy infrastructure, the security 
implications of the alternate routes must be evaluated seriously and 
objectively.
    The suggestion that the ANGTS route is preferable from a security 
perspective because more of it would be built on US soil is baseless. 
There is no negative security implication from the pipeline crossing 
Canadian soil, and both proposed routes transit Canada in any event. 
All of North America is a common energy market under NAFTA, and 
therefore share common security concerns that are not a function of 
national boundaries.
    Objective analysis of the national security implications would 
instead be likely to turn on vulnerability and risk, and may not favor 
the ANGTS route. ANGTS would put the gas pipeline into the same right-
of-way with the elevated TAPS crude-oil line, long recognized to be one 
of the most exposed and vulnerable of major energy systems. A major 
incident on the right of way could potentially disable both systems. 
Placing the gas pipeline immediately along the Alaska highway would 
create further issues of protecting it from unauthorized access. 
Although shorter and easier to construct, the Mackenzie Valley pipeline 
may also offer a less accessible as well as separate gas pipeline 
route.
    Security of supply is important to any country whose petroleum 
demands exceed its domestic production. The United States is blessed 
with significant domestic gas production, but nonetheless requires some 
fifteen percent of its daily demand to be filled by imports. The vast 
majority of these imports come from Canada. Current long-term forecasts 
of increased lower 48 demand and reduced conventional supply do, 
moreover, raise the need for additional gas reserves to be developed in 
both the medium and long-term.
    In the matter of oil, the United States is less fortunate, with 
over fifty percent of its daily demand being filled by imports. As with 
natural gas, Canada is a significant supplier of this needed oil and 
petroleum products, providing sixteen percent of demand. Canada stands 
to play a increasingly vital role in providing additional supplies to 
the United States, with the development of Alberta's tar sands likely 
to be a significant source of new oil.
    The existence of the resource base and Canada's clear intention to 
provide American access to this base is a given. The price at which 
this resource base will be available is another. In the case of oil, 
the world market sets the price but natural gas, being primarily a 
continental product, is determined in the North American market. 
Producers and shippers can play a significant role in ensuring that 
this price remains attractive to the market.
    The long-term natural gas supply source for the U.S. market will 
likely be the reserves of the far North, Alaska, the Northwest 
Territories and the High Arctic islands. However, on their own, the 
reserves of Alaska and the High Arctic may not be economical to produce 
and therefore may never reach the market. Energy security is not helped 
by these resources if they are not brought to market, and if they are 
uneconomic, they will not be brought to market. Linking them through 
one transportation system improves their economics of delivery to the 
market, and therefore their chances of making a major contribution to 
continental energy security.
    The Government of the Northwest Territories believes the most 
economical way to move these three basins to market is through a ``Y'' 
configuration that brings the Alaskan and High Arctic reserves to the 
Mackenzie Valley and through it to the south. Such a routing would 
provide economies of scale and through the joining of the three basins, 
would help realize significant unit cost savings thus ensuring these 
reserves are available to the market.

Environmental Impacts
    Any natural gas project of the scale envisaged here must of 
necessity have an impact on the environment. How great this impact 
might be, and how it can best be prevented and/or mitigated, will be 
the subject of regulatory hearings in both countries.
    As with the other elements of the debate on routes and 
alternatives, the subject of environmental impacts has been enlisted in 
the support of competing routes.
    The impacts raised to date range from the seismic sensitivity of 
the Atigun Pass in Alaska and the consequent likely shifting of any 
pipeline travelling through it, to prospects of buckets of natural gas 
liquids washing ashore following an under-ice explosion.
    The clarification of these and other impacts should properly be 
dealt with in regulatory hearings, and care needs to be taken that 
unfounded environmental claims, and threats of litigation based on 
these claims, do not predetermine route selection.
    Any environmental analysis should begin with an admission that 
there are dangers associated with pipeline transport of hydrocarbons--
to deny this would be to deny reality. The Office of Pipeline Safety 
has reported that in the period from 1990 through 1999, there were a 
total of 3917 liquid fuel spills in the United States, resulting in 201 
deaths, 2,826 injuries and $778 million in property damage. In fact, as 
recently as September 22, the TAPS line in Alaska reported a spill of 
some 1200 gallons of oil during routine testing of its system.
    Yet, more and more pipelines are being put into service and more 
are planned. The recent commissioning of the oil pipeline to carry 
Northstar production of 65,000 barrels per day from six miles offshore 
Alaska's north coast to land is only the most recent example of 
projects reaching out to new reserves in the offshore. The project 
follows on the successful operation, since 1987, of the offshore 
Endicott Field located 15 miles from Prudhoe Bay. To date, this field 
has produced some 400 million barrels of oil from under the Beaufort 
Sea.
    Both of these projects enjoyed the support of the State of Alaska.
    Over its total length within the NWT, the pipeline right of way 
would affect only a limited number of trees. At the north end, the 
pipeline would cross 93 miles of the Tuktoyaktuk Coastal Plain. This 
Plain is characterized by a continuous cover of shrubby tundra 
vegetation with the most significant feature of the ecoregion being its 
distinctive delta landforms. Wetlands cover 25-50% of the area. Much 
seismic and exploration activity has been conducted through this area 
over the past thirty years.
    Moving south, the pipeline would travel 155 miles across the Great 
Bear Lake Plain, an area extending from the Mackenzie Delta to Great 
Bear Lake. Through this area the predominant vegetation consists of 
open, very stunted stands of black spruce and tamarack with secondary 
quantities of white spruce.
    Next would be the Norman Range, an area that extends from the 
community of Fort Good Hope on the east side of the Mackenzie River to 
Willowlake River south of Great Bear Lake. The route would cover some 
108 miles through this area, an area dominated by open stands of black 
spruce with an understory of dwarf birch. As with the Delta, this area 
has seen significant seismic and exploration work although here the 
activity has been conducted over the past seventy-five years.
    Finally, the pipe would cross 21 miles through the Mackenzie River 
Plain, before entering the existing right-of-way of the Enbridge oil 
pipeline that travels the rest of the way through the NWT to Alberta. 
The native vegetation of the Mackenzie River Plain consists 
predominantly of medium to tall, closed stands of black spruce and jack 
pine. (The vegetation descriptions used are from ``Narrative 
Descriptions of Terrestrial Ecozones and Ecoregions of Canada'' an 
Environment Canada publication).

Environmental Approval Processes
    Any pipeline transversing the Northwest Territories will be subject 
to regulatory review by a variety of agencies including the National 
Energy Board, the Mackenzie Valley Environmental Impact Review Board, 
the Environmental Impact Screening Committee and Review Board for the 
Inuvialuit Settlement Region, the Canadian Environmental Assessment 
Agency, the Department of Indian Affairs and Northern Development, the 
Mackenzie Valley Land and Water Board, the NWT Water Board, the 
Inuvialuit Land Administration, Inuvialuit Game Council, Sahtu Land and 
Water Board, Gwich'in Land and Water Board, and the Government of the 
Northwest Territories.
    While the coordination of such a diverse group of regulators may on 
the surface appear daunting, the Chairs of the Boards have met on a 
number of occasions over the past eighteen months and have developed an 
outline for a coordinated regulatory review for a Mackenzie Valley 
pipeline project. This outline will be available for public comment in 
October.
    The situation for the Foothills Project is not as well defined. 
While environmental reviews were conducted twenty-five years ago, and 
permits and approvals were granted, much has changed from a legal 
perspective in the intervening years.
    As noted in the attached legal opinion from Lawson, Lundell, ``the 
two most significant issues from this perspective have been the 
introduction of new environmental assessment requirements and the 
recognition and protection of Aboriginal rights under section 35 of the 
Constitution Act 1982.'' [Attached as Attachment 3]
    In respect of the former, the Lawson, Lundell opinion concludes 
that the Foothills Project would not be exempt from review under the 
Canadian Environmental Assessment Act (``CEAA'').
    Their conclusion states:

          . . . it appears clear that the Foothills Project will have 
        to go through an environmental review process under CEAA before 
        any of the above authorizations could be obtained. There are 
        significant implications for this in terms of timing. There are 
        also significant implications in terms of the potential for 
        legal challenges to the Project.

    The opinion also deals with the development assessment process 
proposed, but not yet established, for environmental reviews in the 
Yukon Territory.
    ``Land claims agreements in the Yukon have significantly changed 
project review and approval requirements in the Yukon since the passage 
of the Northern Pipeline Act. The Umbrella Final Agreement (the 
``UFA'') between Canada, the Council for Yukon Indians, and the Yukon 
government requires that a new Yukon Development Assessment Process 
(``YDAP'') be put in place in the Yukon. Although the legislation was 
supposed to be enacted within two years of the coming into force of the 
UFA, it is now six years later and no legislation has been enacted.
    Chapter 12 of the UFA sets out the requirements for the YDAP. YDAP 
applies to projects and to significant changes to existing projects. A 
``project'' is defined as ``an enterprise or activity or class of 
enterprises or activities to be undertaken in the Yukon that is not 
exempt from screening and review.'' There is also a definition for 
``existing projects'' but that refers to an enterprise or activity that 
has been undertaken or completed. Therefore, unless the Foothills 
Project is exempted from review under the legislation when it comes 
into force--which in light of the magnitude of the Project and its 
potential effects seems unlikely--it would be subject to review under 
the YDAP.
    In light of the difficulties that the governments have had in 
reaching consensus on the legislation, it could be some time before 
this legislation comes into force. In addition, it will likely take 
some time for those administering the process to develop the experience 
and expertise required to handle major project applications. This could 
cause significant delays, especially because under section 12.14.1.2 of 
the UFA, the federal and Yukon governments may not issue any approvals 
or provide financial assistance with respect to a project until the 
YDAP process has been completed.''
    The Government of the Northwest Territories holds no predetermined 
position on the environmental merits or drawbacks of any particular 
pipeline routing, preferring to leave such an analysis to the 
legislatively mandated regulatory processes in both Canada and the 
United States.

Aboriginal Issues
    Another significant change that has occurred since the approval of 
the Foothills Project is the recognition of aboriginal and treaty 
rights under section 35 of the Constitution Act, 1982 and the 
subsequent judicial developments which have occurred with respect to 
the interpretation and protection of these rights.
    The Lawson, Lundell opinion notes that the matter of Aboriginal 
rights is particularly acute in the Yukon Territory because of the lack 
of treaties in place with the majority of Yukon First Nations along the 
pipeline route. Starting at the Alaska border, the Foothills Project 
would pass through the traditional territories of the White River First 
Nation; the Kluane First Nation; the Champagne and Aishihik First 
Nations; the Ta'an Kwach'an First Nation; the Kwanlin Dun First Nation; 
the Teslin Tlingit Council; and the Liard First Nation.
    Of these seven First Nations, only two have land claims agreements 
in effect today. The remainder are at various stages of completion. In 
addition, the Kaska Dene from northeastern British Columbia also assert 
aboriginal rights and title in the southeast Yukon along the pipeline 
route.
    Some have argued that the Northern Pipeline Act, as legislation 
passed before aboriginal rights received constitutional protection, may 
allow some negative effects on these rights. However, the Act expressly 
states that it does not affect these rights. Section 25 of the Act 
provides:

          Notwithstanding this Act, any native claim right, title or 
        interest the native people of Canada may have had prior to 
        April 13, 1978 in and to the land on which the pipeline will be 
        situated continues to exist until a settlement in respect of 
        any such claim, right, title or interest is effected.

    For the First Nations who have not yet concluded land claims 
agreements, the legal effect of Foothills' Certificates and easement 
must be considered in light of section 25. To the extent that the 
Certificates or other regulatory approvals infringe on any aboriginal 
rights or title of those First Nations, those First Nations may be able 
to challenge the validity of those approvals. Government would also 
have to meet the consultancy requirements established by the Canadian 
courts to justify any infringement of unextinguished aboriginal title 
or rights.
    A pipeline up the Mackenzie Valley would cross four separate 
Aboriginal land claim areas: The Inuvialuit Settlement Region; the 
Gwich'in Settlement Area, the Sahtu Settlement Area and the Deh Cho 
Region. Of these four, the first three have settled their claims. The 
Deh Cho First Nations continues its discussions with the Government of 
Canada toward resolving the issues raised in its proposal for a Deh Cho 
process.
    As a result of the settlement of these three northern claims, the 
Northwest Territories is experiencing significant petroleum exploration 
activity with, for example, industry having work commitments in the 
Inuvialuit Settlement Region of $1 billion (Canadian) over the next 
four years. Exploration activity is also proceeding in both the 
Gwich'in and the Sahtu Areas.
    Aboriginal leaders from throughout the NWT have agreed to work 
together to realize an ownership position in a Mackenzie Valley 
pipeline. The Aboriginal Pipeline Group is currently negotiating such a 
position with the Delta Producers' Group consisting of Esso Resources, 
Shell Oil and Conoco. Leaders from the Deh Cho have not yet determined 
the role they may play in such a consortium.
    It is important, however, that a clear distinction be drawn between 
the Deh Cho's land claim process and its possible involvement in the 
Aboriginal Pipeline Group. The latter decision is a commercial 
determination that individual communities and their regional body will 
make based on their analysis of the economic opportunity presented.
    As to the former, Premier Stephen Kakfwi of the GNWT has confirmed 
that while the Deh Cho interim measures agreement will be honoured, 
resource revenue sharing and devolution issues will be negotiated 
through the Intergovernmental Forum process while existing regulatory 
regimes, and not the land claims process, will be used to ratify the 
construction of a Mackenzie Valley pipeline.

Developing Access to Future Natural Gas Resources
    American gas demand continues to grow while conventional supply 
continues to fall. This past year saw Americans consume some 22 Tcf of 
gas, of which 3 Tcf was imported, the vast majority of that from 
Canada. American demand is projected to grow by some 4.5% annually, 
reaching 32 Tcf over the next twenty years. Such a growth would move 
gas from its current market share of 16% of total energy use to 35%. 
This is largely the result of the increased use of gas for electricity 
generation. A major contributor to the increasing use of natural gas in 
the electric utility sector is the lower capital costs and shorter 
construction lead times of advanced combined cycle plants in comparison 
with conventional coal-fired plants.
    The U.S. Department of Energy attributes to the lower 48 some 167 
Tcf of conventional gas reserves, with the likelihood of an additional 
1300 Tcf of unconventional and currently uneconomic reserves. The 
conventional reserves represent about eight years' consumption at the 
current rate. This supply base is, however, under increasing pressure 
as the decline rate from new wells continues to increase. A recent 
study by U.S. Energy Information Agency shows that while Gulf of Mexico 
wells drilled in 1972 declined from their peak at an average rate of 17 
per year, natural gas wells drilled in 1996 have been declining at an 
annual rate of some 49%.
    Like the American market, the demand for natural gas is expected to 
grow in Canada. Ontario, for example, currently receives just under 1 
Tcf annually from Alberta. Significant growth is expected in this 
market as Ontario Hydro decommissions nuclear plants and replaces them 
with co-generation facilities fueled by natural gas. In addition, the 
Government of Ontario is under increasing pressure from neighbouring 
American states to reduce the sulpher emissions associated with its 
coal-burning power generation.
    Alberta gas reserves have declined for the past five years, with 
this past year seeing only 67% of production being replaced by newly 
discovered gas. Current gas reserves are estimated by the National 
Energy Board at 38 Tcf, which translates to under 9 years production. 
The Alberta Energy Utilities Board estimates Alberta's reserves to be 
somewhat higher, at 43 Tcf. More to the point, and more ominously for 
the future, the Alberta reserves have been declining at an increasingly 
rapid rate. In 1994, the reserve to production ratio was 12.7, that is, 
there was nearly thirteen years of reserves left at the then current 
rate of production. This ratio has continued to decline over the past 
five years and now stands at the nine years mentioned above.
    Of further concern is the nature of these reserves. On balance, 
they tend to be scattered and in relatively small pools. Such pools 
are, of course, subject to rapid depletion. The National Energy Board, 
in its recently completed study of short-term gas deliverability, 
estimates the decline rate to be as high as 40 percent. Based on this 
decline rate, the NEB projects that production from existing wells in 
the Western Canada Sedimentary Basin will decline by about 3 billion 
cubic feet per day per year. This is an unsustainable situation.
    The challenge is to find the additional gas that will be needed to 
meet the increasing demand. While there are many possible supply 
sources in North America, many of them are currently not available for 
development. Offshore California, the east coast of the State of 
Florida, the west coast of British Columbia all have great potential to 
supply gas but all are subject to drilling moratoriums and it is 
unlikely that drilling will be allowed anytime in the near future.
    The North would seem to be the logical source of the new gas North 
America will need. The State of Alaska contains significant gas 
deposits with known reserves of nearly 35 trillion cubic feet (Tcf) at 
Prudhoe Bay and up to an additional 30 Tcf onshore and offshore the 
northern coast of the state. The Mackenzie Delta contains some 9 tcf of 
proven onshore reserves with estimates of an additional 60 Tcf.
    There are at present feasibility studies being conducted on the 
economics associated with the development of these reserves. There are 
choices that will have to be made on how best to bring these resources 
to southern markets. The Government of the NWT believes that these 
choices would be best underscored by a firm commitment to market 
principles.
    A pipeline up the Mackenzie Valley will open up new, relatively 
unexplored sedimentary basins that will provide additional gas supplies 
for North American consumers. A Mackenzie Valley pipeline can connect 
to no less than seven established and potential natural gas basins 
Mackenzie Delta/Beaufort Sea, Anderson/Horton Plains, Colville Hills, 
Peel Plateau, Great Bear Basin, Mackenzie Plain, and the Cameron Hills. 
The Mackenzie Delta is estimated to have 9 trillion cubic feet (tcf) of 
proven natural gas reserves and an additional 64 tcf of probable 
reserves. In the Fort Liard area, there are 1.5 tcf of proven gas 
reserves and an estimated 3.5 tcf of probable reserves.
    Further, a recent study by Reinson and Drummond revealed striking 
geological similarities between the long-producing Louisiana Gulf 
Coast, a basin that currently yields about 5.3 tcf of gas a year, and 
the Mackenzie Delta. Their study estimated an additional 30 tcf of 
Louisiana reserves and 55 tcf, an estimate the authors concede may be 
conservative, underlying the Mackenzie Delta. The cumulative Louisiana 
Basin production to date is over 185 Tcf and, in keeping with the 
parallels drawn in the study, one could expect similar of greater 
production levels from the Delta.

Achieving Economic Benefits
    Governments seek to maximize the benefits from resource development 
within their boundaries. The Government of the Northwest Territories is 
no different from others in this respect.
    There are essentially two ways in which a jurisdiction can realize 
benefits from resource development within its borders. One is to add 
value to the product, the other is to add cost.
    In a market where frontier reserves are at the price margin, where 
they are truly ``price-takers'' and not ``price-makers'', any 
additional costs imposed on their development will only serve to make 
them less attractive to the market.
    If, in an attempt to ensure the development of these uneconomic 
resources, resources made uneconomic through unrealistic demands for 
local benefits, government provides project subsidies, the additional 
cost of the resource is simply moved from the developer to the 
taxpayer. Such a situation is not sustainable.
    There are a variety of mechanisms by which the economic benefits 
associated with a construction project of this magnitude may be 
equitably shared between U.S. and Canadian interests. These benefits 
are not necessarily proportionate to respective pipeline mileage within 
the two countries.
    There are a number of ways in which the economic benefits to Alaska 
of gas supply development could be achieved without predetermining a 
pipeline route for all north Alaskan resources. These should be 
explored, and the direct economic benefit to Alaska of building the 
less costly route should be understood.
Construction Logistics
    For much of its route, a Mackenzie Valley pipeline would follow the 
river that gives the Valley its name. This river would also provide the 
means to transport in the materiel and supplies needed for the 
construction of the pipeline, much as it did during the construction of 
the Norman Wells oilfield expansion and the construction of the 
Enbridge oil pipeline in the early 80s.
    This same river played a similar role during the construction of 
the Canol Pipeline during the Second World War, a project that saw 
Norman Wells oil shipped westerly across the NWT in support of the 
American war effort in Alaska. Much of the work on this project was 
overseen by the U.S. Army Corps of Engineers.

Conclusion
    Any decision with regard to a northern pipeline to connect the gas 
reserves of the Northwest Territories and Alaska to market should be 
based on the twin principles of environmental acceptability and 
economic efficiency as determined by the market itself.
    The Government of the Northwest Territories is confident that the 
legislatively mandated environmental review processes to which a 
pipeline project will be subject in both countries will address the 
environmental issues. The Government is also confident that, unless 
they are preempted legislatively, the key economic stakeholders in the 
Alaskan resources will reach a decision about the optimum route that 
their governments should respect.

                                    

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