[Senate Hearing 107-352]
[From the U.S. Government Publishing Office]
S. Hrg. 107-352
ALASKA NATURAL GAS PIPELINE
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
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
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
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
Additional material submitted for the record..................... 95
ALASKA NATURAL GAS PIPELINE
TUESDAY, OCTOBER 2, 2001
Committee on Energy and Natural Resources,
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
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
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
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
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
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
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
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
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
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.
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
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
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
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
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
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
[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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Senator Feinstein. Well, yes. He is still doing those
things today. But anyway, thank you very much. It is great to
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
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
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
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
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
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
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
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
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. 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
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
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
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
Second, to adopt the provisions in H.R. 4 to ban the over-
the-top route to the Beaufort Sea as a legitimate pipeline
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
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.
[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
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
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
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
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,
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
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
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
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
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
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
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.
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
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.
Office of the
The Chairman. Thank you very much.
Ms. Pearce, it is nice to see you here again. Why don't you
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
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
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
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
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
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
That completes my opening statement. I am pleased to answer
[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
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
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
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
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
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
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
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
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.
In short, Mr. Chairman, as our National Energy Policy states:
``America needs the energy that Alaska's North Slope natural gas can
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
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
The Chairman. Mr. Kripowicz, your task force, when was it
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
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
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
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
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
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. 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
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
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.''
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 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
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
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
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
Senator Carper. So on a permitting basis, we should try to
expedite the process. What else should the Federal Government
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
Senator Carper. Anybody else on the panel want to comment,
respond to anything I have asked?
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.
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
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
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
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
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
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
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.
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.
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 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
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
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
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
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
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.
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
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
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
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
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
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,
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
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
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
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
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
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
Mr. Glenn. It is getting cooler. It is getting cooler right
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
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
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
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
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
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
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
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
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
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
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
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
\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
\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)
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
\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,
\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
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
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.
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
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
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
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
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
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.
Mr. Malone. Mr. Chairman, may I add one comment to that of
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. 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
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
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
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
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
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
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
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
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
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. 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
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
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
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
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
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
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
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
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
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?
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
In summary, we are here, we are ready to serve and ready to
cooperate to make the gas flow.
[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
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
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
Senator Murkowski. Thank you very much for that statement.
Mr. Heyworth, the Chairman, Citizens Initiative for the
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
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
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
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
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
Prepared Statement of Michael Stewart and Dennis McConaghy, Co-Chief
Executive Officers, Foothills Pipe Lines Limited
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 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
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
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
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
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
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.
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.
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.
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
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
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
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.
[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.
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.
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.
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.
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.
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
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
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
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
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
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,
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.
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.
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
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
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
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.
[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.
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.
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.
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.
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
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.
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
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.
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
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
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
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
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
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
Senator Murkowski. I have no further questions.
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
I wish you a good day.
[Whereupon, at 1:55 p.m., the hearing was adjourned.]
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
Jerald V. Halvorsen,
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
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
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
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
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
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
While our complete position statement on this complex issue covers
a wide and diverse array of issues, the following best sum up our basic
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.
Bethesda, MD, October 1, 2001.
Hon. Jeff Bingaman,
Chairman, Senate Committee on Energy and Natural Resources, Washington,
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.
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
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
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
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
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.
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,
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.
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
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
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
The concept of the Two Project Line contains the following
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
A spur line to Anchorage from Glennallen
A fractionation plant to extract the liquid propane gas in
A 15 Million Ton per year LNG Plant (at full ramp up) and
port facilities in Valdez
Conditioning Plant (assuming no efficiencies from existing plant)--$4.2
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)
Interest during construction--$4.9 Billion
Owners contingency--$900 Million
Debt service reserve--$1.0 Billion
Financing fees, working capital, etc.--$1.0 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
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
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
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
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
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
7. No need to give up tax revenue, royalties, etc. to subsidize the
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
For more information or questions please contact: David Dengel,
City Manager City of Valdez, Alaska (907) 835-4313
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
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.
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
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.
In project after project, North American producers have
demonstrated full commercial competitiveness on sophisticated
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
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
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
Facilitating the early construction of this important energy
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
Adopting a procurement process for the supply of materials
that encourages North American supply on a fully competitive
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.
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
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
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
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.
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
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.
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
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
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
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
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
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
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
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
On the other hand, a lower cost northern route would presumably
generate offsetting benefits by increasing Alaskan royalty revenues
from higher wellhead netback prices.
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.
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
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
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
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
Respectfully submitted on behalf of the Yukon Territory:
William E. Wickens,
Joseph S. Hoover, Jr.,
Miller Thomson Wickens &
Statement of the Minister of Resources, Wildlife and Economic
Development, Government of Northwest Territories, Yellowknife, NT
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
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
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
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
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
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
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
. . . 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
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
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.
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
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
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
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.
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
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
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
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
``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
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 126.96.36.199 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
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
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
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
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
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
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.
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.
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.