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78–277 PDF 2002

S. HRG. 107–352

ALASKA NATURAL GAS PIPELINE

HEARING

BEFORE THE

COMMITTEE ON

ENERGY AND NATURAL RESOURCES

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

TO RECEIVE TESTIMONY ON THE STATUS OF PROPOSALS FOR THE

TRANSPORTATION OF NATURAL GAS FROM ALASKA TO MARKETS IN

THE LOWER 48 STATES AND ON LEGISLATION THAT MAY BE REQUIRED TO EXPEDITE THE CONSTRUCTION OF A PIPELINE FROM

ALASKA

OCTOBER 2, 2001

(

Printed for the use of the

Committee on Energy and Natural Resources

(II)

COMMITTEE ON ENERGY AND NATURAL RESOURCES

JEFF BINGAMAN, New Mexico, Chairman

DANIEL K. AKAKA, Hawaii

BYRON L. DORGAN, North Dakota

BOB GRAHAM, Florida

RON WYDEN, Oregon

TIM JOHNSON, South Dakota

MARY L. LANDRIEU, Louisiana

EVAN BAYH, Indiana

DIANNE FEINSTEIN, California

CHARLES E. SCHUMER, New York

MARIA CANTWELL, Washington

THOMAS R. CARPER, Delaware

FRANK H. MURKOWSKI, Alaska

PETE V. DOMENICI, New Mexico

DON NICKLES, Oklahoma

LARRY E. CRAIG, Idaho

BEN NIGHTHORSE CAMPBELL, Colorado

CRAIG THOMAS, Wyoming

RICHARD C. SHELBY, Alabama

CONRAD BURNS, Montana

JON KYL, Arizona

CHUCK HAGEL, Nebraska

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

(III)

C O N T E N T S

STATEMENTS

Page

Aron, Mark, Vice Chairman, CSX Corporation, on behalf of Yukon Pacific

Corporation ........................................................................................................... 70

Bailey, Keith E., Chairman, The Williams Companies ........................................ 87

Bayh, Hon. Evan, U.S. Senator from Indiana ....................................................... 14

Bingaman, Hon. Jeff, U.S. Senator from New Mexico .......................................... 1

Glenn, Richard, Vice President of Lands, Arctic Slope Regional Corporation ... 52

Heyworth, Scott, Chairman, Citizens Initiative for the All-American Gasline .. 72

Hoglund, Forrest, Chairman and Chief Executive Officer, Arctic Resources

Company ............................................................................................................... 80

Knowles, Hon. Tony, Governor of Alaska .............................................................. 4

Koonce, K. Terry, President, ExxonMobil Production Co. .................................... 49

Kripowicz, Robert S., Acting Assistant Secretary for Fossil Energy, Department of Energy ..................................................................................................... 32

Landrieu, Hon. Mary L., U.S. Senator from Louisiana ........................................ 13

Malone, Robert A., Regional President, BP America, Inc. ................................... 50

Marushack, Joseph P., Vice President, ANS Gas Commercialization, Phillips

Alaska Inc. ............................................................................................................ 42

Murkowski, Hon. Frank H., U.S. Senator from Alaska ....................................... 2

Pearce, Drue, Senior Advisor for Alaska Affairs, Department of the Interior ... 29

Silva, Patricio, Energy Projects Attorney, Natural Resources Defense Council . 56

Stewart, Michael and Dennis McConaghy, Co-Chief Executive Officers, Foothills Pipe Lines Limited, on behalf of the Alaska Northwest Natural Gas

Transportation Company ..................................................................................... 74

Sullivan, Bill, Executive Vice President, Exploration and Production,

Anadarko Petroleum Corp. .................................................................................. 60

Torgerson, John, Alaska State Senator and Chairman, Joint Committee on

Natural Gas Pipelines, Alaska State Legislature .............................................. 21

Wood, Patrick III, Chairman, Federal Energy Regulatory Commission ............. 23

APPENDIX

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

(1)

ALASKA NATURAL GAS PIPELINE

TUESDAY, OCTOBER 2, 2001

U.S. SENATE, COMMITTEE ON ENERGY AND NATURAL RESOURCES, Washington, DC.

The committee met, pursuant to notice, at 10:03 a.m. in room

SD–366, Dirksen Senate Office Building, Hon. Jeff Bingaman,

chairman, presiding.

OPENING STATEMENT OF HON. JEFF BINGAMAN,

U.S. SENATOR FROM NEW MEXICO

The CHAIRMAN. Good morning. The Senate is about to vote and

let me just advise folks that my plan is to go ahead and make a

short opening statement and then recess the hearing, unless there

are some other Senators who show up at that point to make opening statements. We will recess the hearing, vote, come back, and

then begin at that point with any additional opening statements if

other Senators are here or Senator Murkowski is here.

We have a lot of witnesses, and a lot of testimony to hear today.

I want to get going with the hearing.

The purpose of this hearing—and this is a hearing Senator Murkowski requested we have—is to receive testimony on the status of

proposals for the transportation of natural gas from Alaska to markets in the lower 48 States and on legislation that may be required

to expedite the construction of a pipeline from Alaska.

The committee held a similar hearing on this topic over a year

ago. Frankly, I had hoped that by this time the witnesses, some of

whom we will hear from today, would be involved with discussions

of a commercial proposal and that we would have both the Federal

and the State government working actively on legislation to expedite construction.

I am concerned that in fact we have made fairly minimal

progress in the last 13 months toward the goal of adding Alaska’s

natural gas resources to our domestic energy supply. According to

the Department of Energy, the gas reserves in the Alaska North

Slope equal 20 percent of the total gas reserves both onshore and

offshore in the lower 48 States. Bringing this gas to market would

have huge energy security benefits for the United States.

In addition, it would be a multi-billion dollar construction project

on the part of the private sector, requiring some 1,200 to 1,600

miles of steel pipe just to get from the North Slope to the hub at

Alberta, Canada. The Arctic pipeline, plus the additional pipeline

expansion needed to move the gas into end use markets, will proVerDate 11-SEP-98 13:53 Mar 25, 2002 Jkt 000000 PO 00000 Frm 00004 Fmt 6633 Sfmt 6633 J:\DOCS\78-277 SENERGY3 PsN: SENERGY3
2

vide 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 mothballed LNG terminals, expansion of existing facilities, and construction of new facilities, about 8 percent of our natural gas demand would be met by imported LNG in less than a decade.

By inaction, we start down a path to increased import dependence on natural gas, thereby losing the Alaska natural gas for a

substantial period, if not forever. Without Alaska gas, the United

States will end up importing more liquefied natural gas from countries like Algeria, Qatar, Nigeria, and Indonesia. Once those LNG

facilities are in place, the Alaska gas pipeline may not be economic.

We will never be able to produce enough oil to be independent

of the world oil market, but we have the potential to retain the security of a North American market. I believe we are at a critical

energy security juncture here. It may be of interest to the members

of this committee that this summer there were 11 gas-producing

countries that met in Teheran to plan a new OPEC for natural gas.

As chairman of the committee, I am prepared to develop legislation to streamline the regulatory approval process needed to move

forward with the pipeline. This legislation would need to be supplemented by a mechanism to reduce the financial uncertainty for the

companies that undertake to build the pipeline, and I am committed to work with the Finance Committee to see what can be done

in that area.

But a pipeline transporting domestic natural gas reserves from

Alaska to markets in the lower 48 is a project that can provide real

jobs across the country and in Canada and enable the United

States to meet the growing demand for natural gas and prevent import dependence in this area of natural gas in the future.

As I indicated, we will go ahead and recess the hearing now

while I go vote. We will return and proceed with the hearing after

I return.

[Recess from 10:08 a.m. to 10:21 a.m.]

The CHAIRMAN. All right, the committee will come back to order.

Let me call Senator Murkowski for his statement, and then we will

hear from witnesses.

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

FROM ALASKA

Senator MURKOWSKI. Thanks very much, Senator Bingaman, and

let me apologize for the delay. As you know, we have just completed a vote.

I want to welcome the Alaskans that are down here this morning

and I want to thank again Senator Bingaman for scheduling this

hearing. Some of you might recall it was September 14 of last year

that we held our first hearing to consider the transportation of

Alaska’s North Slope natural gas to market. My objective in calling

that hearing last year was to get a process under way that would

move this project along. That hearing explored the economics of

3

marketing Alaska gas, the energy security implications and route

alternatives for moving gas through Canada, as well as the issue

of developing LNG from Alaska.

Many of the witnesses that were with us a year ago are back

today, including the producers, Exxon, BP, Phillips, as well as the

Department of Energy, the Department of the Interior, FERC,

Yukon Pacific, Foothills, Arctic Resources, and others.

I think all would agree that last year’s hearing accomplished its

purpose and that the issue of developing Alaska gas will one day

become a reality under certain conditions. We hope to learn today

just what those conditions are.

Some may suggest that the Federal Government subsidize this

project. Well, let me enlighten you a little bit on that. The comments of the Federal Reserve Chairman Alan Greenspan and

former Secretary of the Treasury Bob Rubin when I posed that

question at a Finance Committee meeting last week, their concern

was that the gas pipeline would inevitably be built because natural

gas is the energy of choice today and tomorrow. The issue is when

the economics would justify the investment. In their view, to federally subsidize a project would set a bad investment precedent and

draw down from the current surplus for an unreasonable duration.

As you know, a lot of pressure on that surplus as a consequence

of the terrorist activities. They oppose any Federal subsidy, but

they did not rule out allowing accelerated depreciation for all gas

line projects.

I note that the producers in their testimony expressed concern

that they need to have assurances from the State on long-term fiscal certainty. This may be one of the major threshold issues the

Government and the legislature will have to deal with. A project

of this magnitude must have the certainty, and the whims of State

taxing authority are tied in real terms to the market price of gas.

It would seem that, while attention has been directed to the proposed Federal pipeline legislation, the State needs to be prepared

to address how it proposes to provide fiscal certainty regarding its

taxing authority.

I would remind my colleagues that the gas we speak of developing and sending to market in the lower 48 lies beneath State lands.

This is Alaska’s gas, unlike ANWR, which is on Federal lands.

While there is no question that the development of this resources

is important to Alaska as well as the Nation, it must be done with

an eye to the long-term effect its development will have on my

State.

Today, we are presented with a number of proposals from petroleum and pipeline companies to bring Alaska gas to markets in the

lower 48. While many of the proposals and suggestions are intriguing, many questions will remain. How can we reduce the cost of

this project through technological advances and State and Federal

incentives? And existing Federal law, is it really sufficient to expedite construction or is new Federal legislation really needed? How

do we ensure development of secondary gas infrastructures in Alaska and active participation of all production companies in Alaska?

Yes, significant progress has been made since the last hearing we

had on Alaska gas and a great deal, a great deal of money has been

4

spent by the producers to assess the economic viability of the gas

project. But we still have not crossed the finish line.

At the conclusion of last year’s hearing, I asked the producers to

submit draft legislation, which they presented to our committee a

few months ago. We are now prepared to address the recommendations in some detail. This committee has an obligation to hear from

Alaskans, the Governor as well as the legislature, and those who

will be directly impacted by the project. Their experience, their insight, and their role in this project must be part of the consideration.

In my letter to the witnesses, I stress that testimony from producers should address the economic incentives that might be required; further, to comment on the Governor’s ten points and any

proposals circulating from the legislature. I also asked that the

Governor and legislative representatives be prepared to comment

on what incentives the State might consider.

Because of the limited time for witnesses, some 5 minutes, I

would encourage each statement to be as responsive as possible. It

is my hope that by the end of this hearing we will have a much

better understanding of the important issues that need to be addressed as this committee contemplates Alaska gas line legislation

and that we have moved the process even further toward realization.

In the end, America cannot allow itself to become dependent on

overseas sources of natural gas. The potential for disruption of supply makes this solution to our energy needs simply unacceptable.

Getting North Slope gas to consumers in the lower 48 is vital to

the energy security of the Nation.

Well, where do we go next? It is my hope that after today, after

airing the respective conditions in some detail, we can come together again soon in a less formal setting either here or in Alaska

to work directly and collectively to initiate the startup of an economically viable project to bring Alaskan gas to market via a

southern route—a project as bold and as imaginative as any ever

conceived, a project of scope to challenge America’s technical skills

and environmental sensitivities.

Thank you.

The CHAIRMAN. Thank you very much.

Our first witness today is Governor Tony Knowles, who is the

Governor of Alaska. He has, of course, been a leader on this issue

for some period here and spoke to me about it a couple of weeks

ago. We are very pleased to have you here, Governor Knowles. Go

right ahead.

Senator MURKOWSKI. Let me welcome the Governor as well.

Thank you.

STATEMENT OF HON. TONY KNOWLES, GOVERNOR OF ALASKA

Governor KNOWLES. Thank you and good morning, Chairman

Bingaman, Senator Murkowski, and distinguished members of the

committee. For the record, I am Tony Knowles, the Governor of

Alaska. I welcome this opportunity to testify on the vital national

issue of my State supplying America with a secure, substantial,

and long-term source of clean energy which is available today,

Alaska natural gas.

5

Now, I have also long advocated the development of both the gas

line and development of ANWR as being in the Nation’s best interests. These projects meet separate, distinct national energy needs.

I will not go into detail concerning ANWR development today, but

I have attached my recent letter to this committee to my written

testimony.

I especially appreciate the committee’s willingness to consider development of Alaska natural gas when I know your attention as national leaders is rightly focused on America’s recovery from the horrific acts of September 11. On behalf of all Alaskans, I extend to

you and our President our gratitude for your strong leadership for

America. Our thoughts and prayers and my generous acts of Alaskans are with the victims and families as we come together to

mend our Nation.

As our President said, America must return to work. There is no

single undertaking on the national horizon that will do more to put

Americans to work than the Alaska highway natural gas pipeline

project. At a time when this Nation may well be in a recession and

the only news from corporate headquarters is the size of layoffs,

this project will provide 30,000 construction, manufacturing, and

transportation jobs with a payroll in excess of $1 billion a year.

This would all start as soon as the financing was under way. At a cost estimated between $15 and $20 billion, it is the largest

privately funded project in this Nation’s history. This 3,500-mile

pipeline from the Alaska North Slope to lower 48 markets would

be the largest gas capacity pipeline in America as it pumps 4 billion cubic feet of natural gas a day into our homes, businesses, and

electric generating plants for the next half century, tapping into

America’s largest known natural gas reserves of 35 trillion cubic

feet.

It has been estimated that an additional 65 trillion cubic feet are

waiting to be discovered. This long-term supply of affordable energy will obviously increase consumer confidence and business investment. The cumulative effect of this development economically

is estimated at 160,000 jobs and $300 billion addition to our gross

domestic product.

The critical step in realizing this economic and energy boom is

the strong, creative, focused national interest legislation that could

come from this committee and this Congress. I respectfully suggest

that there are three essential components of this vitally important

legislation:

First, the route must be mandated along the Alaska Highway, as

provided for in the 1976 Alaska Natural Gas Transportation Act;

Second, this legislation must build American industry and create

American jobs;

Third, there must be economic incentives to attract the private

capital to the project, which when completed will substantially add

to the national treasury.

There are many reasons why the route of the gas line must follow the existing oil pipeline from the Alaskan North Slope to Fairbanks and then the Alaska Highway through Canada to Alberta.

It is currently authorized in ANGTA and by presidential decision.

It is part of an international treaty with Canada. It recognizes the

environmental advantage of following existing transportation corVerDate 11-SEP-98 13:53 Mar 25, 2002 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 J:\DOCS\78-277 SENERGY3 PsN: SENERGY3
6

ridors. It allows vitally important access to the gas for the residents and businesses in Alaska.

For all of these reasons, this route has the broadest support

among Alaskans of any major project in recent history. Additionally, there are serious objections to the proposed alternative route,

commonly known as the northern, or over-the-top, route. This route

would require 240 miles of pipeline buried under the ice-choked

Beaufort Sea.

The first and perhaps the most significant opposition has come

from the unanimous objection of the North Slope Inupiat Eskimos.

At a recent public hearing, their corporate community and tribal

leaders vowed that they would use every resource available to them

to fight this route, which would threaten their cultural and nutritional dependence on marine mammals.

Second, Alaskans and national environmental organizations

strenuously oppose this ill-conceived frontier route. Calling for previously untested technologies, this project could never be considered as a preferred alternative to an existing land transportation

corridor.

Finally, our congressional delegation and business, civic, and bipartisan political leadership in Alaska steadfastly oppose the

northern route. It ignores the vital needs of the very State that

houses the resource.

Legislation already proposed to this committee by some North

Slope producers is innocently advertised only to expedite permitting and to be route neutral. With all due respect, that is not the

case. Their legislation puts the producers in the driver’s seat, expediting Federal processing of the over-the-top route despite the fact

that no comprehensive environmental analysis has been completed,

as is the case with the Alaska Highway route.

The producers say their legislation does not preempt ANGTA,

but in practice it would. Under their proposal, those what control

the gas control the route. If the producers opt for this northern

route, there would be years, if not decades, of fighting indigenous

peoples, environmental groups, and Alaska’s business and political

leadership. There could also be potential litigation for claims of

rights allegedly granted by Congress two decades ago in the

ANGTA regime.

The second major component of any Federal legislation should be

to build American industry and create American jobs. I would recommend three specific provisions: There should be priorities for the

use of American and Canadian steel, subject to reasonable costs

and in the public interest. After talking to several steel company

CEO’s recently, I can tell you they are excited about what the biggest steel order in American history would bring to their industry.

Second, I propose a project labor agreement to attract highly

skilled workers and organized labor to build and maintain this

pipeline. The Alaska Highway gas project will create about seven

million job years over its half-century life in many industry sectors.

Third, Federal legislation should include provisions to address

employment needs in Alaska, the State that will supply the Nation’s resource. These would include a preference for the hiring of

Alaskans, Alaska Natives, and the use of Alaska businesses in accordance with applicable State and Federal law.

7

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 razorthin margins for investors. That is why I believe there are three

key Federal economic incentives for the project:

First, accelerated depreciation at a 7-year rate, rather than the

15-year rate often granted;

Second, investment tax credits. A 10 percent investment credit,

like that granted in previous Federally authorized projects, would

save $2 billion on a $20 billion project.

Finally, a gas production tax credit, which would provide investor confidence by allowing a tax credit for natural gas production

tied to a floor price of gas.

Mr. Chairman, the other key provisions of Alaska’s proposal are

summarized in a separate handout we have provided the committee. Since completion of the Trans-Alaska oil pipeline nearly 25

years ago, Alaska has been proud to be America’s energy storehouse. By working with this committee, Congress and the national

administration, Alaska will continue to help meet America’s oil

needs from the Arctic National Wildlife Refuge, the National Petroleum Reserve-Alaska, and other fields.

Yet, just a pipeline away, North American demand for natural

gas for electrical generation, industry and transportation is growing. Alaska can help meet this demand while giving our sagging

national economy a sorely needed shot in the arm.

To assist your efforts, the State of Alaska has developed draft

legislation which we look forward to discussing in further detail

with your staff. It is the result of an extensive public process and

I believe represents about as close a consensus as is possible among

Alaskans. For their contributions to this effort, let me commend

the work of our Alaska Highway Natural Gas Policy Council and

the State legislature, especially its Special Gas Pipeline Committee, whose chairman, Senator John Torgerson, you will hear from

shortly.

Before I conclude, let me quickly add in response to questions

from Senator Murkowski that the State of Alaska is prepared on

many fronts to assist in the development of this project. Among

other things, we have expressed our longstanding willingness to

work with the project sponsors of the southern route in designing

a fiscal regime that recognizes the need for stability and predictability.

In summary, Mr. Chairman and members of the committee, the

State of Alaska and my administration stand ready to assist you

and the national administration in crafting a sensible national energy policy that continues to rely on Alaska as our Nation’s energy

storehouse.

Thank you.

[The prepared statement of Governor Knowles follows:]

8

PREPARED STATEMENT OF HON. TONY KNOWLES, GOVERNOR OF ALASKA

Good morning, Chairman Bingaman, Senator Murkowski and distinguished members of the committee. For the record, I am Tony Knowles, Governor of Alaska.

I welcome this opportunity to testify on the vital national issue of my state supplying America with a secure, substantial, and long-term source of clean energy

which is available today—Alaska natural gas.

I especially appreciate the committee’s willingness to consider this matter when

I know your attention as national leaders is rightly focused on America’s recovery

from the horrific acts of September 11th. On behalf of all Alaskans, I extend to you

and our President our gratitude for your strong leadership for America. Our

thoughts and prayers and many generous acts of assistance are with the victims

and families as we come together to mend our nation.

I have advocated the development of both a gas line and development of ANWR

as being in the nation’s best interest. These projects meet separate, distinct national

energy needs. While I will not go into detail concerning ANWR development at this

time, I have attached my previous letter to all of you on this subject to my written

testimony today.

As our President said, America must return to work. There is no single undertaking on the national horizon that will do more to put Americans to work than the

Alaska Highway natural gas pipeline project.

At a time when this nation may well be in a recession and the only news from

corporate headquarters is the size of layoffs, this project will provide 30-thousand

construction, manufacturing and transportation jobs with a payroll in excess of a

billion dollars a year. This would all start as soon as the financing is underway.

At a cost estimated between 15 and 20 billion dollars, it is the largest privately

funded project in this nation’s history. This 3,500-mile pipeline, from the Alaska

North Slope to lower 48 markets, would be the largest gas capacity pipeline in

America as it pumps 4 billion cubic feet of natural gas into our homes, businesses,

and electric generating plants for the next half century.

Tapping into America’s largest known natural gas reserves of 35 trillion cubic

feet, it has been estimated that an additional 65 trillion cubic are waiting to be discovered. The cumulative economic effect of this development is estimated at 160,000

jobs and a $300 addition to our Gross Domestic Product.

This long-term supply of affordable energy will increase consumer confidence and

business investment.

The critical step in realizing this economic and energy boom is the strong, creative, focused national interest legislation that could come from this Committee and

this Congress.

I respectfully suggest there are three essential components of this vitally important legislation. First, the route must be mandated along the Alaska Highway, as

provided for in the 1976 Alaska Natural Gas Transportation Act. Second, this legislation must build American industry and create American jobs. Third, there must

be economic incentives to attract the private capital to the project which when completed will substantially add to the national treasury.

There are many reasons why the route of the gas line must follow the existing

oil pipeline from the Alaska North Slope to Fairbanks and then the Alaska Highway

through Canada to Alberta.

It is currently authorized in ANGTA and presidential decision. It is part of an

international treaty with Canada. It recognizes the environmental advantage of following existing transportation corridors. It allows vitally important access to the gas

for the residents and businesses in Alaska. For these reasons, this route has the

broadest support among Alaskans of any major project in recent history.

Additionally, there are serious concerns over the proposed alternative route commonly known as the northern or ‘‘over the top’’ route. This route would originate

on the Alaskan North Slope then proceed 240 miles under the ice-choked Beaufort

Sea to the Mackenzie River Delta and then up that river drainage to Alberta.

First and perhaps the most significant opposition to that route has come from the

unanimous objections of the North Slope Inupiat Eskimos. At a recent public hearing, their corporate, community, and tribal leaders vowed they would use every resource available to them to fight this route, which would threaten their cultural and

nutritional dependence on marine mammals.

Second, both Alaskan and national environmental organizations have said they

too strenuously oppose this ill-conceived frontier route. Calling for previously untested technologies and risky ventures underwater, this project could never be considered as a preferred alternative to an existing land transportation corridor.

Finally, our Congressional Delegation and business, civic, and bipartisan political

leadership in Alaska have steadfastly opposed the northern route. Among other obVerDate 11-SEP-98 13:53 Mar 25, 2002 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6621 J:\DOCS\78-277 SENERGY3 PsN: SENERGY3
9

jections it ignores the vital needs of the very state that houses the resource. Access

to the gas for business opportunities and affordable energy in a state, that already

pays higher energy costs than most Lower 48 states, is essential to Alaska.

Legislation already been proposed to this Committee by some North Slope producers which is innocently advertised only to expedite permitting and to be ‘‘route neutral.’’ With all due respect, that’s not the case.

Their legislation puts the producers in the driver’s seat, expediting federal processing of the over-the-top route despite the fact that no comprehensive environmental analysis has been completed, as is the case with the Alaska Highway route.

While the producers say their legislation doesn’t pre-empt ANGTA, in practice it

would. Under their proposal, those who control the gas control the route.

If the producers opt for this northern route, there would be years if not decades

of fighting indigenous peoples, environmental groups, and Alaska’s business and political leadership. There also could be potential litigation for claims of rights allegedly granted by Congress two decades ago in the ANGTA regime.

The only route that can provide a timely beginning of this national interest

project is the already approved Alaska Highway route and current legislation must

reflect that.

The second major component of any federal legislation should be to build American industry and create American jobs. I would recommend three specific provisions.

First, incentives for the use of American and Canadian steel, subject to reasonable

costs and in the public interest. After talking to several steel company CEOs recently, I can tell you they are excited about what would be the biggest steel order

in American history 3,500 miles of specially designed, high-pressure 48- to 52-inch

diameter pipe.

Second, I propose a project labor agreement to attract the highly skilled workers

in organized labor to build and maintain this pipeline. The Alaska Highway gas

project will create about 7 million ‘‘job-years’’ over its half-century life in many industry sectors.

Third, the federal legislation should include provisions to address employment

needs in Alaska, the state that will supply the nation this resource. These would

include a preference for the hiring of Alaskans, Alaska Natives and the use of Alaska businesses in accordance with applicable state and federal law.

The final component of federal legislation should be economic incentives necessary

to attract private investment for a Southern route. Four billion cubic feet a day of

Alaska gas flowing into the Lower 48 will create market stability and lower prices,

both of which are good for residential and industries consumers. It will reduce the

cost of living for American users and provide a needed boost to the national economy.

Yet at the same time, uncertain gas commodity prices make for razor-thin margins for investors. That’s why I believe there are three key federal economic incentives for this project.

First, a provision that has been proposed by the Congress for other projects on

a bi-partisan basis, accelerated depreciation, at a 7-year rate rather than the 15-

year rate often granted.

Second, investment tax credits are an important component to propel this project

forward. In previous federal projects, a 10 percent investment tax credit adopted by

Congress in other contexts would save $2 billion on a $20 billion project.

Finally, a production gas tax credit which would provide investor confidence by

allowing a tax credit for natural gas production tied to a floor price of gas.

Mr. Chairman, the other key provisions of Alaska’s proposal are summarized in

a separate handout we have provided the committee.

Since completion of the trans-Alaska oil pipeline nearly 25 years ago, Alaska has

been proud to be America’s energy storehouse. We have supplied up to a quarter

of America’s domestic oil production from the nation’s two largest oil fields. By

working with this committee, the entire Congress and the national administration,

Alaska will continue to help meet America’s oil needs from the Arctic National Wildlife Refuge, the National Petroleum Reserve-Alaska and other fields.

Yet just a pipeline away, North American demand for natural gas for electrical

generation, industry and transportation is growing. The United States and Canada

already consume about 24 trillion cubic feet of natural gas a year, with that projected to soar to 30 trillion cubic feet by the decade’s end.

Alaska can help meet this demand, while giving our sagging national economy a

sorely needed shot in the arm.

To assist your efforts, the State of Alaska has developed draft legislation which

we look forward to discussing in further details with your staff. It is the result of

10

an extensive public process and I believe represents about as close a consensus as

is possible among Alaskans.

For their contributions to this effort, let me commend the work of our Alaska

Highway Natural Gas Policy Council and the state Legislature, especially its special

gas pipeline committee whose chairman, Senator John Torgerson, you will hear from

shortly.

Before I end I wanted to quickly add in response to questions from Senator Murkowski that the State of Alaska is prepared on many fronts to assist in the development of this project. Among other things, we have expressed our long-standing willingness to work with project sponsors of a southern route in designing a fiscal regime that recognizes the need for stability and predictability.

In summary, the State of Alaska and my administration stand ready to assist you

and the national administration in crafting a sensible national energy policy that

continues to rely on Alaska as our nation’s energy storehouse.

The CHAIRMAN. Thank you, Governor. Thank you very much for

that testimony. Let me just ask a couple of questions and then

defer to Senator Murkowski.

You have indicated that the legislation or the draft legislation

that was presented to us regarding expediting the permitting process is objectionable, that it is not in fact route-neutral. You have

indicated that the State of Alaska has developed its own draft legislation as an alternative. Do you address this issue of expediting

the permitting process as part of what you are proposing, or do you

believe that that is not a necessary element of what we do? How

do you deal with that subject?

Governor KNOWLES. Yes, sir, Mr. Chairman, we do believe that

the expedited permitting process could take place on the southern

route, as it has already been subject to an EIS statement, which

does need to be renewed, but indeed has met all of those provisions. An expedited permitting process for the over-the-top route

would be seen by many, and I think validly so, as a shortcut

through important environmental considerations that have not

been addressed through that route.

We do believe that the expedited permitting process should take

place, but that the producers should not be put for the first time

ever in the position of choosing who, where and when a route

would be decided upon, that it is in the national interest to dictate

the route, just as it was in 1976 with a presidential action and

Congressional action, and would remain so today.

The CHAIRMAN. So the main difference between what you are

proposing and what has otherwise been recommended is that you

would have the Congress dictate the southern route as the way to

go?

Governor KNOWLES. Yes, sir.

The CHAIRMAN. On the financial incentives, how do you respond

to the position that Senator Murkowski summarized, that we heard

from Chairman Greenspan and from former Secretary of Treasury

Bob Rubin about how they did not believe the Government should

subsidize the construction of a pipeline? What is your view? How

do you counter that?

Governor KNOWLES. Mr. Chairman, there is no question that this

project is unique, not only being the largest in American history

privately funded project, but by the nature of the resource and the

time period over which a return on the investment would have to

be realized and a commodity price that fluctuates wildly, to say the

least.

11

In order to do that, there does have to be fiscal regimes, both at

the Federal and State level, that would attract the necessary capital to that. We believe it does have to be tailor-made for the

project and, rather than a subsidy, would be really the opportunity

to create a project which will add substantially to the national

treasury, and not in the sense of a subsidy be a drain on it.

The CHAIRMAN. Let me defer to Senator Murkowski.

Senator MURKOWSKI. Thank you, Senator Bingaman.

Good morning, Governor. We are very pleased that you could be

with us. My compliments on your testimony. Let us together share

the dilemma. I have had the opportunity to read the testimony of

the producers and they without exception generalize that currently

neither the northern or southern route is economically viable.

Where do we go next? We can talk about your ten points. We can

talk about the legislature’s 12 points, I believe. Maybe there is 14.

I am not sure. We can talk about the Federal proposal that the producers have submitted. But the price of natural gas is the price of

natural gas today and this is a long-term project. I am wondering

from the standpoint of the State what your thoughts are relative

to where we go next.

Governor KNOWLES. Thank you, Senator Murkowski. I too have

heard the interim or midterm report from the producers and, looking at it in a very positive light, I found it very productive and optimistic. The fact that they could look even at this mid-term report

not yet finished and see that there would be a 10 to 12 percent return on investment, something that our mutual constituents would

be glad to be receiving these days, I do not think is a hindrance.

What I do suggest that we need to do is work in a collaborative

fashion between the public and the private sector to craft a project

that does meet the needed investment needs to pull in, and if it is

not the producers, perhaps it is pipeline companies and other investment opportunities that can be attracted to it. There certainly

has been a lot of interest in it.

So I see the report that they have come up with, not saying that

saying that neither route is economic, but that this still remains

a very doable project. The advice that we have had from any number of industry experts and energy experts believes that this

project, despite a current low price and commodity fluctuations, is

not a hindrance to the long-term need of America for this project

because of the fundamental change in the structural demand for

natural gas, as you alluded to in your comments.

Senator MURKOWSKI. One more question, Governor, relative to

your specific recommendations about what the Federal Government

can do in regard to incentives, and I think the possibility of accelerated depreciation applicable to all gas pipelines might be a possibility as well. But when we are dealing with a business decision, as

you and I know from our long experience in Alaska, the major corporations do not come to Alaska because they are in love with our

State; they come because they want a return on investment to their

shareholders.

We have provided I think a good business climate, but they want

some certainty that indeed the State will maintain a fiscal continuity. As you know, that is pretty hard, to bind one legislature with

another. But in my conversations time and time again I have

12

heard: Well, what assurances can the State provide that there is

going to be a certainty associated with the taxing authority? I am

going to ask the legislative representation here the same question

as well.

But I think you generalize a little bit in your statement that the

State is prepared to give that, but could you be a little more specific relative to just what you feel the State should do to provide

that degree of certainty, which I think can make up to some extent

for the evaluation. Maybe the return is 11 percent now, they are

looking for 15 percent, and we are trying to obviously increase the

and make it more attractive.

Governor KNOWLES. Mr. Chairman, Senator Murkowski, in response to what specific measures the State would take, indeed I

think it would have to come down to the specific details in a wide

universe of needs. It is not just the needs of producers. There are

other companies that are interested perhaps in building a pipeline

and we have not yet exhausted all of those opportunities.

The State has recognized the fact that the predictability and that

current State laws are really more oriented toward an oil tax regime rather than a gas tax, which has different needs because of

the length of the time that it requires to have a return on investment.

I do not necessarily accept the 15 percent investment return, nor

do industries that are interested in developing a pipeline. I think

that what we need to do is look specifically to a model on how the

pipeline can be developed, with what safeguards need to be applied,

to provide the necessary investor confidence. The State has certainly a history of working in partnership with the industry for this

procedure and we would do the same.

But we would have to see first of all, concerning the route designation, as mandated along the southern route, which would then

give us the basis upon which we could proceed with that in conjunction with Federal legislation.

Senator MURKOWSKI. I am going to ask the producers that same

question because I think it is paramount: How do we get over the

hump relative to their evaluation that it is currently not economic?

There are obvious ways to tie taxation to a floating price structure

for gas and taxes that would, in other words, correspond with

whatever the price of gas was. If it went up higher, the tax would

be higher, and if it went down it would be lower as well. Some assurances along that line might sooth some of the concern that the

investors have with the project.

Thank you very much.

Governor KNOWLES. Mr. Chairman, if I might, Senator Murkowski, that would also comply with, I respectfully suggest, with the

Federal tax legislation level of the industry also, with this being in

the national interest in the form of jobs and a secure, clean source

of affordable energy that residents and consumers of gas in the

lower 48 would recognize. That would also indicate a responsibility

for Federal legislation.

The CHAIRMAN. Senator Landrieu.

13

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

FROM LOUISIANA

Senator LANDRIEU. Thank you.

Welcome, Governor. It is always a pleasure to have you before

the committee. I want to acknowledge and thank you for your leadership in this area and so many important issues for our Nation.

Let me just make a couple of comments and then just a brief question.

I really appreciate the chairman calling this hearing and recognize that when Senator Murkowski chaired this committee this was

one of the focuses, about trying to move this gas from Alaska to

be beneficial to our Nation. It was important before September 11.

Now, post-September 11, it becomes even I think more important,

more critical. The country is really focusing on our vulnerabilities,

not just our military but our economic.

The energy policy of this Nation is one clear place where we need

to refocus our efforts to try to make our country more self-reliant.

Second from self-reliance is reliance on allies we can count on in

places in the world that are closer and safer than the areas that

we find ourselves to be. So I, in the context of that, want to give

my support in whatever way to speed up the development of this

pipeline, thinking that it has been much too long in its development.

I would say that, as a producing State, that I would argue

strongly that the Alaska delegation, the Governor and the delegation that is ably represented by Senator Stevens and Murkowski

and Don Young in the House, that your views be given extreme importance or weight in terms of what is best for Alaska, as well as

what is best for the Nation, because while you are producing the

gas and it is economical for the private companies and hopefully

beneficial to Alaskans, it is the Nation that needs the gas, not necessarily the people in Alaska, but the rest of the 48 States that

need the gas, as well as the 500,000 or so people in Alaska.

The second point I want to make is that, while I generally support Federal-State partnerships and have found them useful,

whether you are talking about housing developments or reconstruction of downtowns or gas, oil, energy delivery systems, I would just

say, Mr. Chairman, that I think we have to be very careful about

the nature of this subsidy, because we have a lot of energy to

produce in this Nation at a lot of different ways, and the subsidy

that we craft for this pipeline is going to set precedent for how we

craft other subsidies for other pieces of this energy puzzle.

So I think we have to be very careful. While I normally want to

be in partnership with industry and I am not saying that I would

not give my vote along that line, I just think that we have to be

careful.

So my question is, Governor, would you be specific with us about

your ideas as Governor about trying to move a route that the delegation from Alaska favors, what the specifics of some kind of partnership or subsidy might be to get this project really moving and

get the gas where we need it as quickly as possible?

Governor KNOWLES. Thank you, Mr. Chairman, Senator

Landrieu, thank you very your comments. I certainly am very supportive of what you have established as important to the national

14

policy. In regard to the routing of the pipeline, the southern route,

which has already been subject to congressional act, a presidential

decision, and an international treaty, we believe has the broadest

national and certainly State of Alaska support of any direction

from all of the relevant perspectives.

We think we could immediately begin the successful start of this

project. In relation to the subsidies, I do perceive this project to be

unique, certainly in size. There is no project in the history of America that comes close to the $20 billion that are estimated here, also

going through two countries. I believe it does need to have some

special consideration concerning the long-term relationship of the

payback.

I make suggestions that certainly the State will be looking at

similar types of partnerships and security to private investment.

But I would note that there are only private investment dollars

that are going into this project, that it will when completed substantially add to the national treasury and through the increased

employment and prosperity will certainly add to the Federal treasury in that regard.

Senator LANDRIEU. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

I am advised that Senator Bayh wanted just a minute to make

a statement and has to leave again. Could I interrupt and do that,

and then Senator Campbell?

Senator CAMPBELL. Yes.

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

FROM INDIANA

Senator BAYH. Thank you, Senator Campbell.

I apologize, Mr. Chairman. I do have to preside on the floor at

11 o’clock and so it is not a meeting I can very well put off. I just

very quickly want to say welcome to Governor Knowles. Governor

Knowles and I, Mr. Chairman, had the pleasure of serving together

as governors for several years, and it is good to see you again,

Tony, and I look forward to working with you as best we can on

this issue.

Mr. Chairman, I am struck by the fact that this issue was first

visited by the U.S. Senate in 1976, I believe. It shows you how long

this issue has been around that my father voted on this subject. So

generations come and go in the U.S. Senate, but the issue of this

gas pipeline remains.

But I am hopeful that we can make some progress on it. It is

clearly an issue whose time has come. The gas spikes of last winter

remind us of that. So, Governor, I just want to say that I am going

to do what I can in being constructive in getting this project going,

getting this gas on line. It is important for the American people,

for consumers. As Senator Landrieu mentioned, there is an important national security issue here. So let us pick the route in a way

that will expedite this, get on with it, and you can count on me to

be a constructive supporter of that recommendation.

It is good to see you again.

Senator Campbell, thank you for your courtesy.

15

Mr. Chairman, thank you. I apologize for needing to get to the

floor.

Senator CAMPBELL. Thank you, Mr. Chairman.

Welcome to the lower 48, Governor. I am a big supporter of any

energy-producing systems and I know that, particularly when we

have got ourselves into being more and more dependent with each

passing year on getting our energy from countries who would like

to bury us, it is not a good long-range plan for us.

I wanted to ask you two or three questions. I come from a State

that has huge natural gas reserves, as you probably know, Colorado, as does Wyoming, my colleague to my left. To my knowledge,

none of the companies that build transmission lines for the natural

gas for our States get any kind of a government subsidy. I may be

wrong, but I do not think they do for building their lines.

Let me play the devil’s advocate and ask you, why should the

Federal Government subsidize one from Alaska, which I am not opposed to doing? But I have to go home and explain that to my companies. Why should we do that when we are not subsidizing the

companies in the lower 48 to transport natural gas?

Governor KNOWLES. Mr. Chairman and Senator Campbell, I believe that there are projects on the record where an investment tax

credit has been given to companies for investments. There are situations—I believe it is currently being considered by Congress for

gas infrastructure to be given accelerated depreciation.

Certainly because of the nature of the size of this particular

project, which would have an enormous national interest impact,

perhaps some type of security in regards to a commodity pricing

that may well fall and hesitate to have investors put $20 billion towards it, might indicate a need for some type of gas production tax

credit. This I think should be judged in that light.

Certainly Congress would be looking at providing incentives for

investment in all industries, particularly rebuilding our infrastructure, which I believe Felix Rohatyn has recently written some important articles on. There is nothing more important than getting

this business and economic back on the positive direction of that

type of investment.

So all of these I think are going to be closely considered and I

would only represent this to this committee and the Congress in

that light.

Senator CAMPBELL. Thank you.

There are several routes that have been proposed, as I look

through the notes, and I have not read them line by line. But you

prefer the one that is called the southern route that goes along the

AlCan Highway, is that correct?

Governor KNOWLES. Yes, sir.

Senator CAMPBELL. I have not seen anything in here that compares the costs. Two things, actually: the cost of the different proposals, transmission proposals, number one; and the security of it.

Obviously, since the 11th of the month we have all been concerned

about security of everything here in Washington. Long transmission lines, long transportation lines, would seem to me offer

great opportunity for people that would want to disrupt our energy

policy.

16

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 socalled over-the-top route and the southern route. But I believe you

will hear testimony today perhaps that indicates that this may not

exist at all, from producers and from other witnesses.

It is really unknown and untested technology, in reference to

that section of the pipeline under the sea. Also, being a frontier

route down the MacKenzie River, there are a wide number of both

logistical questions that are not applicable to the route along the

already existing Alaska Highway, as well as just unknowns in a

frontier area, that would say that whatever cost estimates there

are are going to be very inexact.

So it may not be any difference whatsoever. I do say, though,

that in reference to the ability to get the project started, the enormous barriers that confront the over-the-top route from the indigenous peoples of the Alaska North Slope, who are adamantly opposed to it, as you will hear today, environmental concerns, again

from groups both Alaskan and national the are adamantly opposed

to it, as well as the Alaskan business and political leadership,

would make, if time is money, the northern route I think extraordinarily expensive in regards to meeting the national interest.

Senator CAMPBELL. The northern route, is that the one that proposes that they bring the gas by pipeline a certain portion of the

way, then liquefy it and put it on ships for the rest of the way?

That is not the northern route?

Governor KNOWLES. Mr. Chairman, Senator, no, sir. that would

be an LNG project that has been discussed from the Port of Valdez

in Alaska with the LNG. This route would be one that would go

from Alaska’s North Slope 240 miles under the Beaufort Sea to the

MacKenzie River Delta, then up the MacKenzie River to Alberta.

In reference to the question concerning security—— Senator CAMPBELL. How do we secure from sabotage?

Governor KNOWLES. Of course, the security of the existing oil

pipeline was very first on the concerns of the State of Alaska. My

Adjutant General during the events on and immediately after and

continuing today of September 11, the security of the pipeline, the

port facility and the production facility are critical and are shared

jointly by both the private ownership of that pipeline as well as the

State troopers of Alaska, the FBI, the Coast Guard at Valdez. We

have a number of provisions, all of which, like everything else in

America, are being reviewed.

I would suggest that the security even of a long transmission line

within the confines of the United States and Canadian territories

is certainly more secure than the tanker and facility traffic from

far distant ports in other countries.

Senator CAMPBELL. Thank you, Mr. Chairman.

17

Just let me say, I also heard with interest that the Governor

mentioned the use of American steel. Knowing the proximity of

part of that northern part of Alaska to Japan, it is a lot closer than

it is to here. I sure hope that we can preserve some jobs in steel

and contracting contracts to build that with American labor and

American supplies. But that is yet to be played out, I suppose.

Senator MURKOWSKI. Senator Bingaman, let me just make a very

short reference to the issue of subsidies, which has come up here

by at least two members. In reading over the producers’ testimony,

there is no request for subsidies. There is incentives relative to expediting permitting. There is a concern over the benefits of accelerated depreciation, taking it from 15 years to 7 years. One producer

would like to see a floor and ceiling.

But I do not want the public or the press to be misled that producers are asking for subsidies. They are simply saying that the economics currently do not favor either route. But I do not want to

be construed that we are talking about subsidies here for this pipeline.

The CHAIRMAN. Senator Feinstein.

Senator FEINSTEIN. Thanks, Mr. Chairman. Mr. Chairman, Senator Bayh said that he knew Governor Knowles. I also know him.

We were mayors together and he hosted the U.S. Conference of

Mayors in Anchorage. Tony, I think that was what, 16, 17 years

ago?

Governor KNOWLES. Yes, Senator.

Senator FEINSTEIN. When I returned home there was a huge

king salmon awaiting me. It was still the best salmon I ever had,

I want you to know. I do not know if it will get you a pipeline, but

it was the best salmon I ever ate. So it is great to see you again.

Governor KNOWLES. Thank you, Senator. As I recall that trip

also, while you and I were mayor your husband was climbing

Mount McKinley. Certainly, my great respect for his athletic prowess.

Senator FEINSTEIN. Well, yes. He is still doing those things

today. But anyway, thank you very much. It is great to see you.

I wanted to follow up on something Senator Campbell said. That

is, it is the price difference. I have the route options between the

north and the south. If I understand it correctly, the southerly one

is $17.1 billion and the northerly $15.1 billion, so there is a $2 billion difference in cost.

Why in your view is there such a difference in cost?

Governor KNOWLES. Mr. Chairman, Senator, I think that you

will hear today that that cost has not yet been determined. There

are estimates as of the interim report. The studies have not been

completed, and until that information is given the opportunity for

scrutiny they will have to answer the question of the untested technology of heretofore never tried before span of 240 miles of pressurized pipe, which has never been achieved, without booster stations

along the way.

They will have to address some of the other issues that will be

certainly questioned about the routing up the MacKenzie River. So

the difference of $2 billion has yet to be established.

Even if it is, Mr. Chairman, Senator, at a level more from just

a purely engineering perspective, there is certainly the considerVerDate 11-SEP-98 13:53 Mar 25, 2002 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6602 J:\DOCS\78-277 SENERGY3 PsN: SENERGY3
18

ation that the people of the North Slope deserve regarding protection of their marine mammals, certainly the environmental concerns that we would all share, that would make a scrutiny of this

project years, decades, if ever at all; and that, if time is money, I

think would have to be part of the equation in determining the advantages of one route over the other.

Senator FEINSTEIN. I would assume that either route would have

some environmental problems, not that they cannot be remedied.

But who would be expected to pay that differential?

Governor KNOWLES. Of course, the cost of the pipeline will be reflected in the tariff which would be paid for by the consumer.

Senator FEINSTEIN. Thank you, Mr. Chairman.

The CHAIRMAN. Senator Thomas.

Senator THOMAS. Welcome, Governor. Glad to have you here.

Certainly interested in this pipeline, as we are a production State

in Wyoming certainly.

Someone mentioned there is no need for legislation now. How do

you react to that?

Governor KNOWLES. It is our belief that if there is to be legislation that will actually get this project moving, it has to be addressed by this committee and this Congress.

Senator THOMAS. Why could it not move without legislation?

Why is this not a private sector operation?

Governor KNOWLES. It is a private sector operation. But just as

there needed to be national legislation in 1976 which exists on the

books, it does have to be, I believe, modernized to existing conditions today. All of the provisions under the existing national law

of the Congressional Act of 1976 are not applicable today. So we

would like to see—and it is in the legislative amendments that we

have suggested—there are a couple points that do need to be addressed, certainly in terms of the regulatory structure and the franchise of it, that have not yet been satisfactorily answered.

So it is private sector-driven, but there does need to be, I think,

national action, or there is national action already on the books

and it would have to be, I think, brought up to date.

Senator THOMAS. Notwithstanding what you said before, in your

testimony you asked for a tax credit for producing gas tied to a

price floor. Do we have that same thing in Wyoming?

Governor KNOWLES. I do not believe so, sir.

Senator THOMAS. Why should they then have it in Alaska?

Governor KNOWLES. Well, in reference to the investment that is

being made here, the amount of money is I think certainly a consideration that should be part of the equation in determining what

would be necessary to attract all of the private sector dollars.

Senator THOMAS. I understand, but is not this gas going to be

competitive with the rest of the country, or is it going to be treated

separately?

Governor KNOWLES. I believe that it would be competitive with

all gas. But it is determined that America needs an additional 6

trillion cubic feet by the year 2010 and there is a real question as

to whether we can make up that supply. There is currently a 24

trillion cubic feet every year use in America. It is going to go to

30, and there is real concern as to whether we will be able to meet

that gap.

19

Senator THOMAS. I agree with you entirely, but I do not see how

you can kind of single out one development and one production

area as opposed to others which are going to be in the marketplace.

For instance, you say you would provide for Alaska hiring. Was

that done when we built our pipeline to California? Did we hire

Wyoming people?

Governor KNOWLES. I believe that all States do look to having——

Senator THOMAS. You can look to, but you cannot pass it in the

legislation, can you?

Governor KNOWLES. I make reference to it, sir, that that is something that would be allowable under applicable current State and

Federal law.

Senator THOMAS. It would be strange if it were, real strange.

That is a little unusual, is it not, to say, look, you can only hire

Alaskans for this job, especially if you want to kind of support nationally that you are asking for?

Governor KNOWLES. I believe that there are certain considerations for areas that have very wide unemployment. We have some

remote rural areas where there are 50 percent unemployment,

there is no private sector jobs. I think empowerment zones is something that has been embraced by this Congress to look to local hire.

Certainly there are provisions in national law for American Indian opportunities and the Alaska Native opportunity that we are

doing has been reflected in previous national law with construction

of the oil pipeline. So this does have precedent in law and we are

asking for nothing more than could be provided to other projects.

Senator THOMAS. But you do agree that when this gas arrives at

wherever, Chicago or wherever, it is going to be competitive with

the gas produced in Wyoming and in Colorado and in Louisiana?

Governor KNOWLES. Yes, sir.

Senator THOMAS. Okay. I just am a little concerned that it is

hard to be competitive when on the other end you provide unusual

incentives. I am for this and I hope we can come up with something, but I am a little concerned that we are saying we are going

to come into the marketplace, we are going to provide all of this,

but here are the conditions that do not apply to the rest of the producers in the country.

Thank you very much.

The CHAIRMAN. Senator Dorgan.

Senator DORGAN. Mr. Chairman, thank you.

Governor Knowles, I missed your testimony. I have read it, however. But I have another Commerce Committee hearing on transportation security occurring right now, so I am trying to get to both

of them, and excuse my absence while you were testifying.

The price of natural gas today is what, $1.85, $1.90?

Governor KNOWLES. Yes, sir.

Senator DORGAN. A dramatic change from 6 months ago or 9

months ago, 12 months ago. So when you in your testimony talk

about certainty and about price floors and so on, you are making

the point, I suspect, that in order to justify the kind of money that

is necessary to build a pipeline to transport that natural gas. The

market would have to feel some certainty with respect to income,

is that the point you are making?

20

Governor KNOWLES. Yes, sir.

Senator DORGAN. My own view is that, while there are a lot of

controversial issues in energy policy that we will come to grips with

in this committee, I really feel that the issue of natural gas from

Alaska is a question of not whether, but when and how. Your testimony I think is instructive for us. I think there are a lot of questions.

The folks in Alaska who will contribute substantially to our energy, present and future, are receiving State royalty payments and

so on. We watch all that from down here. I guess the question I

would ask you is, as we proceed to try to connect your supply to

our demand as a Nation with a pipeline, what is the State of Alaska prepared to do to help provide that certainty that I just described earlier about price and economic return or financial return,

rather, to those who will be involved in building the pipeline?

Governor KNOWLES. In reference to the fluctuation of the price,

clearly the $1.80, $1.90 that it reflects today would not substantiate the building of the line. However, the gas that has stayed for

20 years in the ground has not had really a market. There was in

the last 2 years a feeling that there was a dramatic change in the

demand structure of the demand curve for natural gas in the future, even despite the current dip in the prices.

It has been my advice that this feeling remains strong. You will

have witnesses coming up here to testify from both producers as

well as pipeline companies that I think will also adhere to the fact

that the long-term feeling that the price of natural gas will justify

this development.

In regards to competing other gases much closer to market, there

does have to be I think some collaborative measures taken both by

the Federal Government and by the State of Alaska to ensure some

type of security so that the investment dollars will go into this unprecedented transportation infrastructure which will be necessary

to bring this gas to market.

Senator DORGAN. But do you have some idea as to what the

State of Alaska’s piece of that might be?

Governor KNOWLES. Yes, we are willing to talk about all aspects

of the gas tax structure, to tailor it, not as a subsidy, as Senator

Murkowski has said, but as part of the necessary incentives to attract the dollars to a market that previously has not existed. So we

feel that, just as there are uniquely tailored tax structures

throughout a tax code that is rather thick to address specific areas

that are not done on a uniform basis, so will be this project.

Senator DORGAN. Mr. Chairman, I do not think the present price

of natural gas diminishes the need at all for us to be working on

this issue. I agree with Governor Knowles that our view of this in

terms of energy security must be on the longer term, not the shorter term. We might want to learn from the period where oil went

to ten dollars a barrel and people stopped looking for oil and gas

and then we had really flat exploration and we needed supply and

the price spiked way up.

It does not serve anybody, It certainly does not serve this country

or its consumers, to have these roller-coaster rides on prices. We

need more stability, stability in exploration, stability in supply. We

need a lot of other things in energy policy, including conservation.

21

But I think the point of your testimony is very important for us

to understand. That is, that current circumstances do not diminish

the need for us to do this. The question is not whether, the question is how and when do we do it.

Mr. Chairman, thank you very much.

The CHAIRMAN. Thank you very much.

Senator Craig.

Senator CRAIG. I have no questions.

The CHAIRMAN. Governor, thank you very much for your excellent testimony. We appreciate it, and we will take your suggestions

under advisement, as they say in the courts.

Governor KNOWLES. Thank you, Mr. Chairman and distinguished

members of this committee.

The CHAIRMAN. Thank you very much.

Senator MURKOWSKI. Thank you, Governor.

The CHAIRMAN. We have a panel one. We also have one additional witness specifically representing a State senator from Alaska, who is chair of the Joint Committee on Natural Gas Pipelines,

Mr. John Torgerson. If he would come forward with the first panel,

and I will ask them each to testify before we start our next round

of questions.

Mr. Kripowicz, who is the Acting Assistant Secretary for Fossil

Fuel in the Department of Energy; Pat Wood, who is the Chairman

of the Federal Energy Regulatory Commission; and Ms. Drue

Pearce, who is the Senior Advisor for Alaska Affairs in the Department of the Interior. We are very glad to have all of you here.

Why don’t we start with you, Senator Torgerson. We appreciate

you being here and look forward to hearing your perspective, each

of you. In each case, of course, we will take the full testimony into

the record. If you could summarize the main points you think we

need to be aware of in about 5 minutes, that would be great. Please

go ahead.

STATEMENT OF JOHN TORGERSON, ALASKA STATE SENATOR

AND CHAIRMAN, JOINT COMMITTEE ON NATURAL GAS PIPELINES, ALASKA STATE LEGISLATURE

Mr. TORGERSON. Thank you, Mr. Chairman. Good morning. Good

morning, Senator Murkowski and members of the committee. My

name is John Torgerson. I chair the Alaska State Senate Resources

Committee and the Joint Committee on Natural Gas Pipelines,

which is made up of equal members from our House and Senate.

One of the responsibilities of this joint committee is to represent

the legislature before this Congress on natural gas pipeline issues.

The committee met on September 19, where we discussed the

Alaska gas producer pipeline team’s proposed legislation. We

unanimously oppose this draft legislation and voted in favor of requesting Congress to reaffirm the Alaska Natural Gas Transportation Act, ANGTA, as the prevailing law. Virtually everything the

producers have proposed can be found in ANGTA.

One of our major concerns with the producers’ legislation is the

fact that it is route-neutral, giving them the opportunity to apply

for a buried, underwater, offshore ANWR pipeline route, which

Alaska is adamantly opposed to. Back in the mid-1970’s there were

three pipeline applications filed under the Natural Gas Act: the soVerDate 11-SEP-98 13:53 Mar 25, 2002 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 J:\DOCS\78-277 SENERGY3 PsN: SENERGY3
22

called over-the-top route, the Alaska Highway or AlCan route, and

an all-Alaskan or liquefied natural gas route.

To end the route debate, Congress passed the Alaska Natural

Gas Transportation Act. Section 7 of this act required the President

to prepare a decision on the Alaska natural gas transportation system, which he did, and which he submitted to Congress on September 22, 1977. The President’s decision was approved by Congress

in Public Law 95-158 and modified later on by Public Law 97-93.

The Canadian Parliament then passed its own version of ANGTA,

known as the Northern Pipeline Act.

So the President and Congress have not repealed their action on

the Alaska highway route. ANGTA is still the prevailing law with

respect to Alaska pipelines. Furthermore, an application should not

be considered if filed under the Alaska Natural Gas Act since these

very same proposals have already been reviewed and the route has

been selected.

An Alaska Highway route authorized by Congress and the President is important for Alaskans for the in-State jobs and the creation of value-added industries along the line and along spur lines

to tidewater, the stable revenue stream for our communities and to

our State, and most importantly a clean-burning energy source for

Alaskans to rely on for many years in the future.

A pipeline built in the Beaufort Sea greatly reduces the potential

for Alaskans to reap the benefits from our gas. In addition, we believe, and the national environmental organizations agree, that the

Alaska Highway route is more environmentally sound than the

Beaufort Sea route.

In our support for ANGTA as the prevailing law, the Joint Committee recognizes that a few changes will be helpful to bring this

project into the twenty first century. Therefore, we approve 12 proposals that I have submitted in my written testimony, and in the

interest of time I would like to just highlight a few of those.

The first proposal we have already discussed. It is to reaffirm the

Alaska Natural Gas Transportation Act as the prevailing law.

Second, to adopt the provisions in H.R. 4 to ban the over-the-top

route to the Beaufort Sea as a legitimate pipeline route.

Third, create a joint board consisting of members appointed by

the Federal Energy Regulatory Commission and the regulatory

commission of Alaska, to ensure that Alaska has fair and reasonable access to the gas produced within our State.

The last two proposals I will highlight have to do with tax incentives. First, we support the language currently in H.R. 4 allowing

for an accelerated depreciation schedule of 7 years. Our next proposal could be considered a tax disincentive. Since it is the policy

of the United States to reduce our dependence on foreign energy

sources, we believe Congress should not pass any law giving incentives to liquefied natural gas imported from outside North America.

Rather, Congress should give incentives to gas from nonconventional sources in frontier areas within the United States.

As far as other tax incentives are concerned, the producers have

not asked for any. They have not shared their financial projections

with my committee. The only thing the producers have mentioned

is a need for fiscal certainty in the State’s tax regime. The Alaska

legislature has funded the Department of Revenue to hire outside

23

experts to study our gas tax regime, to make recommendations to

advance the project, and to offer market-based incentives.

We have also funded and hired experts to make recommendations regarding the possible ownership by the State or financing all

or part of the line.

These reports are due back to the legislature January 2002. So

we will be prepared to consider any necessary incentives when we

have the data from the project’s sponsors to justify the incentive.

Right now I feel we should not begin our negotiations by leading

with incentives until we at least verify the profitability of the

project.

In closing, Mr. Chairman, I would like to mention this is important to Alaskans, that the provisions authorizing the exploration

and drilling in the Arctic National Wildlife Refuge remain in H.R.

4. America needs more reliable energy sources. We have those resources available in Alaska. Alaska stands ready to assist you in

delivering those to market.

Thank you.

[Attachments submitted by Senator Torgerson have been retained in committee files.]

The CHAIRMAN. Thank you very much.

We have Pat Wood, who is the Chairman of the Federal Energy

Regulatory Commission. Very pleased to have you here. Go right

ahead.

STATEMENT OF PATRICK WOOD III, CHAIRMAN,

FEDERAL ENERGY REGULATORY COMMISSION

Mr. WOOD. Thank you, Chairman Bingaman, Senators Murkowski, Craig, and Feinstein.

I think, as Senator Dorgan just pointed out, with regard to Alaska natural gas, it is not a question of if, but when. I should say

that FERC or my fellow commissioners and I and our staff are

ready and willing to move this as fast forward and as thoroughly

forward as we need to once an application is filed. This is a national priority. In order to make the rest of all the integrated energy plans of North America work, Alaska natural gas has to be

part of the equation.

Getting it to the entire North American market is a critical priority. In that light, I wanted to lay out the procedural paths that the

Commission has before it. Attached to the back page of my testimony is a little one-page chart that lays out the concerns that we

have got with the current state of play under the three different

paths that are available and provide, as requested, some feedback

to the committee as to issues that may arise that would tend to impede the swift processing of one or more applications to transport

gas to the broader market.

Certainly, the issue we focused on so far this morning is in the

middle box, which is the ANGTA from a quarter century ago. The

pipeline that has been permitted under that, a lot of the work

under that has already been done, as is pretty clear. A couple of

the issues under that particular path were that if a revised application, also known I believe as the southern route, were to come back

and be activated before the commission, there is some I think flexibility within the original act as to how much the original proposal

24

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:]

25

PREPARED STATEMENT OF PATRICK WOOD, III, CHAIRMAN, FEDERAL ENERGY

REGULATORY COMMISSION

I. INTRODUCTION AND SUMMARY

Mr. Chairman and Members of the Committee:

Thank you for the opportunity to speak today on the status of proposals for the

transportation of natural gas from Alaska to markets in the Lower 48 States and

legislation to expedite the construction of a natural gas pipeline from Alaska. As an

initial matter, I want to assure you that the FERC Commissioners and staff stand

with President Bush and Congress in our commitment to ensure that America’s energy markets function reliably and well at this crucial time and for many years to

come.

Natural gas is an essential part of our Nation’s energy future. The Department

of Energy estimates that natural gas currently represents 24 percent of the energy

consumed in the United States, and that demand may reach almost 35 trillion cubic

feet (Tcf) by 2020, an annual level requiring a significant increase in production and

delivery.

Against this backdrop, the importance of Alaska natural gas supplies, including

those in the North Slope area, is clear. It is impossible to envision a 30-35 Tcf annual domestic market without Alaska natural gas. There has recently been renewed

interest in the development of the transportation infrastructure necessary to move

that gas to markets in the Lower 48 States. However, there are currently no applications before the Commission regarding an Alaska natural gas transportation

project.

In this testimony, I will first describe the statutory schemes under which the

Commission may consider applications filed with it for authorization for Alaska

pipeline projects. I will then discuss issues that may be expected to arise under

these laws and provide my thoughts on how these matters could be addressed

through Congressional action. While I recognize that energy markets, like all markets, are subject to change, so that the economic viability of building an Alaska gas

pipeline may vary from time to time, the need for Alaska natural gas in the Lower

48 market is only going to increase as the years go by.

My overall regulatory philosophy is to ensure that there are an adequate energy

infrastructure, clear and balanced rules that allow efficient trading between market

participants, and effective regulatory oversight. These key elements have led to robust competition in energy markets, with resultant benefits to customers. Toward

that end, we will make every effort to process and act upon any applications for

Alaska gas transportation projects as efficiently as possible, working with the applicants, other federal and state agencies, Native Americans, shippers, end users, and

other interested parties, to ensure timely, reasonable decisions.

II. STATUTORY BACKGROUND

Applications for authorization to construct and operate an Alaska natural gas

transportation project may currently be filed under either the Natural Gas Act

(NGA) or the Alaska Natural Gas Transportation Act (ANGTA). I will address these

statutes in turn. I will also review proposed legislation which I understand has been

submitted to Congress for its consideration (the proposed Alaska Natural Gas Pipeline Act).

A. The Natural Gas Act

Under Section 7(c) of the Natural Gas Act, the Commission issues certificates of

public convenience and necessity authorizing the construction and operation of natural gas pipelines. The Commission also establishes initial rates for new facilities.

Most natural gas pipeline facility construction is authorized under the case-bycase certificate review process embodied in Subpart A of Part 157 of the Commission’s regulations. 18 C.F.R. Part 157 (2001). The Commission reviews numerous aspects of a proposed project, including the route, environmental impacts, engineering

and design, gas supply, market, cost, financing, construction, operation, and maintenance, revenues, expenses, and income, and tariff and rate matters.

During the last fifteen years, the Commission has moved increasingly to promote

competition in the natural gas industry. The Commission has strongly encouraged

pipelines subject to its jurisdiction to unbundle their production, sales, and transportation functions, and to provide transportation on an open-access basis. Almost

all have done so. Under the open-access policy, shippers are able to buy gas directly

in production areas and separately obtain transportation on interstate pipelines on

an equal footing with other shippers. Moreover, in response to competition, the

interstate pipeline transportation grid has expanded significantly, offering shippers

26

more flexibility in their choice of supply areas, and creating new paths from supply

areas to additional markets.

When the Commission receives an application under Section 7(c), it issues public

notice of the application in the Federal Register, and notifies potentially-impacted

landowners of the proposed project. Interested persons may file motions to intervene

or protest. Generally, Commission staff requests from the applicant any additional

information it needs to fully understand the application, considers issues raised by

other persons, and conducts a thorough environmental review. A certificate order is

then drafted, containing whatever terms and conditions are deemed necessary for

the public convenience and necessity. The Commission can set an application for

evidentiary hearing before an administrative law judge, if there are material issues

of fact that cannot be resolved on the basis of the written record, although such

hearings regarding construction applications are rare.

I am proud of the prompt manner in which the Commission in recent years has

acted on natural gas pipeline applications. For major projects, we have been making

every effort to act within 18 months of the time that the application is complete,

which, given the complexity of these cases, is quick indeed. This requires a significant commitment of time and resources, but we know that swift regulatory action

is necessary for properly functioning markets.

B. The Alaska Natural Gas Transportation Act

In response to the energy shortages of the 1970’s, Congress passed ANGTA, in

an effort to establish streamlined procedures for the consideration, approval, and

construction of a natural gas pipeline to bring Alaskan natural gas to the Lower

48 States (the Alaska Natural Transportation System, or ANGTS).

ANGTA established a unique process for selecting an ANGTS and expediting its

construction and initial operation. Under this process, the Commission was directed

to recommend to the President a specific transportation proposal. The President

then would submit a decision to Congress, and Congress would approve or disapprove that decision. Thereafter, the Commission was to issue an NGA certificate

for any approved project. ANGTA also established other procedural mechanisms to

assist in the completion of an ANGTS, including requiring all federal agencies to

expeditiously grant necessary authorizations for the ANGTS, establishing the Office

of the Federal Inspector to oversee the timely, efficient, and environmentally sound

construction of the ANGTS and to coordinate federal efforts related to the project,

and strictly limiting judicial review.

In 1977, in the President’s Decision and Report to Congress on the Alaskan Natural Gas Transportation System (President’s Decision), President Carter designated

the route and selected the project sponsors for construction of the ANGTS, running

4,787 miles from Prudhoe Bay, south to near Fairbanks, and then southeast along

the route of the Alaska-Canadian highway to near Calgary, Alberta, where it would

split into two legs, one continuing to California in the West, and the other to Illinois

in the Midwest.

The President’s designation of the ANGTS route and choice of sponsors to construct and operate it were closely coordinated with the government of Canada and

followed adoption of an Agreement Between The United States And Canada On Principles Applicable To A Northern Natural Gas Pipeline (Agreement on Principles).

Pursuant to the Agreement, Canada enacted the Northern Pipeline Act, which is

similar to ANGTA.

On December 16, 1977, the Commission issued a conditional certificate under

ANGTA and the NGA to designate project sponsors. (The project sponsors have

changed over the years and the certificate is currently held by the Alaska Northwest

Natural Gas Transportation Company, a partnership between Foothills Pipelines,

Inc. and Transcanada Pipelines Limited). This conditional certificate, which authorized the project sponsors to construct and operate the pipeline system to transport

gas from Alaska’s North Slope to the Lower 48 States, was actually the initial step

in the process of issuing a more detailed final certificate. The conditional certificate

was followed by extensive procedures to establish further conditions for the project,

including the design specifications and initial system capacity of the Alaskan segment of the ANGTS and an interim rate of return mechanism applicable to the segments of the ANGTS located in the United States.

The ANGTS sponsors, in order to facilitate financing for what would be the largest privately financed construction project in U.S. history, proposed to build the

project in two phases. Phase 1, or the ‘‘Prebuild,’’ completed in 1982, is an approximately 1,500-mile segment, which presently delivers large volumes of Canadian gas

from Alberta to Stanfield, Oregon in the Western Leg, and to Ventura, Iowa in the

Eastern Leg.

27

At the time work on Phase I was being completed, the energy outlook of the

United States and Canada changed substantially. Natural gas discoveries in Canada

and in the Lower 48 States ballooned, and world oil prices moderated. With this

changed natural gas market, the ANGTS sponsors announced in April 1982 that the

Alaska portion of the project (Phase II) would be substantially delayed. No final certificate for Phase II was requested or issued before proceedings came to a halt in

1983.

On January 18, 2001, former Chairman James Hoecker submitted to Congress a

report on ANGTA prepared by Commission staff. That report reviewed the background of ANGTA and discussed issues that might arise in the event of a renewed

ANGTS application or of an Alaska gas pipeline application under the NGA.

C. The proposed Alaska Natural Gas Pipeline Act

The proposed Alaska Natural Gas Pipeline Act, as I understand it, is an effort

to apply many of the streamlining aspects of ANGTA to a project filed solely under

the NGA. To that end, the proposed legislation would, among other things: require

the Commission to complete environmental review and issue a certificate to any proposal backed by an agreement with a shipper of Alaska gas, within 18 months of

the filing of an application; establish a Federal Pipeline Director with sweeping authority to coordinate and control federal activities relating to a proposed project; establish the Commission as the lead agency for purposes of environment review; and,

like ANGTA, strictly limit environmental review. The bill contains provisions relating to facilities constructed within Alaska and to those located in the Lower 48

States.

III. POTENTIAL ISSUES

In this section, I will discuss issues that may arise with regard to applications

filed under each of the three potential statutory schemes. I have also attached to

my testimony a chart which lists some of the key issues on a side-by-side basis, for

ease of comparison.

A. Issues with Respect to an NGA Application

The NGA itself raises few issues. The Commission has been reviewing applications under Section 7 for more than 60 years, and that process is well-known and

understood by all participants. I am confident that Commission staff would work

quickly to complete its review of any NGA application for an Alaska natural gas

pipeline, and that, if the Commission is presented with a complete application, including all necessary environmental documentation, the Commission would be prepared to act on the application in a timely manner.

Two key matters could nonetheless arise. First is the question of the effect of

ANGTA on the Commission’s authority to consider an NGA proposal. Arguably,

ANGTA precludes the Commission from approving any other proposal for an Alaska

gas pipeline until the ANGTS is complete. Chairman Hoecker and the staff report

concluded that, while ANGTA provided that the Commission was required to give

precedence to consideration of the ANGTS, nothing in ANGTA bars the Commission

from considering competing NGA proposals. I agree with that conclusion. Nonetheless, it would eliminate delays occasioned by litigation if Congress were to clarify

that, since the Commission satisfied the requirements of ANGTA by issuing an

ANGTS certificate in 1977, nothing in ANGTA precludes, or requires delay in, Commission consideration of another Alaska pipeline proposal, filed under the NGA. Alternatively, Congress could establish that the Commission in fact is precluded from

approving any other proposal for an Alaska natural gas pipeline until the ANGTS

is either procedurally or physically complete.

Second is the question of the coordination of federal efforts. There is no doubt that

coordinated federal action is necessary to avoid increased expense, redundant reviews, and delay. It would greatly assist the consideration and implementation of

an Alaska gas pipeline proposal if Congress were to provide that the Commission

has the authority to coordinate federal activities with respect to a proposal filed

under the NGA. At a minimum, it would be helpful if Congress provided that the

Commission has the authority to establish deadlines for action by other federal

agencies with respect to an Alaska natural gas pipeline proposal, so that the Commission can ensure that it is able to act on any application in a timely manner.

B. Issues With Respect to an ANGTA Application

As I explained earlier, the Commission granted to the ANGTS sponsors a conditional certificate in 1977. Before the ANGTS could be constructed, the Commission

would have to issue a final certificate. A renewed or revised ANGTS application

28

could raise several issues. These issues are discussed in detail in the staff report,

but I will summarize some of the key questions here.

1. Ability to Deal With a Revised ANGTS Proposal

The President’s Decision, which was issued pursuant to ANGTA and approved by

Congress, contains a number of conditions that on their face seem to affect directly

the Commission’s consideration of a renewed application to complete the ANGTS.

Among other things, the President’s Decision, in addition to designating the sponsors and route for the pipeline, specifies many aspects of the design, provides for

a variable rate of return as an incentive to limit costs, and determines that the required environmental impact statements relative to an Alaska natural gas transportation system have been prepared and are in compliance with NEPA. Completion

of the certificate process more than twenty years after issuance of the conditional

certificate could raise some questions about aspects of the President’s Decision that

could appear to restrict the applicants’ and/or the Commission’s ability to revise the

project in light of changes in the market, technology and environmental circumstances.

ANGTA permits the Commission or another federal agency to amend the ANGTS

(15 U.S.C. 719g(d)), but restricts agency discretionary revisions only to those that

would not alter ‘‘the basic nature and general route’’ of the ANGTS. The staff report

noted that these provisions leave it unclear as to what extent the project sponsors

or the Commission or other federal agencies could propose or authorize changes to

the ANGTS as outlined in the President’s Decision. I observe, however, that the

term ‘‘basic nature and general route’’ is sufficiently broad to encompass a number

of update-related revisions that the sponsors, the Commission or another federal

agency could take upon reactivation of the project. This becomes more difficult, however, if revisions were to reasonably vary from the ‘‘basic nature and general route’’ of the original project. In such event, Congressional guidance would assist prompt

processing of a reactivated project.

2. Environmental Considerations

The original environmental impact statement (EIS) for the ANGTS project was

prepared more than 20 years ago by the Department of Interior and supplemented

by the Commission’s predecessor, the Federal Power Commission. In 1980, the Commission prepared a second EIS to consider the environmental impacts of a gas conditioning plant that was proposed to be built, as part of the ANGTS, at Prudhoe

Bay.

ANGTA provided that a decision by Congress approving the President’s Decision

designating an ANGTS was deemed conclusive as to the sufficiency of the underlying EIS and that the EIS was insulated from judicial review. Given that the ANGTS

environmental documentation is now more than 20 years old, a supplemental EIS

may need to be prepared before the Commission can issue a final certificate for

Phase II. It would expedite Commission review of a reactivated project if Congress

would clarify whether the original EIS is legally sufficient or if a supplemental EIS

should be prepared and, if so, whether the supplemental EIS is also protected from

judicial review.

3. Role of Other Federal Agencies

As noted above, coordinating the roles of the various Federal agencies that have

responsibility over various aspects of such a proposal is critical to efficient, timely

review of any Alaska natural gas pipeline proposal. During the original ANGTS proceedings, this coordination role was performed by the Office of the Federal Inspector. The Office of the Federal Inspector was abolished by Congress in 1992, and

those functions and authorities were transferred to the Secretary of Energy. I defer

to the Secretary with respect to any budgetary or other authority he might need to

fulfill the coordinating and compliance functions if the original ANGTS proposal is

renewed by the project sponsors.

C. Issues With Respect to the Proposed Alaska Natural Gas Pipeline Act

I have reviewed the proposed Alaska Natural Gas Pipeline Act. I support what

I see as the overall thrust of the bill, which is to streamline consideration of an

Alaska natural gas pipeline, and to ensure coordination of federal actions with respect to such a project. I do have two implementation-related concerns with the proposal:

First, Section 6 of the proposed bill would require the Commission to complete environmental review and act on an application for an Alaska natural gas project

within 18 months of its filing. This 18-month time frame would be achievable only

if the Commission were to receive a complete application (this is often not the case,

requiring Commission staff to seek additional information from applicants), and if

29

all the other federal agencies were to complete their efforts in a timely fashion.

Thus, any legislation should provide that any deadlines begin to run from the date

that the Commission deems an application to be complete, and that the Commission

is empowered to set deadlines for action by other agencies, including state agencies.

Second, while the proposed bill would establish an Office of the Federal Pipeline

Director, it is not clear how the authority of the Director would mesh with that of

the Commission, and who would control the timing and processing of an application.

I believe that those decisions should rest with the Commission. Pipeline certification

is what we do. I believe the pipeline certification record of the Commission in recent

years demonstrates it is able to properly handle the required environmental, siting

and other issues under the most aggressive of timetables.

IV. CONCLUSION

I cannot predict which, if any, applications for Alaska natural gas projects will

be filed with the Commission. That is for the investors in those projects to decide.

But, in my view, at least one pipeline carrying Alaska natural gas will need to be

built in the near future. It would be most helpful for interested parties to collaborate on a single project of sufficient scope to enable our focus to be on getting the

gas to the market rather than on spending time in litigation. In the event that settlement of issues is not forthcoming, it would be wise, in advance of such events,

to clarify the statutory structure(s) governing the issue, so we don’t spend more time

in Court than in the field building the needed transportation. A quarter-century

wait is long enough.

I can assure you that whatever application(s) is/are ultimately filed with the Commission, we will review it/them thoroughly, promptly, and fairly, with the public interest firmly in mind, and with a clear understanding of how important Alaska natural gas is to our Nation’s long-term energy security.

The Commissioners and staff of the FERC are always available to assist the Committee in any manner.

RECOMMENDATIONS WITH RESPECT TO AN ALASKA GAS TRANSPORTATION PROJECT UNDER THREE POSSIBLE STATUTORY SCHEMES

Natural Gas Act Alaska Natural Gas

Transportation Act

Alaska Natural

Gas Pipeline Act

1. Clarify that ANGTA

does not preclude, or require delay in, Commission consideration of an

Alaska natural gas

project under the NGA.

2. Grant the Commission

the authority to coordinate federal activities

with respect to an Alaska natural gas project

under the NGA, or authorize the Commission

to establish deadlines

for action by other federal agencies.

1. Provide guidance as to

the extent to which the

original ANGTS proposal can be revised.

2. Clarify whether the

ANGTS EIS is still legally sufficient and

whether a supplemental

EIS would be protected

from judicial review.

3. Provide any necessary

clarification and budgetary authority necessary to revitalize the

Office of the Federal Inspector.

1. Provide that any deadline imposed on Commission action of an application begins to run

from the date that the

Commission deems the

application complete,

and empower the Commission to set deadlines

for action by other federal and state agencies.

2. Provide that the Commission will control the

timing and processing of

any application.

The CHAIRMAN. Thank you very much.

Ms. Pearce, it is nice to see you here again. Why don’t you go

ahead.

STATEMENT OF DRUE PEARCE, SENIOR ADVISOR FOR ALASKA

AFFAIRS, DEPARTMENT OF THE INTERIOR

Ms. PEARCE. Thank you. Good morning, Mr. Chairman and members of the committee. Good morning, Senator Murkowski. Thank

30

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 TransAlaska Gas System. If the BLM receives an application from producers for an over-the-top offshore route, the right of way application will be adjudicated by the Minerals Management Service, also

an agency of the Interior Department.

The Mineral Leasing Act placed in the Department of the Interior the authority and responsibility for granting pipeline rights of

way through any Federal lands. This responsibility includes assessment of the technical and financial capability of a pipeline operator

to construct, operate, maintain, and terminate a pipeline project.

Through the execution of these duties, the Department has been involved in technical design, construction, operations, and maintenance oversight on the TAPS system throughout its history.

The Department of the Interior has through its several bureaus

the oversight responsibilities for thousands of miles of offshore oil

and gas pipelines in both the Gulf of Mexico and the Pacific Ocean.

In exercising our responsibilities, the Department has a number of

31

pipeline employees who can assist in the Alaska natural gas pipeline project. In addition, we have numerous environmental and biological scientists with years of experience in Alaska who can assist

in the review of the various proposals and permits that will be required.

The BLM is the lead Federal agency in the Joint Pipeline Office

since its inception in 1990. The Joint Pipeline Office was administratively established to coordinate government oversight of the

Trans-Alaska Pipeline System. The office is currently comprised of

six Federal and seven State agencies, Interior being represented by

both BLM and the Minerals Management Service. It allows for a

single functional organization and the avoidance of duplicated resources and efforts.

The organization has the ability to tap the knowledge of member

agencies, to share expertise, to coordinate permitting, technical reviews, and the issuances of leases and rights of way. The Joint

Pipeline Office represents the type of multi-agency oversight that

will be necessary for the design and construction of any Alaska natural gas pipeline.

One of the most significant recommendations to come out of the

lessons learned exercise conducted after the construction of TAPS

was to mandate the coordination of Federal and State agencies involved in any new pipeline projects of similar magnitude. The Alaska Natural Gas Transportation Act of 1976 authorized the appointment of a Federal inspector to oversee construction of the gas pipeline system in accordance with a joint Federal-State monitoring

agreement. The Office of the Federal Inspector was an independent

executive agency that received advice from an executive policy

board comprised of the Secretaries of the Interior, Energy, Agriculture, Labor and Transportation, the Administrator of the Environmental Protection Agency, the Chairman of the Federal Energy

Regulatory Commission, and the Chief of Engineers of the Army

Corps of Engineers.

However, progress on the gas pipeline project ceased in the

1980’s and in 1992 the Federal Inspector’s Office was disbanded

and those responsibilities were transferred to the Department of

Energy.

There are many issues surrounding an Alaska gas project, such

as Alaska Native hire agreements, special provisions for construction in Arctic and sub-Arctic regions, and unique environmental

conditions that make the Department of the Interior’s regional expertise a very real advantage to expedient government regulation.

Given that the law transfers monitoring authority to the Department of the Interior 1 year after construction of the gas pipeline

and because latent design and construction deficiencies can have a

significant impact on pipeline operations, Interior’s involvement in

construction monitoring is essential for effective oversight throughout the life of a project.

As I have noted, the Department of the Interior has a longstanding partnership with the State of Alaska and years of experience

in the Arctic. We stand ready to partner with our sister agencies

in the coordination of the gas pipeline project.

This concludes my testimony and I will be happy to answer any

questions that the committee may have.

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The CHAIRMAN. Thank you very much.

Mr. Kripowicz, you are the Acting Assistant Secretary for Fossil

Fuel in the Department of Energy. We welcome you. Go right

ahead.

STATEMENT OF ROBERT S. KRIPOWICZ, ACTING ASSISTANT

SECRETARY FOR FOSSIL ENERGY, DEPARTMENT OF ENERGY

Mr. KRIPOWICZ. Thank you. Mr. Chairman, members of the committee: As virtually every witness has testified this morning, Alaska’s natural gas on the North Slope represents a large and potentially significant future energy resource for the United States. I

have outlined in my testimony the Nation’s growing demand for

natural gas. Last year we consumed 22.8 trillion cubic feet of natural gas and by 2020 under a business-as-usual scenario gas consumption could jump to almost 35 trillion cubic feet, a 52 percent

increase.

Even though we have large quantities of natural gas in the lower

48 States, demand for natural gas between now and 2020 will likely outpace supply, at least supply from those resources we are developing today. Especially in the power generation market, natural

gas use is on the rise, largely because it can help generators meet

increasingly stringent clean air requirements. More than half the

projected increase in gas use will likely be in the electric power sector.

President Bush’s national energy policy recognizes the importance of natural gas to our energy, economic, and environmental future. The policy emphasizes the need to develop a variety of new

natural gas resources. It specifically calls attention to the prospects

for producing and transporting Alaskan natural gas to markets in

the lower 48 States.

One of the policy’s recommendations which the President subsequently implemented has been to direct the Secretaries of Energy

and State, along with the Interior Department and the Federal Energy Regulatory Commission, to be ready to expedite any necessary

permitting for an Alaska gas pipeline. We have responded to the

President’s direction by creating a multi-agency task force. This

task force is meeting regularly to get a head start on identifying

impediments to ensuring that relevant agencies are communicating

well with each other.

We also intend to work closely with the government of Canada

to determine if existing bilateral agreements are sufficient or

whether additional government to government agreements might

be warranted. Obviously, however, we can only go so far before

there is an actual proposal before us, and that in turn will depend

upon business’ decisions made by the private sector. The administration remains neutral regarding the specific project or projects

that the private sector might undertake in order to develop and

market North Slope gas. We believe the marketplace should determine when, how, and by whom North Slope gas is developed and

transported.

In short, Mr. Chairman, the vast natural gas resources of the

Arctic represent one of our largest, most promising, and most secure domestic energy supplies. America certainly needs the energy

that Alaska’s North Slope can provide. When or if a commercially

33

viable transportation project emerges, the President has made it

clear that he expects the government to be ready and responsive

to perform its duties as quickly as possible.

That completes my opening statement. I am pleased to answer

any questions.

[The prepared statement of Mr. Kripowicz follows:]

PREPARED STATEMENT OF ROBERT S. KRIPOWICZ, ACTING ASSISTANT SECRETARY FOR

FOSSIL ENERGY, DEPARTMENT OF ENERGY

Mr. Chairman and Members of the Committee:

One of the largest known reserves of natural gas in the United States is found

in the Arctic, associated with the development of oil at Alaska’s Prudhoe Bay. These

proven gas reserves, likely totaling more than 35 trillion cubic feet, could make a

significant long-term contribution to the Nation’s energy supplies if delivered to the

lower 48 states. There may also be an additional 100 trillion cubic feet of natural

gas resources on the North Slope that, although currently more speculative, could

potentially be a source of new energy supplies in the future.

Recently, as demand for natural gas has increased, interest has been renewed in

tapping into Alaska’s natural gas supplies. During the past year, producers on the

North Slope have begun reexamining market and technical factors to determine

whether transporting this gas is likely to be economically feasible in the near future.

Recognizing the resurgent interest in moving Alaskan natural gas to lower-48

markets, the President’s National Energy Policy calls for a coordinated federal/state/

private sector effort to expedite construction of the necessary pipelines. Specifically,

the National Energy Policy recommended that:

. . . the President direct the Secretaries of Energy and State, coordinating

with the Secretary of the Interior and the Federal Energy Regulatory Commission, to work closely with Canada, the State of Alaska, and all other interested parties to expedite the construction of a pipeline to deliver natural

gas to the lower 48 states. This should include proposing to Congress any

changes or waivers of law pursuant to the Alaska Natural Gas Transportation Act of 1976 that may be required.

Following release of the National Energy Policy in May, the Administration has

responded to the President’s direction. A multi-agency federal task force has been

established to identify impediments to the expedited construction of an Alaskan natural gas pipeline and to advise the Federal Government on how best to respond to

such impediments.

THE NEED FOR NORTH SLOPE NATURAL GAS

The prospect for increasing demand for natural gas in the United States has been

the primary reason for the resurgence of interest in transporting Alaskan North

Slope gas to market. Natural gas is an especially attractive energy resource due to

its environmentally clean characteristics.

Currently it represents 24 percent of the energy consumed and 27 percent of the

energy produced in the United States. In 2000, U.S. natural gas consumption totaled 22.8 trillion cubic feet. According to projections by the Department’s Energy

Information Administration (EIA), natural gas consumption is expected to grow by

2.3 percent annually, reaching 34.7 trillion cubic feet by 2020.

Spurred mainly by dramatic increases in the use of natural gas to generate electricity, the demand growth rate is faster than any other major fuel source consumed

in the United States. More than half of the projected increase in consumption is expected in the electricity generation sector.

Between now and 2020, domestic natural gas demand is expected to increase more

rapidly than supply. Much of the difference between U.S. gas consumption and

lower 48 production will be made up by imports, primarily from Canada. Today, net

natural gas imports account for 16 percent of total U.S. natural gas consumption,

or about 3.5 trillion cubic feet. By 2020, the United States will likely be importing

about 5.8 trillion cubic feet of natural gas, or about 17 percent of its projected consumption. However, these EIA projections do not include gas from the North Slope

which, if made available to the lower 48 States, would probably reduce gas imports.

Natural gas prices will likely have an effect on private sector investments necessary to bring Alaskan natural gas to market. In the short-term, EIA projects that

the average wellhead price of natural gas will be around $2.65 per Mcf in 2002,

while longer-term projections for the average wellhead price are around $3.13 per

34

Mcf in 2020. Like any commodity, however, the actual price of natural gas oscillates

frequently. Also, technological progress in pipeline construction practices and equipment, in pipe materials, in welding, and in telecommunications are reducing pipeline construction and operating costs. This, along with the normal business cycles

in the natural gas industry, may support prospects for new pipeline construction

linking the North Slope to lower-48 markets.

PIPELINE PROJECTS CURRENTLY ENVISIONED

The private sector is currently examining three general approaches for transporting North Slope gas to markets: (1) new gas pipelines linking to connection points

in Canada, (2) liquefied natural gas, and (3) gas-to-liquids conversion that could utilize the existing Trans-Alaskan oil pipeline.

Some of the most widely-discussed natural gas pipeline proposals include:

• The Alaska Natural Gas Transportation System (ANGTS)—In September 1977,

President Carter designated a specific transportation system known as the

Alaska Natural Gas Transportation System, or ANGTS, for streamlined certification under the authorities of the 1976 Alaska Natural Gas Transportation Act

(ANGTA). The proposal, selected by the President from three different projects

then competing before the Federal Power Commission for certification, envisions

a nearly 5,000-mile joint U.S.-Canadian overland pipeline following the Alcan

Highway, capable of delivering up to 2.5 billion cubic feet of gas per day to markets in the lower 48 states. President Carter’s decision was approved by a joint

resolution of Congress.

Although only portions of ANGTS have been constructed—the ‘‘rebuild’’ segments

extend 2675 miles along two legs from Alberta, Canada into the lower-48 states— its legal framework still exists.

• Northern Gas Pipeline Project—Arctic Resources Co.’s Northern Gas Pipeline

Project would run eastward from Prudhoe Bay and come ashore in the Mackenzie Delta area in northern Canada, then follow the Mackenzie River south

through the Northwest Territories to interconnect with pipelines in Alberta,

Canada, providing access to lower-48 markets. • Producers’ Alternatives—The three producers that own nearly all of the North

Slope gas currently are assessing the feasibility of different pipeline routes, including a northern route similar to the Arctic Resources proposal and a southern route that would either be the same as or similar to the ANGTS route.

THE FEDERAL ROLE IN EXPEDITING ALASKAN NATURAL GAS PIPELINE PROJECTS

Our National Energy Policy strongly supports the environmentally responsible development of Alaskan North Slope natural gas and the actions to expedite the delivery of that important energy resource to the lower 48 states. The Administration

remains neutral regarding the specific project(s) the private sector might undertake

to accomplish this task. The marketplace should determine when, how, and by

whom the North Slope gas resource is developed and transported.

The Administration is also committed to an expedited, coordinated effort in permitting whichever commercial pipeline project or projects emerge as a viable candidate. As one of the implementations of the National Energy Policy, the Administration has created a task force involving various government agencies including the

Departments of Energy, State, Interior, Agriculture, and Transportation, and the

Federal Energy Regulatory Commission. These are the government agencies that

have responsibilities related to a project to transport Alaskan North Slope gas to

lower 48 markets.

The Task Force has been meeting regularly since July 2001, to establish a communication network within the various agencies, to disseminate information and

ideas through this network, and to address issues related to permitting and pipeline

construction.

CURRENT AND FUTURE LEGAL AUTHORITIES

The Administration could be faced with new or revised proposals to transport

Alaska North Slope gas, filed under ANGTA or the Natural Gas Act (NGA). The Department of Energy has certain authorities under both legal frameworks.

In 1977 the Department of Energy Organization Act transferred authority from

the former Federal Power Commission to the Secretary of Energy to regulate natural gas imports and exports under the NGA, including section 3. Section 3 requires

persons seeking to import or export natural gas, including liquefied natural gas, to

first secure an order from DOE authorizing the import or export. In reviewing the

application, DOE must determine if the public interest standard in section 3 of the

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NGA, as amended by the Energy Policy Act of 1992 (EPACT), is met. In addition,

authorization must be granted if the import or export is with a nation with which

the United States has a free trade agreement, such as with Canada, requiring national treatment for trade in natural gas.

The Department of Energy also has ANGTA-related authorities. EPACT abolished

the Office of the Federal Inspector (OFI) for the ANGTS and transferred its functions and authorities to the Secretary. The primary function of the OFI, which was

created by President Carter through Reorganization Plan No. 1 of 1979, was to enforce terms and conditions relevant to the pre-construction, construction, and initial

operations of ANGTS.

Regardless of whether an application is filed under the NGA or the ANGTA, we,

in consultation with the Congress and in coordination with the Department of State

and other relevant agencies, will work closely with the Government of Canada to

review existing bilateral agreements and to determine if additional government-togovernment agreements might be warranted.

CONCLUSION

In short, Mr. Chairman, as our National Energy Policy states: ‘‘America needs the

energy that Alaska’s North Slope natural gas can provide.’’

Natural gas will play an increasingly important role in providing secure, reliable,

and environmentally clean energy to American consumers. We must recognize that

the attractiveness of natural gas requires that we look seriously at all potentially

viable gas supply sources while not creating an over-reliance on any one energy resource.

The vast natural gas resources on Alaska’s North Slope are one of the largest,

most promising and most secure domestic energy supplies that could become available to America’s consumers. We are committed to working with the private sector

and with Canada to ensure that any commercially viable proposal to bring this natural gas to market is processed as expeditiously as possible.

This completes my prepared statement.

The CHAIRMAN. Thank you very much.

Let me start first with a question to Mr. Torgerson. As I understand, in your position there in the legislature you have—you say

in your testimony that: ‘‘As far as tax incentives are concerned, the

producers have not asked for any. They have not shared their financial projections with your committee, with my committee. The

only thing the producers have mentioned is a need for fiscal certainty in the State’s tax regime. I feel we should not begin our negotiations by leading with incentives until we at least verify the

profitability of the project.’’

That seems like a sound position to take. Why do you not recommend the same course of action to the Federal Government?

Mr. TORGERSON. Can I claim the Fifth Amendment? Well, sir, we

have had discussions in general terms about tax certainty, but I

have not seen either in-depth financial projections other than a

couple slides that show profitability and some other things, but

nothing in detail enough for us to make a decision on whether or

not incentives were a good or a bad thing or if we need to do that.

The CHAIRMAN. It would be logical, then, for Congress to take the

same basic position, that for us to be giving preferential tax treatment to investments interest in this particular line, pipeline or production going into this line would be foolhardy unless we know

what the profitability of this project is before we act, would you not

agree with that?

Mr. TORGERSON. I would, Mr. Chairman. I do not want to leave

you with the impression that the State of Alaska is not ready to

look at some incentives that come under our control. But it is my

position not to until we are familiar with their financial projections. I would recommend that to this committee also.

36

The CHAIRMAN. Mr. Kripowicz, your task force, when was it established?

Mr. KRIPOWICZ. In July.

The CHAIRMAN. This is the inter-agency task force?

Mr. KRIPOWICZ. Yes, sir.

The CHAIRMAN. But the administration position, as I understand

your testimony, is that the administration is neutral as to whether

a southern route is chosen or a northern route?

Mr. KRIPOWICZ. That is correct, yes, sir.

The CHAIRMAN. Is the administration also neutral on whether

Congress legislates anything on this subject? Because we are in

this awkward position where we are being urged to complete action

on a comprehensive energy bill, which of course is to a large degree

an outgrowth of the commitment the President and the Vice President have had to move energy legislation in this Congress.

We are under pressure to move ahead with that, to complete action to deal with these issues. At the same time, we have no recommendation from the administration as to what should be done

on this subject.

Is it your view that we should not legislate on this subject? Is

that the position of the task force?

Mr. KRIPOWICZ. I think at this point, Mr. Chairman, we are uncertain also. We have identified all the relevant authorities either

from ANGTA or from the Natural Gas Act. We have reviewed the

possible problems that each one of those has and many of those

problems are identified in Chairman Wood’s statement to the committee. We have prepared some recommendations for the administration, which are now being looked at at levels above the task

force.

But one of the problems with recommending legislation at this

point is a lot of it would depend on what the application is. Currently, without an application it is very difficult to recommend the

specifics of legislation that might be required. Many of these items

may very well be able to be handled administratively without

changes to the law.

The CHAIRMAN. So your basic view is, as I understand it, that it

is premature for the Congress to be legislating on this subject until

we know more about what the proposal is?

Mr. KRIPOWICZ. Because you might have to legislate again once

you get a proposal, because the legislation might not fit the proposal that you receive or that we receive.

The CHAIRMAN. So would the recommendation be that we hold

up action on a comprehensive bill until we have more information

or that we go ahead with a comprehensive bill and then, if necessary, come back at some future date and deal with this issue legislatively? What is your thought there?

Mr. KRIPOWICZ. The administration, of course, is very anxious to

move ahead on a comprehensive bill and I would not recommend

holding that up for this particular piece of legislation.

The CHAIRMAN. So your thought is that the administration’s position is that we should move forward, but we should not deal with

this matter as part of this legislation, either by adopting the proposal of the producer group which has come forward or adopting

37

the proposal of the State of Alaska which was discussed by Governor Knowles?

Mr. KRIPOWICZ. Mr. Chairman, I think it would be very difficult

for us to recommend specific legislation at this point absent a concrete proposal from the producers or from other parties who might

submit an application.

The CHAIRMAN. Senator Murkowski.

Senator MURKOWSKI. Thank you, Senator Bingaman.

Perhaps we should go back to just what the producers are asking

for so we can focus in on the reality. The purpose was to expedite

the approval of construction and initial operation of one or more

gas transportation systems from Alaska to the Canadian border

and from the Canadian border to the lower 48 to markets.

Now, that means what it says. What they asked for was quite

specific: expedited review of applications, single consolidated EIS

review, the establishment of a Federal pipeline director, limited judicial review. Clearly, it was route-neutral. That is obviously contrary to the State and the legislative position and, for that matter,

my own position and the delegation.

That has to stand alone relative to the proposal from the President and the administration for a national energy security legislation, which as proposed covers three titles: protecting critical energy infrastructure, which includes provisions from the administration on energy security about ports, about pipelines, transmission

pipeline safety, electric reliability. There was another title concerning domestic suppliers, Price-Anderson, clean coal, renewable energy inventory, ANWR, hydro provisions, filling SPRO, alternative

transportation fuels; and title III, reducing demand and increasing

efficiency, State programs in LIHEAP, Federal energy management, appliance and building standards.

Now, I am not putting words in the mouths of the administration, but obviously this project is going to be determined on the

timeliness of the economics that support it standing alone from the

standpoint of the producers. Anything that would suggest some

kind of an emergency action would have to be predetermined by

the Congress with the support of the administration, because it

would suggest that it would be expedited and if it is going to be

expedited, why then, the economics to a degree would go out the

window.

I want to be sure that we generally understand the parameters

that we are considering. Now, I do not know if you are familiar,

but I am going to pose this to the panel, the status relative to the

role of the Corps of Engineers and where the Corps has evaluated

this. I will just quote very briefly in the Corps’ statement: ‘‘It

should be noted that a permit already exists for the ANGS, or the

Alaska Natural Gas Transportation System, which runs from the

North Slope to Fairbanks, following the AlCan through Canada.

This route is already permit-approved, which means work could

begin immediately if this route is chosen.’’

Now, there is another route, the Trans-Alaska Gas Line, which

would run from Prudhoe Bay to Valdez. This is a permit that was

issued some time ago with the idea of LNG being shipped out of

Valdez. Now, this route would require additional authorization for

rivers and stream crossings, but it has been for practical purposes

38

approved and an abbreviated permitting mechanism has been

granted.

Now, if neither of these are proposed the Corps indicates that

there would be a requirement of an EIS. Now, we have heard from

FERC relative to the suggestion that a supplemental EIS may be

needed to be completed. Yet, in the proposal from Foothills the suggestion is an EIS would be a violation of the Federal law and Canadian treaty obligations.

I would ask the Chairman of FERC if he agrees that indeed an

EIS would be unlikely since a project of this magnitude has already

been addressed and that a pipeline can be built from the Alaska

North Slope the existing infrastructures? What would be the purpose of an EIS? Would it be to re-examine another route, LNG

transportation? Certainly it would not be applicable to the existing

permit already available under the Alaska Natural Gas Transportation System.

Mr. Wood.

Mr. WOOD. Senator Murkowski, I think certainly that is one of

the reasons why I mentioned in my testimony clarification would

be helpful. But barring any clarification coming, I think what we

would look at in any sort of supplemental EIS is the fact that there

have been some additional environmental laws. For example the

Coastal Zone Management Act may or may not be implicated by

this.

Senator MURKOWSKI. It is pretty hard to reach out on that one.

Mr. WOOD. To do the original route—if the route deviates from

the original route—the language as proposed is the general route.

It is fine to deviate from that and those have already been done.

I think it would be a relatively short process, but I think just the

kind of gut reaction I have to reviewing the issues in these cases

is it is a 23-year-old EIS and to go from a conditional certificate

which was granted by the Commission as I think the Commission’s

first order back when it was first formed in 1978, to now the

changes in the environmental laws and the changes in the technology that would be used and was originally approved, could be

subject to some review.

Without seeing what they propose to do, Senator Murkowski, it

would be difficult to know what, if any, environmental review is

needed.

Senator MURKOWSKI. Well, that is a safe answer and I appreciate

it. Thank you very much.

Let me ask one final question. This is also to Pat Wood. What

is the usual return allowed on debt and equity for a large pipeline

of this magnitude?

Mr. WOOD. Well, we have never seen one like this, but I think

the larger pipelines, the equity return would generally be in the—

it could be up to the low teens.

Senator MURKOWSKI. The low teens? Is 15 percent low teens?

Mr. WOOD. Well, let us say that is probably the upper end of

where we would go.

Senator MURKOWSKI. Well, I am going to conclude with a reference from the Corps’ statement and it will make some of my

Alaska friends a little more pleased. It says: ‘‘Selection of some

other route—other than the southern route of the Alaska Natural

39

Gas Transportation System; for example, another route would be

the Beaufort Sea pipeline route to the Canadian MacKenzie

Delta—would be expected to be dead on arrival and could not obtain State approvals unless the State were to change its position

on the option. If the State would consider this option or another

route, expect a minimum of 6 years to complete the process of the

EIS and permit authorizations before construction could begin.’’ Thank you.

The CHAIRMAN. Senator Carper.

Senator CARPER. Thank you, Mr. Chairman.

To our witnesses, welcome. It is nice to see some of you once

again and to meet others for the first time. I have been over on the

Senate floor and I have missed most of your testimony. We are

working on the Department of Defense authorization bill. I needed

to be there to attend a couple of amendments, so I missed a good

deal of what you said.

I understand that Governor Knowles was here earlier and testified. He is my old colleague. He and I were governors together for

I guess about 6 years or so, and I very much regret missing him.

If there is anybody in the audience from the State of Alaska office

who works with the Governor, give him my best and tell him to call

Delaware; I would like to talk to him.

To Senator Torgerson: Do I understand that the land which the

natural gas is believed to lie under is owned or controlled by the

State of Alaska?

Mr. TORGERSON. Yes, sir, it is.

Senator CARPER. In its entirety?

Mr. TORGERSON. In its entirety.

Senator CARPER. Do I understand that so far—and this is to anybody on the panel—so far nobody has stepped forward from an energy company and said that they would like to help finance or build

a natural gas pipeline? No one has deemed this to be a commercially viable project; is that correct?

Mr. TORGERSON. No, sir. They are in the process, the producers— BP, Exxon and Phillips—are currently in the process of a very in- tensive study, spending somewhere upwards of $100 million seeing

if it is profitable and trying to find out what barriers might be out

there and other things.

Mr. WOOD. Senator Carper, I think the main thing is that there

has not been a formal application filed, but there is quite a bit of

activity.

Senator CARPER. Well, good.

Will the State of Alaska realize royalty payments from the extraction of the natural gas from your land?

Mr. TORGERSON. Yes, sir.

Senator CARPER. Give me some idea?

Mr. TORGERSON. 12.5 percent is the royalty for the State of Alaska.

Senator CARPER. Give me an example of how that would work?

12.5 percent of what?

Mr. TORGERSON. Of the market value. We could either take that

in kind or we could take it in value. So we could have the producer

sell it to wherever their market would be and we would be reimbursed 12.5 percent.

40

Senator CARPER. If the market value were, say, a billion dollars, 12.5 percent of that would be about $125 million?

Mr. TORGERSON. Yes, sir.

Senator CARPER. Now, the U.S. Government, to what extent does

the U.S. Government benefit from that, at least with respect to revenues?

Mr. TORGERSON. Nothing off the royalty, sir. But certainly off of

income taxes and corporate taxes. I think I have seen one report

that shows in the 25-year life of the project, which would be what

we know is the reserves and not the potential for that area—the

potential is a lot greater in the Prudhoe Bay area or in the basin,

which we all have a shared ownership in—but it is up in the $20

billion somewhere is the Federal potential, Federal take through

your taxes on the life of the project.

Senator CARPER. The potential take for Alaska would be how

large, using the same hypothesis or same assumptions?

Mr. TORGERSON. We are somewhat, as I believe, a little bit more

than that with our royalty share, and we have a severance tax and

also a corporate business tax, not as high as what the Federal Government is, but we are in that ballpark also.

Senator CARPER. Let me ask other panelists: What should the

Federal Government do in order to encourage the construction or

completion of the pipeline to ship natural gas from Alaska’s land

down to the 48 States? What should the Federal Government do?

Mr. KRIPOWICZ. We expect the market to determine whether it

is economic to build a pipeline. But the Government has committed, the President has committed, once an application is tendered

to the Government that we will move with the utmost speed in

order to process it and not cause any delays in the process.

Senator CARPER. So on a permitting basis, we should try to expedite the process. What else should the Federal Government do?

Mr. WOOD. I think, just to build on Bob’s point, the economics

drive it and to move through the southern route, for example, to

Chicago, from the gas coming out, paying all the bills all along the

route, you have already taken about $2.50 out of the gas stream.

Today gas in Chicago is selling for less than $2. So the economics

there just are not there today.

Now, in 2006, ’07, ’08, I do not think anybody expects we are going to have $2.00 gas. It will be higher than that. But at some

point—I think the producers and shippers can tell you on the next

panel there is an economic flip point at which it makes sense to

do the project. But I think really, the way pipeline have worked in

the last 15 years, they have been driven by the economics of supply

and demand and that has resulted in a pretty robust grid in the

lower 48.

This is different. It is huge. It is really one of the biggest projects

you can imagine in the energy industry. Again, the economics are

really the key driver, as Bob pointed out.

Senator CARPER. Other than expediting the permitting process,

is there an appropriate role for the Federal Government to move

this project along? Anyone?

Mr. TORGERSON. Could I? From the State of Alaska or from the

legislature’s position, you could verify that the Alaska Natural Gas

Transportation Act is the prevailing law and that any other appliVerDate 11-SEP-98 13:53 Mar 25, 2002 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6602 J:\DOCS\78-277 SENERGY3 PsN: SENERGY3
41

cations filed under any other, the Natural Gas Act or any other

Act, would not apply to this.

That was in my earlier testimony, that it is our belief that the

Federal Government went through a selection process back in the

mid-seventies and you have not repealed your action on that. So

therefore that law that you passed in 1977 did not expressly forbid

someone from filing another application under the Natural Gas

Act, but by not doing that we have left this cloud open that anybody could file under a previous law, although this body has already acted and so has the President of the United States.

Once we get that cloud clear, then all this starts falling into line.

Senator CARPER. Anybody else on the panel want to comment, respond to anything I have asked?

Ms. Pearce.

Ms. PEARCE. No, thank you.

Senator CARPER. Mr. Chairman, I thought I heard you in your

questioning of the panel—I heard someone mentioning, one of the

panelists mentioning, government incentives, Federal Government

incentives to move this along. My thought, the first thought I had

was, to the extent that the Federal Government provides those incentives, moves the project along and natural gas prices go through

the roof, energy companies make out well, Alaska makes out well,

and we will have obtained a new source of natural gas for the rest

of the country, but we will not have participated in the profitability

of the venture, unlike the State of Alaska and the producers.

To the extent that the Federal Government is asked to play that

kind of role and provide some incentives, we may want to consider

what we did with Chrysler, the Chrysler bailout about 20 years

ago, where we did not just give Chrysler money, we did not just

loan Chrysler money; we actually issued warrants, or they issued

them, and we ended up not only providing the money and financial

assistance to Chrysler, but in the end when it became profitable we

shared in that success. The Government actually, maybe one of the

few times in our history, we actually made money on the deal.

I do not know. We might take some of the lessons we learned

from there and incorporate them here. But perhaps we could.

The CHAIRMAN. Thank you.

Senator MURKOWSKI. If I may just make a point, I would remind

my friend of the reality that this particular gas is on State lands.

Obviously, it belongs to the State of Alaska. The State of Alaska

is entitled to a reasonable return for it, unlike ANWR, which the

Federal Government would receive the benefit because ANWR is on

Federal land.

Thank you.

Senator CARPER. Thanks, Mr. Chairman.

The CHAIRMAN. Thank you very much.

I thank this panel very much for their testimony. It is very useful to us. Let me ask the next two panels to both come forward:

Mr. Marushack, who is the vice president of ANS Gas Commercialization; Mr. Terry Koonce, who is the president of ExxonMobil

Production; Mr. Robert Malone, who is the regional president of BP

America; and also Mr. Richard Glenn, who is with the Arctic Slope

Regional Corporation; Mr. Patricio Silva, who is the Energy

Projects Attorney with the Natural Resources Defense Council; Mr.

42

William Sullivan, who is the executive director or executive vice

president of Anadarko.

We thank you all very much for coming today. Again, we will

take everyone’s testimony and include it in the record, and I would

urge each witness to summarize the main points that you believe

that the committee needs to be aware of.

Why don’t we go in the order that I introduced people: Mr.

Marushack, who is with ANS Gas Commercialization first. Is that

the right pronunciation?

Mr. MARUSHACK. Yes, ‘‘MAR-ue-shack,’’ sir.

The CHAIRMAN. Why don’t you start out, please.

STATEMENT OF JOSEPH P. MARUSHACK, VICE PRESIDENT,

ANS GAS COMMERCIALIZATION, PHILLIPS ALASKA INC.

Mr. MARUSHACK. Thank you. Good morning, Mr. Chairman, Senator Murkowski, members of the committee. My name is Joe

Marushack and I am vice president of Alaska North Slope Gas

Commercialization with Phillips, Alaska, and I am based in Anchorage. I am pleased to be here today to discuss our efforts to develop an Alaska North Slope natural gas pipeline. We provided extensive written testimony for the record, so I will summarize our

views briefly.

As background, the development of the natural gas resource on

the Alaska North Slope is a priority for Phillips Petroleum and we

recognize the strategic importance of this resource to the State of

Alaska and the rest of the United States. We believe that it is possible to develop this important resource if all the stakeholders in

the project work together to find solutions and to share the risks

and rewards of this important project.

The benefits of developing the resource are immense. The ANS

Gas project will allow the development of 45 TCF of natural gas

resources over the next 40 years and provide infrastructure to potentially develop even larger volumes of domestic gas production.

These production volumes are needed to meet the growing North

America gas demand and will help prevent the United States from

developing the same dependence on imports that currently characterizes our use of crude oil.

Using Energy Administration price forecasts, the project could

generate over $70 billion in government revenues over its life. The

risks of developing this project are also high. With initial cost estimates approaching $20 billion, the ANS gas project is one of the

largest investments ever contemplated in North America. The

project will require construction of the largest gas treatment plant

in the world, the laying of about 3,600 miles of pipe from the Arctic

North Slope to the North American market.

The project will need 5 to 6 million tons of steel. The type of materials and pipeline technology used will require the development

of specialized equipment solely for this project. The challenges of

timely permitting and implementation of a safe, environmentally

sound project will be critical and unparalleled.

The project will be subject to considerable price risk, as evidenced by the fact that natural gas prices this year alone have fluctuated between $2 and $10 per thousand cubic feet.

43

There has been considerable debate on whether to use a northern

or southern route for the proposed pipeline. A joint team from Phillips, BP, and ExxonMobil has been studying this and other issues

for almost a year. Jointly, we will have spent almost $100 million

by year end, utilizing over 100 company employees and 500 contractors.

Unfortunately, the preliminary results show the project is not

economically viable with either route, though we continue to improve the project’s technical design and formulate legislative and

fiscal proposals that will improve the project’s viability.

While both routes have their own unique set of risks, on balance

Phillips sees certain advantages to the southern route. Accordingly,

if it is the opinion of the members of this committee that endorsement of a southern route would materially improve the prospects

for passage of a bill granting fast track regulatory authority needed

to move forward, then Phillips is prepared today to make that endorsement.

But we need and ask for your help, as well as that of the State

of Alaska, in obtaining the following requirements: First, Federal

enabling legislation that will result in a well-coordinated, streamlined regulatory process; second, Federal fiscal relief that will ensure the appropriate sharing of risks and benefits; third, Alaska

fiscal certainty; and finally, the project must not be subject to mandated requirements that would diminish the viability of the project.

Phillips’ assessment of the benefits of the southern route should

not be interpreted as a departure from the joint work team. Rather,

we recognize that for the project to progress most rapidly the State

of Alaska’s interests, as well as that of the other stakeholders and

the producers, must come together. We hope the ongoing route debate can be positively settled so we can focus on ways to improve

project viability.

Phillips, ExxonMobil, and BP have each provided draft Federal

legislation to the committee that would provide an expedited process that is fair, simple, and efficient for obtaining permits and

other approvals for the Alaska gas pipeline. The project would still

be subject to FERC regulation and a full-scale environmental impact study would be required.

The proposed legislation is not exclusive. The legislation could be

used by the current producer group, either with or without additional partners, by other pipeline companies, by the State, or even

by the current ANGTS permit holders. The enabling legislation

would permit market-driven competition, better assuring the

project with the lowest cost will be allowed to prevail.

Indeed, we feel that a streamlined regulatory legislation encouraging projects is a cornerstone to making any Alaska pipeline

project a reality. It is good for the consumer and it is good for the

stakeholder.

Phillips has also submitted proposals to the committee to help

manage the large financial risks associated with the project. They

are intended to encourage increase of the Alaska natural gas pipeline and are specifically designed to provide relief only when marketplaces in the lower 48 fall to levels that would not otherwise

support a level of this magnitude and risk.

44

In either case, the American public is the winner. If prices are

lower, as might be the case when this substantial resource is

brought to the market, the consumer benefit from lower gas prices

far outweighs the proposed fiscal relief. If prices are as projected

by the Federal Energy Information Administration, no tax relief

would be provided.

In conclusion, we understand the ANS gas project’s critical role

in providing a new source of reliable, long-term energy. Phillips is

extremely anxious to see the development of this project and we

urge you to carefully consider our suggestions. We look forward to

continuing our discussions of this exciting project with all potential

stakeholders and we welcome the opportunity to answer any questions you may have at this time.

[The prepared statement of Mr. Marushack follows:]

PREPARED STATEMENT OF JOSEPH P. MARUSHACK, VICE PRESIDENT,

ANS GAS COMMERCIALIZATION, PHILLIPS, ALASKA INC.

Good morning Mr. Chairman and Members of the Committee. My name is Joseph

P. Marushack. I am Vice President, Alaska North Slope Gas Commercialization,

Phillips Alaska Inc. based in Anchorage, Alaska. Phillips Alaska is a major subsidiary of Phillips Petroleum Company charged with all exploration and production of

oil and natural gas resources in Alaska.

Let me start by saying that Phillips understands that national energy security

and economic revitalization have taken on a new priority in light of the tragic

events of September 11. We would like to assure the Committee that the women

and men of Phillips are committed to the maximum development of our Alaskan and

Lower 48 resources while continuing to adhere to our enduring and high standards

of safety and environmental responsibility and compliance.

ENERGY SECURITY & ALASKA GAS RESOURCES

National Energy Policy proposals recognize the importance of both national energy security and economic growth in developing reliable, economic, long-term domestic energy supplies. At the same time, consumers recognize the need to encourage the use of the most environmentally friendly sources of energy. Natural gas is

the most efficient and most environmentally acceptable fuel currently serving consumers. Alaska has been blessed with abundant domestic resources that are readily

available. Bringing gas from the Alaska North Slope to market in the Lower 48

states can provide a new source of reliable, economic, long-term energy that is consistent with the country’s environmental desires, national security objectives, economic prosperity, and National Energy Policy.

The Alaska North Slope gas represents the largest known but untapped natural

gas resource in North America. The demand for natural gas in the United States

is expected to grow by 17% over the next decade. Our current domestic gas consumption out-paces domestic gas production by 14 billion cubic feet per day and this

shortfall is expected to grow in the future. An Alaska gas project, sized at about

4.5 billion cubic feet per day (bcfd), could supply about 10% of the projected 2010

new gas supply required to meet domestic demand. Once an ANS gas pipeline is

on stream, it will provide gas to the American consumer for at least 30 years and

will be a stabilizing force on gas prices. As a point of reference, every $1 per mcf

in avoided gas price increase is worth $30 billion annually to the U.S. economy consuming 30 trillion cubic feet of gas per year.

The ANS gas project will enable commercialization of at least 45 tcf of stranded

natural gas resources over 30 years. This volume is equivalent to approximately 7.5

billion barrels of oil. With additional exploration and development efforts, total recovered resources may increase up to 100 tcf.

In addition to the direct economic benefit of developing ANS gas, there are also

environmental and other indirect benefits. Natural gas is the fuel of choice for its

environmental and energy efficiency attributes. Natural gas is highly versatile in

that it can be used not only in the generation of electricity but also in residential

and commercial space heating, in industrial uses, and as a transportation fuel. A

project of this magnitude would also stimulate money flow through the economy

through multiplier effects and through induced investments.

45

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

46

* The chart has been retained in committee files.

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 project, which spans over two sovereign nations, encompassing several states

and provinces, requires alignment of interests and support of many stakeholders.

Implementation of the project will also require resolution of diverse political interests.

ROUTE SELECTION

While a northern route is significantly shorter, given the uncertainty regarding

the capital cost of the project we do not believe either route can realistically claim

a meaningful cost advantage. Both routes would sell natural gas to the same markets and receive the same prices, so neither route would have an advantage in marketing. As capital costs and natural gas prices are the largest factors in determining

the economic benefit of the project to the producers and as both projects are exposed

to these factors, we do not believe relative economics can necessarily be used to decide between the two routes.

A southern route may have certain technical, expandability, environmental, and

timing benefits. From a technical perspective, a southern route’s ability to use existing infrastructure over much of the Alaska segment of the project is a benefit, particularly given the harsh Arctic environment. A southern route would follow the

Alaska oil pipeline for a portion of its route, and would generally follow the Alaska

Highway for the remainder of the route. By contrast, a northern route would have

no access to infrastructure, and would have the additional technical challenge of

having to construct a pipeline under the Beaufort Sea. We believe these factors

place more of a construction and environmental risk on a northern route.

The ability to expand the pipeline to meet the country’s future energy needs favors a southern route. Both routes would use the largest pipeline size currently

practical, so increases in capacity would come from addition of compressor stations

along the pipeline route. Addition of these compressor stations will be built into the

design of either route, but for a southern route additional compression has the advantage of existing infrastructure related to pump stations on the oil pipeline or access from the Alaska Highway. Capacity increases are somewhat more problematic

for a northern route because a compressor station would need to be placed in the

environmentally sensitive Beaufort Sea. The Alaska North Slope has tremendous

potential for additional resource development, with some estimates of future resources as high as 100 tcf, and the ability to expand the pipeline is a significant

consideration.

Construction of a southern route does not preclude development of the Canadian

gas in the Mackenzie Delta. Gas from both the North Slope of Alaska, as well as

gas from the Mackenzie Delta in Canada will be needed to serve North America’s

growing demand for natural gas. We believe that if the ANS pipeline is built using

a southern route that the Mackenzie Delta producers will separately decide to build

a pipeline from that area to serve their needs. As a result, Canada and the U.S.

will benefit from both sources of gas in the future. Two separate lines will create

the infrastructure to allow both of these potential sources of energy to be developed

to their full potential and ultimately provide more gas supplies from strategically

secure sources than would be the case with a single line.

Advantages from an environmental perspective are another feature of a southern

route. Since a pipeline following the southern route will use land that is adjacent

to either an oil pipeline or a highway over much of its length, the incremental

change in the environment will be minimized. Environmental issues associated with

the southern route are easier to manage and therefore less likely to cause delays

in the construction of the pipeline.

The State of Alaska has endorsed a southern route. Alaskans’ preference for a

southern route is based on the ability to provide the State’s natural gas to key areas

in Alaska, the opportunity to develop natural gas related industries, and the increased opportunity for construction and operations employment that would result

47

from more of the pipeline being built through Alaska. The active support from Alaska will expedite the realization of the benefits of the project for the rest of the U.S.

In summary, we believe a southern route has a distinct timing advantage over

a northern route. A southern route has the benefits of fewer environmental issues,

less construction risk due to the availability of existing infrastructure, support from

the State of Alaska, and a less difficult permitting process. Timing is an important

consideration. Delays will hurt the economics of the project, and will create uncertainty in natural gas markets as to when this vital source of energy will be delivered.

FEDERAL LEGISLATION

Federal Enabling Legislation. Phillips, ExxonMobil and BP have provided draft

federal enabling legislation to the Committee that would provide an expedited process that is fair, simple and efficient for obtaining permits and other approvals for

an Alaskan gas pipeline. Under that proposal, a federal director would be appointed

to expedite the coordination of all federal agency activities. However, regulatory

agencies would still have to be satisfied that tariff rates and terms are equitable

and that there is full compliance with environmental laws. A full scale Environmental Impact Study (EIS) would be required.

This new enabling legislation would not impact the provisions of the Alaska Natural Gas Transportation Act (‘‘ANGTA’’). Although enacted in an era of regulation,

ANGTA would remain in effect, just not as the exclusive means of implementing an

Alaska gas pipeline project. The prospects for development of a successful pipeline

project would be significantly enhanced under our proposal because it is free and

clear of the constraints and mandates of ANGTA.

It is essential that the lowest cost projects be allowed to compete utilizing the proposed federal enabling legislation. The provisions of the enabling legislation would

be available to anyone sponsoring the construction of an Alaskan gas pipeline who

has reached an agreement with one or more shippers (including the State) for the

transport of Alaskan North Slope gas to the Lower 48 markets. The legislation could

be used by the current producer group with or without additional partners, or by

other pipeline companies, the State of Alaska, or even the current ANGTS permit

holders. This enabling legislation would promote market-driven competition, better

assuring that the project with the lowest cost and corresponding lowest possible tariff to prevail.

Mandates will decrease the chance a project will be developed. We would discourage Congress from including language mandating Project Labor Agreements (PLAs),

any sole sourcing requirements for steel, or any other mandates. These are business

decisions that the federal government must allow the private sector to decide

through normal competitive processes.

In some cases, these mandates are impossible to meet. For example, a requirement that all steel used in the pipeline come from American mills would be impossible to meet. We have visited with the major steel and pipe mill companies in the

U.S. and have found only one currently capable of providing the pipe milling specialization that this project will require. The sheer size of this pipeline will require

steel supplies from many sources, both domestic and foreign. The pipeline developers will certainly favor domestic supplies whenever it is economically feasible to

do so.

On the issue of Project Labor Agreements (PLAs), it is very probable that any

pipeline built will require the use of a PLA, as was the case with the Trans-Alaska

Pipeline. This project will require a vast trained labor pool, and one of the issues

for the project will be finding the required number of skilled laborers to allow timely

completion of the project. A key factor in the economics of any project is the cost

of labor and a mandate to utilize a PLA up front gives an unfair advantage to one

side in the labor negotiations. The result will be a more costly pipeline. Congress

should leave it to the private sector and labor to negotiate an agreement and not

mandate a PLA, thereby tipping the negotiating scale.

Federal Fiscal Incentives. Any pipeline from Alaska to the Lower 48 states will

be the most expensive project undertaken in North America and will involve a natural resource whose price history is extremely volatile. (See attached chart) The risk

of this pipeline will be significant.

Phillips has submitted two proposals to the Committee that help manage these

risks. Both are intended to encourage construction of an Alaska gas pipeline and

the second one is specifically designed to provide relief only when market gas prices

in the Lower 48 states fall to low levels that would not otherwise support a project

of this magnitude and risk.

48

The first proposal is an acceleration of the depreciation recovery period for that

part of an Alaska North Slope gas pipeline infrastructure that is located within the

United States. Specifically, such gas pipeline infrastructure should be treated as 7-

year recovery property instead of 15-year recovery property. There is widespread

agreement that this provision makes good tax sense. A similar provision is in the

House energy bill, applicable to all domestic gas gathering and distribution pipelines.

The second proposal is a credit against federal income tax that would provide

downside price relief only if natural gas prices in the Lower 48 states are at low

levels. That is, relief under this provision would be contingent because it would be

available only when gas prices are low and, even then, the amount of the relief

would be capped when gas prices are extremely low. For example, using government

EIA forecasted gas prices, there should be no relief given under this proposal. The

contingent nature of this relief provision means the potential relief would be small

particularly when compared to the significant benefits to the American consumer

and economy (see above).

Unlike Section 29, marginal well and other tax incentives being pursued for producing properties located in the Lower 48 states, this incentive is not automatic and

may never be utilized. For a project of this size and cost and located so far from

market in a frontier area, we believe this credit mechanism is fair and will help

in our efforts to move this huge gas supply to market.

We believe that $1.25/mmbtu is an appropriate initial base line for this credit.

However, such base line amount should be adjusted annually for inflation in much

the same way as is currently done in existing tax relief provisions.

Essentially, this relief mechanism, as proposed, would equal the amount by which

a ‘‘netback’’ value for Alaska gas sold in the Lower 48 markets falls below the base

line. The ‘‘net back’’ value would be an amount equal to the market price for gas

in the Lower 48 markets minus the actual cost of treating Alaska gas and transporting it from the Alaska North Slope to the Lower 48 states. The relief available

under this provision would be capped at the base line. As noted above, there would

be no relief where the ‘‘netback’’ value equals or exceeds the base line.

These legislative proposals should provide a necessary environment for the sponsors to fully commit their resources to the project. Coupled with timely regulatory

review, this will expedite the process of completing engineering studies on time,

going to open season in the first half of 2002 and starting construction of a pipeline

to bring first gas to the market as soon as possible.

CONCLUSION

We understand the ANS Gas project’s critical role in providing a new source of

reliable, economic, long-term energy that is consistent with the country’s environmental desires, economic prosperity and national security objectives. We believe

that the Alaskan gas can be brought to the U.S. markets by either a southern or

a northern route in an environmentally sound way with similar cost structures.

However, we are concerned about capital expenditure uncertainty with a northern

route and that potential opposition may cause significant delays in its construction.

Additionally, a southern route offers more flexibility for future expansions. Accordingly, Phillips is prepared to commit to a southern pipeline route if the necessary

support mechanisms are provided.

Our proposed Federal enabling legislation will result in a coordinated, streamlined regulatory process and is an essential element in making a competitive national interest project a reality. The federal fiscal relief will ensure the appropriate

sharing of risks and benefits. The project’s enormous benefits for the U.S. economy

justify the need for Federal support.

Eliminating the uncertainty around route selection should be a major step forward for the project and will focus all of the stakeholders on the next steps and provisions for successful implementation of this project, which is key to the future energy security of the U.S. Phillips wants to make an Arctic gas pipeline to the Lower

48 states a reality. We would be happy to meet and discuss the project with any

and all stakeholders who share our vision of providing improved energy security

through the development of the unique resource of Alaskan natural gas.

The CHAIRMAN. Thank you very much.

Mr. Koonce, why don’t you go right ahead.

49

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

PRODUCTION CO.

Mr. KOONCE. Thank you, Mr. Chairman. Senator Murkowski has

left the room, I guess, and there are no other members of the committee present, so I will address these comments, Mr. Chairman,

to you.

Good morning. My name is Terry Koonce. As president of the

ExxonMobil Production Company, I am responsible from

ExxonMobil’s worldwide production operations, including our extensive oil and gas holdings on the North Slope of Alaska. As the

largest holder of natural gas on the North Slope, ExxonMobil has

a keen interest in commercializing that resource.

ExxonMobil has diligently pursued commercializing Alaska

North Slope gas since the startup of the Prudhoe Bay field in 1977.

However, in spite of significant efforts over the years, no economically viable project has been identified.

Beginning late last year, ExxonMobil, BP, and Phillips have been

working together to evaluate and address a potential pipeline

project to serve gas markets in Canada and the lower 48 States.

We are examining multiple routes and the attributes of those

routes in an effort to identify an economic project. Our preliminary

cost estimates are in the range of $15 to $17 billion for what would

be one of the largest North American projects in history.

There are clearly many risks associated with a project of this

magnitude, including cost, the market, and regulatory issues. Acquiring all the necessary permits and authorizations will take time

and could result in major delays and increase the cost of the

project. This is an important area where Congress could take action to improve the prospect of an economically viable project being

built to supply additional energy to our country.

The legislation that ExxonMobil, BP, and Phillips have proposed

would simply provide a level playing field. It creates a market-driven expedited regulatory process for any viable project or projects

for the delivery of Alaska natural gas to the lower 48 States. A

project would be subject to FERC regulation, including fair and

reasonable terms, and provide for open access consistent with

FERC rules. The project would be subject to all environmental laws

and regulations.

The provisions of the producer-proposed legislation are available

to any project, not just one sponsored by producers. Also, this legislation does not affect the existing provisions of the Alaska Natural

Gas Transportation Act, or ANGTA, that was passed by Congress

over 25 years ago. Those would remain in place and be unchanged.

As I mentioned, a major risk that we face is cost, being able to

hold the line on the investment associated with a project of this

magnitude. Of course, cost is a major factor in determining whether a project is economically viable. It is important not to have any

mandates, including route, that could raise the cost of a project and

possibly preclude a project from being built. A project that stays on

the drawing board benefits no one, while an economic project would

provide significant benefits in the form of energy for U.S. consumers, jobs, and government revenues.

Some have suggested that the government provide incentives for

an Alaska natural gas pipeline project. However, ExxonMobil is not

50

asking for anything specific for this project. If a project is determined to be economic in a normal market environment, no special

incentive or subsidy is necessary. If a project is not economic, our

preference is to try to improve it through our own actions or wait

until market conditions support the project. ExxonMobil does not

support the concept of subsidies, but prefers a level playing field

that allows the market to operate unencumbered. ExxonMobil, BP, and Phillips are spending over $100 million this

year on a work program that involves about 100 company personnel drawn from the three companies, along with significant contractor support. The areas of focus include conceptual design,

project costing, permit considerations, commercial structure, and

the overall viability of the pipeline project.

Based on our preliminary cost estimates, our current analysis

has not identified a project that is presently economic. Our work

remains on target for completing technical and engineering studies

and having updated cost estimates by early year end—by year end

or early next year. The continued expenditure of significant sums

of money in continued joint producer study is only justified if the

way forward from a regulatory perspective is clear. This clarity is

provided by the producers’ proposed enabling legislation that would

be route-neutral and give some assurance that a project can be permitted in a timely manner.

We urge your favorable consideration of this draft legislation.

Thank you, Mr. Chairman. We would be glad to answer questions

at the appropriate time.

The CHAIRMAN. Thank you very much. Thank you for that testimony.

Mr. Robert Malone, who is the regional president for BP America. We are glad to have you here.

STATEMENT OF ROBERT A. MALONE, REGIONAL PRESIDENT,

BP AMERICA, INC.

Mr. MALONE. Mr. Chairman, Senator Murkowski. It has been

just over 12 months since I provided this committee’s with BP’s

views on Alaska’s gas. This morning I am pleased to have an opportunity to provide the committee with a brief update on our activities and developments since the last time we met.

Since discovery of Prudhoe Bay some 33 years ago, the energy industry has sponsored a number of efforts to identify commercially

viable means to bring Alaska’s 35 trillion cubic feet of natural gas

to market. In fact, BP has participated directly in the majority of

these studies, including the gas pipeline studies that were encompassed in the ANGTA process over 20 years ago. BP, Exxon, and Phillips are spending more than $100 million on

the only current study to determine the viability of transporting

Alaska gas to North American markets. The study is almost complete. Our work to date indicates the costs are extraordinary and

the project is not presently economic.

Now, this is not the final answer and I do not want to leave the

impression that it is. This is clearly work in progress. With our

partners, we will be completing this work and we will have better

information by the end of the year. We hope as this work progresses that additional efficiencies and technological advances can

51

be found. At the same time, we hope that other possible project

sponsors will be making similar efforts.

Mr. Chairman, governments have asked what they can do. There

are areas where governments can help this process and they are

being clearly communicated to. First, in Alaska we communicated

the need to develop simple, clear, and predictable State fiscal terms

for major gas development.

The Federal Government can provide regulatory clarity that will

help reduce risk. This is an area where this committee can help.

The producer team has prepared draft legislation and we believe it

provides a positive regulatory foundation from which to develop a

fully competitive Alaska gas pipeline project. But it is simply draft

legislation. It is not etched in stone. BP stands ready to discuss

viable improvements or alternatives that serve the same purpose.

We are aware that Governor Knowles also called for Federal legislation to facilitate construction of an Alaska gas pipeline. While

we have not had the opportunity to view any specific legislation

language, I can speak, as this committee requested, to some of the

Governor’s points. The Governor has proposed expanding opportunities for other investors to participate in the pipeline. This principle is consistent with the draft legislation, whose framework is

available to any project and any investor.

However, let me assure you, pipeline ownership and control are

not driving motivators for BP. We have no precondition on pipeline

ownership and indeed we would expect that if we identified an economic project we would seek other investors or pipeline companies

to participate in this construction of a line. If others are able to develop a lower cost or more efficient proposal, we would ship our gas

on that pipeline. That is how the market is meant to work.

We support the use of local hire, native hire, and the use of local

businesses in Alaska and Canada. It is how we do business today

and we stand by our track record. In addition, a project of this

magnitude will require the in-migration of labor and business to

support the project and we should be careful not to impede the free

flow of goods and labor across lines.

We support the principle of access both for communities and now

exploration, but we believe existing FERC regulations address

these issues. We could not agree more that Alaska gas into the

North American market is good for the United States and Canada,

and we support the use of U.S. and Canadian steel. It is critical,

however, that it be competitively priced and that free trade principles are honored. We have to recognize that a project of this scale

is going to stretch global steel capacity.

A project of this magnitude is going to require union labor and

BP recognizes this. We have a long and productive relationship

with organized labor and we are confident that we would be able

to address issues between us without the need for Federal legislation.

Finally, let me turn to route. Alaskans have made clear their desire to see a pipeline built along the Alaska Highway, while the

producers have suggested that no route decision should be taken

until all the facts are in. I think we all agree that, first, the project

has to be economic, but let me assure you the gas pipeline that BP

52

will support will be the pipeline to which Alaskans, Canadians, and

the Federal Government can all agree.

Mr. Chairman, BP believes the time has come for government

and industry to sit down collectively to collaborate on what tangible

steps can be taken to actually progress this project forward. This

process needs to be open, transparent, and constructive in order to

advance a highly competitive and economically viable project. BP

stands ready to be an active participant in any such effort, around

the following principles:

A project must be economic to attract investor support under a

stable and predictable fiscal framework; any solution must create

a level playing field; embracing competitive free market principles,

no single party can be perceived as having monopoly rights to build

a pipeline; a project must have a competitive tariff. This is critical

not only to the producers, but to the State of Alaska through its

percentage ownership of the gas, and the United States with its

taxing policies.

Finally, any solution must have active support of all governments—Alaska, United States, and Canada.

So in closing, let me assure you that BP remains fully committed

to progressing this important project, and I thank you for allowing

us to participate today.

The CHAIRMAN. Thank you very much.

Mr. Glenn, why don’t you go right ahead.

STATEMENT OF RICHARD GLENN, VICE PRESIDENT OF LANDS,

ARCTIC SLOPE REGIONAL CORPORATION

Mr. GLENN. Thank you, Mr. Chairman, committee members, Senator Murkowski. First of all, let me begin by thanking the chairman for taking the time to visit the North Slope of Alaska in the

past year. Our region was proud to host you, and Senator Murkowski’s work in bringing other members of Congress to the place

where this discussion is coming from is well worth the cost and I

would like to thank you for that.

The CHAIRMAN. I hope it has warmed up a little since I was

there.

Mr. GLENN. It is getting cooler. It is getting cooler right now.

My name is Richard Glenn and I am the vice president of lands

for Arctic Slope Regional Corporation, or ASRC. This is the Native

regional corporation established pursuant to the Alaska Native

Claims Settlement Act. Our corporation represents more than

8,000 Inupiat Eskimos of Alaska’s North Slope. Our shareholders,

who are the Inupiat Eskimos, own surface and subsurface title to

more than 4 million acres of North Slope lands and by virtue of

this title ASRC represents the largest private landowner on the

North Slope.

As a slight correction to the earlier discussion, we talked about

ownership of resources, oil and gas. The more than 35 trillion cubic

feet of natural gas identified at Prudhoe Bay and Point Thompson

does belong to the State, but the lands surrounding Prudhoe Bay

are owned by the Native corporation, our Native people, and also

by the State of Alaska. These lands, located just south of the

Prudhoe Bay area, are in one of America’s premier natural gas

provinces and could hold as much as 60 trillion cubic feet of gas.

53

We urge the committee not to overlook this significant resource

when discussing routing or any other structures, cost structures,

tariff structures, and capacity structures for any proposed natural

gas pipeline.

Much of the discussion documents drafted by the producers that

has been presented to your committee covers these topics and we

would like to provide additional discussion of these topics just to

make sure that the interests of our people and the significant resources that we own as a people are not neglected.

As it stands now, the producers’ document needs the consider a

capacity allocation that looks to the resources outside of the

Prudhoe Bay. In addition, assumptions regarding secondary treatment services, the design and cost structure of these services, and

the shippers’ bidding schedule and structure also need to take this

into account.

Now, it is said that the existing FERC regulations have made

provisions for this. But we urge the committee not to overlook

these items when discussing any Alaska natural gas pipeline, because to overlook them now has the potential to condemn the more

than 60 trillion cubic feet of natural gas that sits on these important lands.

In addition to access to capacity, we request access to opportunity. As you know, there is no industry in the rural parts of Alaska save for resources extraction. It is for reasons like this that title

29 of the Trans-Alaska Pipeline Agreement was developed, to support native hire. We supported this provision, but we also know

that the results fell a little bit short of the intent. Alaska Natives

were aggressively recruited during the construction of the TransAlaska 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 AlasVerDate 11-SEP-98 13:53 Mar 25, 2002 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6602 J:\DOCS\78-277 SENERGY3 PsN: SENERGY3
54

kan natural gas. I hope that you will find the opportunity to accept

them as testimony at some point and I give them to you for use

at your discretion.

[The prepared statement of Mr. Glenn follows:]

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

My name is Richard Glenn and I am Vice-President of Lands for Arctic Slope Regional Corporation (‘‘ASRC’’). Arctic Slope Regional Corporation (‘‘ASRC’’) is the

Alaska Native-owned Regional Corporation, established pursuant to the Alaska Native Claims Settlement Act of 1971 (‘‘ANCSA’’), representing more than eight thousand Inupiat Eskimos of Alaska’s North Slope. The shareholders of ASRC own surface and subsurface title to more than four million acres of North Slope lands. By

virtue of this title, the ASRC represents the largest private North Slope landowner.

The ASRC ownership stems from an earlier claim of aboriginal title—covering the

entire Alaskan North Slope—that was eventually settled in part by ANCSA.

A large percentage of ASRC’s current land holdings are in the Central Arctic region of the North Slope, an area that extends from the foothills of the Brooks Range

north to the Colville River. ASRC’s Central Arctic lands are located between the National Petroleum Reserve—Alaska on the west and the Arctic National Wildlife Refuge on the east. This is an area of high probability for large natural gas discoveries

which, if found, will allow ASRC to succeed in its mission to enhance the cultural

and economic freedoms of its shareholders, who are the North Slope Inupiat Eskimos. Mr. Chairman, we are at a point in our history where there is a very strong national need to access Alaska natural gas for the lower 48 market at a reasonable

price. ASRC supports the development of an Alaskan Natural Gas Pipeline.

In addition to granting the access to much-needed energy for the nation, the proposed pipeline would greatly benefit the State of Alaska by providing in-state energy

infrastructure, generating new capital investment and creating new jobs. It would

allow for in-state access to natural gas that would otherwise be unavailable. It

would allow the State to realize economic benefits through royalties, severance

taxes, and property taxes. This additional revenue to the state benefits all Alaskans

through statewide capital improvements. Closer to home, our local borough, the

North Slope Borough, would benefit via property tax assessments on local natural

gas facilities, allowing for an improved quality of life for North Slope residents. Because it would provide the only vehicle for bringing North Slope Alaskan gas to

market, the proposed natural gas pipeline has the potential to allow ASRC and the

State to realize the economic benefits of continued gas exploration and development

on our lands and on adjacent State leases.

ASRC’s requirements related to North Slope natural gas exploration and development can be summed up in one statement: ‘‘We require access—access to capacity,

access to opportunity, and access to the planning process.’’

ACCESS TO CAPACITY

As stated above, ASRC is the largest landowner on the North Slope, outside of

the federal government, with title to more than four million acres of surface and

subsurface estate. ASRC’s lands include more than three million acres in the central

Arctic foothills, one of America’s premier natural gas provinces. Together with

State-owned lands in the central Arctic, there are 11 million acres of land there that

may contain more than sixty trillion cubic feet of natural gas, which we strongly

believe should have an avenue to market. Said another way, ASRC believes that

any natural gas pipeline leaving the North Slope should provide capacity to accommodate areas of new natural gas production, such as in the central Arctic, in addition to the significant identified natural gas reserves around Prudhoe Bay. In this

respect, we are in agreement and supportive of Governor Knowles’ efforts to ensure

access to ‘‘future’’ gas owners.

For ASRC, and our industry partners currently involved in gas exploration, access

to a gas pipeline is critical. If we cannot be assured of fair and reasonable access

to space on a pipeline to carry new gas to market, our partners will not explore for

or develop natural gas outside of Prudhoe Bay, Point Thomson and related fields.

This outcome would, in effect, condemn more than 11 million acres of highly prospective Native- and State-owned lands from future exploration potential.

As it now stands, ASRC is concerned that the three owners of 90 percent of the

existing proven natural gas reserves on the North Slope could use the power of this

ownership, and presumably ownership of a natural gas pipeline, to restrict pipeline

55

access to other potential gas shippers. The three owners might utilize excessive capacity ‘‘hold backs’’ whereby the owners would set aside more pipeline capacity than

is necessary for their own internal purposes. In addition, the three owners would

have the opportunity to make transportation capacity either completely unavailable

or unreasonably expensive to shippers who are not able to secure firm capacity

under the initial open season bidding process. They might also force shippers to sell

their ‘‘stranded’’ gas at distressed prices to those that control the firm transportation. Finally, the three owners might unnecessarily delay or forestall an expansion

that would provide additional pipeline capacity for new producers who have made

new gas discoveries.

ASRC believes that any new legislation regarding the Alaska gas pipeline must

look at the capacity requirements of the known stranded gas, as well as at the requirements of companies holding acreage that is potentially significant to natural

gas exploration and development in the future.

ASRC is also concerned the gas-owners could set a high tariff structure that

would deter any future gas producers from effectively purchasing capacity if they

were not able to reserve capacity during the initial open-season process. Unbundling

secondary services, such as the CO2 conditioning plant, would allow for a fair tariff

structure by not burdening low CO2 gas with the cost of conditioning. ASRC opposes

the creation of special or preferential rate schedules that favor the Prudhoe Bay and

Pt. Thomson gas owners, thereby removing existing incentives for other gas exploration on the North Slope. Again, shutting out future natural gas shippers through

a high tariff condemns our lands from future exploration and development.

ACCESS TO OPPORTUNITY

The construction and eventual operation of a natural gas pipeline presents many

opportunities to all Alaskans. Jobs in construction, engineering, operations and the

support of natural gas-related processing industries all will be welcomed by all Alaskans along the pipeline route.

We agree with and support Governor Knowles’ point that special emphasis be

placed on recruitment, training and employment of Alaska Natives. ASRC, as an

Alaskan Native Corporation, with established subsidiaries in oilfield construction,

surveying and engineering, and pipeline operations, has much to contribute to the

construction and operation of a natural gas pipeline. ASRC and other Alaskan Native Corporations have the unique ability to provide a highly skilled, Alaskan Native

workforce. ASRC is already contributing, for example, in the ‘‘front-end engineering

and design’’ for the gas conditioning plant and the pipeline along its proposed route

through Canada. We seek continued participation in the design, construction, and

future operations of this major development project. Our companies are competent,

we have proven ourselves in the industry, and most importantly we seek to put our

people to work.

Native hire was also incorporated as a term within the Trans-Alaska Pipeline

System (‘‘TAPS’’) Agreement. Title 29 of that Agreement prioritized Native hire.

However, as history has shown, the implementation of Title 29 fell very short of its

intent. Very few Alaskan Natives were hired to work on TAPS. ASRC applauds the

Governor’s goal of Native hire and feels that the previous disappointment of the

TAPS Title 29 experience will be instructive for developing similar, but improved,

provisions for the Alaska Natural Gas Pipeline.

ACCESS TO THE PROCESS

In addition, we do not wish to foreclose any opportunities related to an equity position in the Alaska Natural Gas Pipeline or any of the related systems. To this day,

there has been little discussion on who will own the pipeline. While it is assumed

that the three majority gas owners—ExxonMobil, BP, and Phillips—will be the owners of the proposed gas pipeline we feel this is an area still open for discussion. Although ownership is still unclear, as it is defined and developed, ASRC wants to

participate.

While ASRC is in favor of and supports the development of the proposed Alaska

Natural Gas Pipeline, we wish to make it clear that our support of this important

project is independent of our on-going support for the opening of the Arctic National

Wildlife Refuge (‘‘ANWR’’) to oil and gas leasing. Both the Natural Gas Pipeline and

the opening of ANWR are important, yet distinct, issues for our Corporation and we

wish for this Committee to treat them as such. ASRC recognizes that while natural

gas development is important to the energy needs of our country, it will not replace

our dependence on foreign oil in the long-term and that only development of the

ANWR coastal plain will help solve that piece of America’s energy puzzle.

56

Finally, ASRC would like to join the North Slope Borough, the whaling captains

of our villages, and many others in supporting an overland route for the Alaska Natural Gas Pipeline. In addition to avoiding the placement of a pipeline in the Beaufort Sea, a route from the North Slope paralleling the Trans-Alaska pipeline would

provide access to the significant resource base of the central Arctic, opening up a

significant hydrocarbon province, and provide jobs and revenue to all Alaskans. This

southern route would also provide natural gas to communities dependent on high

cost diesel in the interior of the State. By routing the pipeline through the State,

our urban centers of Anchorage and Fairbanks would not only benefit from low cost

natural gas but also be able attract other industries to the State allowing for diversification of the State’s economy. ASRC is confident that the oil producers will come

to the same conclusions after reviewing all of the issues related to gas development

in Alaska.

We respectfully encourage the Committee to review all the issues related to proposed legislation, and not just the interests of a few gas owners, to better understand the impacts that any legislation might have on State of Alaska and this important national energy source.

The CHAIRMAN. Thank you very much.

Mr. Silva, why don’t you go ahead.

STATEMENT OF PATRICIO SILVA, ENERGY PROJECTS

ATTORNEY, NATURAL RESOURCES DEFENSE COUNCIL

Mr. SILVA. Thank you, Mr. Chairman and Senator Murkowski,

for the opportunity to appear before you today on the status of proposals to facilitate transportation of natural gas from Alaska to the

market in the lower 48 States. My name is Patricio Silva and I represent the Natural Resources Defense Council, which is a nonprofit

organization of scientists and lawyers and environmental specialists serving a membership of over 500,000.

The key recommendations we would like to share with the committee this afternoon are: NRDC can support the proposed Alaska

Natural Gas Transportation System route following the TransAlaska 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.

57

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.

[The prepared statement of Mr. Silva follows:]

PREPARED STATEMENT OF PATRICIO SILVA, ENERGY PROJECTS ATTORNEY,

NATURAL RESOURCES DEFENSE COUNCIL

Thank you for the opportunity to appear before you today on the status of proposals for the transportation of natural gas from Alaska to markets in the lower 48

States and legislation that may be required to expedite the construction of a natural

gas pipeline from Alaska. My name is Patricio Silva, and I represent the Natural

Resources Defense Council.

The Natural Resources Defense Council is a national nonprofit organization of scientists, lawyers, and environmental specialists, dedicated to protecting public health

and the environment. Founded in 1970, NRDC serves more than 500,000 members

from offices in New York, Washington, Los Angeles, and San Francisco.

Natural gas is a critical part of an environmentally and economically sound national energy policy. Natural gas demand in the United States is expected to grow

in response to increased demand for gas-fired electric generation, in addition for

commercial and residential heating and cooling and as feedstock for petrochemical

manufacturing. Natural gas use in the United States has grown approximately 2.0

percent each year over the past decade. In 2000, natural gas consumption reached

almost 23 Tcf (trillion cubic feet) with gas demand for industrial use representing

about 60 percent of the new growth.

According to the Energy Information Administration’s (EIA) Annual Energy Outlook 2001, by the year 2020, gas demand in the United States is projected to increase to 34.7 Tcf per year. Gas consumption used to generate electricity is expected

increase from 16 percent of generation in 2000 to nearly 36 percent in 2020 according to EIA. Additional gas gathering, transmission, and distribution infrastructure

will be required, including infrastructure to bring Alaskan natural gas to market.

Domestic natural gas exploration has rebounded from historic lows in early 1999,

when 371 natural gas drilling rigs were reported in service as gas futures prices

fell below $2 per mmBtu. Natural gas exploration has surged with 1,032 rotary gasdrilling 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.

Now that gas futures prices have settled back below $3 per mmBtu, it is unclear

what this will mean for gas demand, pricing and drilling activity in the short term.

The long-term forecast of increasing natural gas demand appears to remain accurate.

NRDC believes that pipelines should be constructed and operated in an environmentally sensitive manner, with strong safety measures and oversight, and, whenever possible, along existing routes. If Prudhoe Bay gas supplies are needed to serve

markets in the lower 48 states, any Prudhoe Bay natural gas pipeline should follow

the Trans-Alaska Pipeline System and the Alaska-Canadian Highway right-of-ways;

undergo a thorough, new environmental impact statement; comply with all U.S. and

Canadian environmental laws; and incorporate the best pipeline safety and environmental measures. Plans to construct an offshore pipeline off the Arctic National

Wildlife Refuge coastal plain should be rejected.

EXISTING LAW SUFFICIENT

Additional authorizing legislation for an Alaskan natural gas pipeline is unnecessary. In the mid 1970s, rising natural gas demand in the lower 48 states led energy

producers to explore the feasibility of bring Alaskan natural gas to market through

various natural gas transportation projects with several filings proposed under the

58

3Staff 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). 4 H.R.J.Res. 621 Pub.L. No. 95-158, 91 Stat. 1268, 95th Cong., 1st Sess. (1977).

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. 6 Joseph Kahn & Jeff Garth, ‘‘Energy Industry Raises Production At A Record Pace,’’ The New

York Times, May 13, 2001, p. 1, 15. See also Energy Information Administration, U.S. Natural

Gas Markets: Recent Trends and Prospects for the Future SR/OIAF/2001-02 (May 2001) pp. 16-

20.7 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.

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. § 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.’’

Under the procedures provided under ANGTA, the President selected an Alaskan

gas pipeline proposal (ANGTS gas pipeline), which Congress approved on November

8, 1977.4 To date only portions of ANGTS have been constructed and placed into

service. It appears that disagreements between producers and pipeline proponents

over economic and market conditions have contributed to the lack of activity in completing ANGTS.

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

EXPEDITING ENERGY PROJECTS UNNECESSARY

While some have proposed streamlining permitting regulations to expedite construction of energy projects, natural gas pipeline operators have not found existing

environmental and public safety regulations to be an obstacle to energy development. According the Energy Information Administration, natural gas pipeline operators have been adding natural gas transmission capacity across the United States

at a fevered pitch with 1,895 miles of new pipeline constructed in 2000, 4,300 miles

to be completed by end of 2001, and 4,650 miles in 2002.6 There is no indication

that the existing environmental and public safety regulations have prevented construction and operations of ANGTS. Attempts to expedite natural gas transmission

pipeline approvals by abbreviating or eliminating public review and regulatory oversight could lead to unnecessarily compromising public safety and environmental protections.

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

59

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. 9T.J. Glauthier, deputy secretary of energy, testimony before the Senate Committee on Energy and Natural Resources, September 14, 2000. 10 Emil D. Attanasi, USGS, Economics of Undiscovered Oil in the 1002 Area of the Arctic National Wildlife Refuge, in The Oil and Gas Resource Potential of the Arctic National Wildlife Refuge 1002 Area, Alaska. USGS Open File Report 98-34 (1999). Chapter EA p. EA-12.

PRESERVING THE ARCTIC REFUGE AND ALASKA OFFSHORE

It is important to point out that with natural gas the issue is less about the need

to find new supplies, than the need to develop the infrastructure to deliver these

supplies to market. Increasingly, it is getting the existing gas supplies to the market

that is the biggest challenge. Development of a safe and environmentally benign

pipeline infrastructure is critical. NRDC believes that pipelines should be constructed and operated in an environmentally sensitive manner, with strong safety

measures and oversight, and, whenever possible, along existing routes. With a thorough environmental impact statement, ANGTS fulfills these requirements.

Some have also suggested that natural gas production is a reason to drill in the

Arctic National Wildlife Refuge. In reality, industry interest in the Artic Refuge is

driven by its desire to produce oil, not gas. The Arctic Refuge is estimated to contain

less than 7 Tcf of natural gas resources; about a three-month supply by the time

the resources could be developed.8 By comparison, the Prudhoe Bay production area

is estimated to contain 32 Tcf to 38 Tcf of natural gas resources.9 Associated gas

produced at Prudhoe Bay fields is re-injected into the oil field for enhanced oil recovery, or used as fuel at production facilities because there is no way to transport it

to market.10

NRDC is concerned that other Alaska gas pipeline routes may endanger sensitive

wildlife habitat, including offshore in the Beaufort Sea. The Alaskan Outer Continental Shelf (OCS) is home to a rich variety of marine life, and lies adjacent to

some of the most important and spectacular terrestrial public resources in the

United States, including national parks, wildlife refuges, forests and wilderness

areas. The Arctic Ocean’s Beaufort Sea is home to polar bear, walrus, seals, migratory birds, threatened spectacled and Steller’s eiders and the endangered bowhead

whale. This unique natural resource is also a place dominated by ice, where temperatures can plummet to –60 degrees F, where relatively stable land-fast ice and

a mobile icepack interact violently in the ice shear zone, and where wind and fog

can make air or boat travel impossible.

The Arctic National Wildlife Refuge, with its incomparable wildlife and wilderness, lies landward of the eastern portion of the Beaufort Sea in the United States.

Critical bowhead whale spring migratory pathways are located east of Barrow, and

fall migratory pathways and feeding areas are located offshore the Arctic National

Wildlife Refuge. These unique natural treasures are sensitive to disturbances

caused by industrial activities and infrastructure.

Development off the coast of the Arctic Refuge poses risks to fish, polar bears, and

migratory birds using the refuge coastline, lagoons, and barrier islands. Internationally important polar bear habitats are at risk, both within the refuge and off its

coast. Protection of polar bears and their habitats is a specified purpose of the Arctic

Refuge, and the Refuge provides the most important onshore denning habitat in the

U.S.

Similarly, the National Petroleum Reserve—Alaska (NPR-A) possesses extensive

critical habitat areas for many species of mammals, migratory birds and fish. Until

these areas can be fully inventoried and appropriately protected we urge that there

not be any more oil and gas leasing in the NPR-A.

NRDC is concerned about increasing industrial encroachment across the North

Slope and Beaufort Sea despite the U.S. commitment to protect feeding, denning,

and migratory areas in the international treaty, Agreement on the Conservation of

Polar Bears. Offshore exploration and development would cause pollution, aircraft

and vessel noise and related industrial activity, and potential oil spills would degrade the Refuge and threaten the integrity of this protected conservation unit, even

if there were no construction of infrastructure within its boundaries.

CONCLUSION

NRDC can support the proposed Alaska Natural Gas Transportation System route

following the Trans-Alaska Pipeline System, and the Alaska-Canadian Highway

right-of-ways already conditionally certificated under ANGTA, if a thorough, new

environmental impact statement that complies with all U.S. and Canadian environVerDate 11-SEP-98 13:53 Mar 25, 2002 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6621 J:\DOCS\78-277 SENERGY3 PsN: SENERGY3
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mental laws and incorporates the best pipeline safety and environmental measures

is prepared. To ensure that adequate sources of natural gas are available in the future, NRDC urges the adoption of aggressive efficiency measures that lower the

amount energy required for everyday activities from heating and ventilation of home

and buildings to manufacturing and generating electricity. NRDC opposes, and sees

no need for, natural gas development in sensitive areas or any expedited permitting

processes.

The CHAIRMAN. Thank you very much.

Mr. Sullivan.

STATEMENT OF BILL SULLIVAN, EXECUTIVE VICE PRESIDENT,

EXPLORATION AND PRODUCTION, ANADARKO PETROLEUM

CORP.

Mr. SULLIVAN. Mr. Chairman, Senator Murkowski, Anadarko appreciates the opportunity to testify today on these important issues.

At Anadarko we are explorers and we have been exploring aggressively and successfully in Alaska for many years. Our people are

among the best in the business and we use the latest technology

to focus exclusively on exploration, development, and production of

oil and natural gas.

As the world’s largest independent, we are working hard to supply America’s energy needs. We are one of the most active drillers

in North America and we are the fifth largest producer of natural

gas in North America. One of the most promising areas for significant new natural gas finds is Alaska, with estimates ranging from

60 to as much as 100 trillion cubic feet of undiscovered gas on Federal, State, and private lands on the North Slope. That is more

than three times the estimated proven discovered reserves in existing fields.

Anadarko has a huge acreage position of Federal, State, and private lands with tremendous natural gas potential. We have made

significant investments in technical, geologic, and seismic work

over many years and we are ready to explore for natural gas, but

the costs of exploration and development are high without the assurance that we will have access to pipeline capacity on equal

terms and conditions that do not place us at a competitive disadvantage. We may not be able to justify that investment.

That brings us to why we are here today. We understand the

committee is considering the need for legislation to facilitate construction of a pipeline to transport Alaskan natural gas to the

lower 48. Congress passed such legislation in 1976 when it enacted

the Alaska Natural Gas Transportation Act. It may be that, given

the passage of time, further or updated legislation is required. In

fact, we have three particular concerns which should be addressed

with new legislation:

First, that access must be available on equal terms to any person

seeking to transport natural gas;

Second, that the tariffs for transportation are nondiscriminatory;

And third, that the pipeline be expanded as supply and demand

dictate in the future.

In enacting ANGTA, Congress recognized these principles as essential to ensure that Alaska’s significant natural gas resources,

not just those in Prudhoe Bay, would be developed and transported

to markets through what will undoubtedly be the only gas pipeline

to transport gas from the North Slope to the lower 48. In the interVerDate 11-SEP-98 13:53 Mar 25, 2002 Jkt 000000 PO 00000 Frm 00063 Fmt 6633 Sfmt 6602 J:\DOCS\78-277 SENERGY3 PsN: SENERGY3
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est of time, let me very simply say that a lot has changed in natural gas marketing and in transportation since ANGTA was passed

in 1976. So these three principles must be updated in new legislation whether or not the pipeline is constructed under ANGTA.

It is important to know that three producers hold more than 90

percent of the proven Alaskan natural gas reserves. This gives

them the position of joint negotiating power to structure the open

season, the contracts, the tariff terms, potentially to competitive

advantage. Obviously, unless access to the pipeline is made available to all shippers on equal terms and unless rates and conditions

of service are nondiscriminatory, the economics of exploration and

production on the North Slope may be tilted against companies like

Anadarko.

This would inhibit the exploration and development of Alaska’s

natural gas resources and adversely affect the supply of that gas

to the U.S. economy and the consumer. We hope that these concerns will be resolved by FERC under the Natural Gas Act. We are

not convinced. At the present time, FERC does not try to control

the terms and conditions under which capacity is allocated on new

pipelines during the open season. Clear and fair rules must be in

place before, not after, capacity is awarded.

FERC has no authority to order an expansion of facilities under

the Natural Gas Act and, although Congress recognized the need

for pipeline expansion in ANGTA, it is unclear how FERC is to

handle such a situation.

Again, for these reasons we believe the committee should consider legislation that: first, directs FERC to issue clear rules governing the open season process in which the capacity is to be allocated; second, require that tariffs be nondiscriminatory so as not to

inhibit competition and exploration; and third, grant FERC the

power to order an expansion of pipeline facilities where economically and technologically feasible.

There are those who say that the market should decide who will

obtain pipeline capacity and what rates will be charged. In circumstances where there is open competition, I would absolutely

agree. However, in this unique circumstance where only one pipeline will ever be built and three producers appear to be in control

of the process, legislation and regulation are required to ensure

long-term competition.

U.S. consumers and the economy will benefit from that competition, and at Anadarko we intend to be that competition. We have

the acreage, we have the expertise, we have the financial resources,

and we have the commitment to explore on the North Slope, and

we are ready to drill. We need clear legislation that ensures a level

playing field and access on equal terms and conditions.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much.

Let me just ask a few questions. Let me first start with any of

the three producer representatives from the producing companies

here. The administration’s position as I understand it from the previous panel is that they believe it is premature for Congress to do

anything on this subject. They have no position in favor of legislation, they have no position opposed to legislation, but they think

62

until actual proposals are on the table, it is too early for us to legislate.

What is your response to that?

Mr. MARUSHACK. Senator, we are trying to move this project

along and, speaking for Phillips right now, we are trying to move

this project along as quickly as we possibly can. Certainly we see

some economic hurdles there. So we have talked about the enabling

legislation and fiscal legislation, but we think it is critical to have

a process for the permitting of this pipeline well defined and well

understood.

We are spending collectively about $100 million, Phillips about $35 million, which is a large amount of money for us. To move to

that next phase, we need to have a clear regulatory process so that

we can move this along as quickly as we possibly can.

We heard Chairman Wood speak earlier this morning and we

clearly understand that he needs a complete EIS. We intend to

comply with all the requirements that are out there, but we have

to have the certainty and the timing so we can move forward with

this project and continue to spend the kind of money to bring this

gas to the lower 48 as quickly as possible.

The CHAIRMAN. Mr. Koonce, did you have a comment?

Mr. KOONCE. Yes, Mr. Chairman. The issue here is one of risks,

I think. We have severe risks in costs. We have talked about that.

We have risks in the market and we have risks in permitting.

Those are kind of the major areas. Permitting obviously affects timing, which in turn affects the economics.

So what we have said was we need this legislation to take away

and mitigate one area of those risks. We continue to work on the

cost side to try to lower the costs. We continue to monitor the market side. There is not a lot we can do about the market side, except

we continue to study it.

Now, another factor that is a deterrent to us reducing the cost,

I think, is the mandating of any route. So we have recommended

route neutrality in this legislation. Let me just bring out a factor,

too, about the so-called northern route that has not been brought

out yet in this hearing. The $2 billion difference between the north

and the south has been mentioned and that derives primarily because the northern route is about 300 miles shorter than the southern route if you are just delivering Alaska gas to the lower 48 and

you ignore anything going on in the MacKenzie Delta.

What I would like to bring forward here is the fact that there is

gas in the MacKenzie Delta. There is a gas project that is looking

at the feasibility of bringing Canadian gas to the lower 48, to Alberta and to the lower 48, and that project, which we are part of,

appears to be economically viable.

Now, if that pipeline is built, then here is the scenario that can

conceivably develop. Now, all you have to do is expand that pipeline from maybe 36 inches to 52 inches, build a bigger line to accommodate Alaska gas, and lay about 400 or 500 miles of line instead of 2,100 to the south. That takes $3.5 billion out of the

project, more than the $2 billion if you are just considering Alaska

gas.

Now, I say that only to say that that is why we are route-neutral. We just think it is premature to rule out any options until we

63

have had the opportunity. We and everyone interested in these options has had the opportunity the fully explore them. It can even

be said of the one I just described that the incremental footprint

that you are dealing with environmentally is only 400 or 500 miles

instead of 2,100 miles, and the emissions that would be accompanying that scenario would be considerably less. So there are even

some environmental advantages that need to be further explored.

So I think these are the reasons I think we need some legislation

to take away that risk of permitting. We will continue—we would

like to be able to continue to work on the cost side and the market

side.

Thank you.

Mr. MALONE. Mr. Chairman, may I add one comment to that of

my colleagues?

The CHAIRMAN. Yes, go ahead.

Mr. MALONE. For 25 years now, Alaska gas has remained in the

ground rather than coming to market. There has been a routing

out through ANGTA which has not been economic to commercialize

the gas. It is very important as part of the studies that we have

been doing is to not say that ANGTA is not a valid process, but

rather allow for others to be able the compete to build pipelines

that could move this gas to market. It is very important to us in

order to be able to commercialize this that competition, a level

playing field, be created.

The CHAIRMAN. My time is about up. Why do you not go ahead,

Senator Murkowski.

Senator MURKOWSKI. Thank you, Senator Bingaman.

We talk—I am talking to producers now primarily—relative to

the necessity of the proposed legislation, and obviously expedited

review of the application, a single consolidated EIS, establish Federal pipeline director, limited judicial review, all of which are certainly reasonable in the request.

‘‘Route-neutral’’ reminds me of, if there is anything wrong in this

it is a parallel to the issue of a national energy security bill. It is

always about ANWR. This particular issue is about route selection

and route specificity relative to the attitude prevailing by action of

the House of Representatives, which has designated a southern

route, and the State of Alaska. Clearly, what is in the long-term

interest of the State, is it more revenue or is it the ability to try

and develop that gas within the State?

The problem I have, gentlemen, is we have been advised that we

have an uneconomic project before us at this time. That is significant in the sense that you are saying it is not economic. What are

we to expect to hear at the end of the year? We will simply have

to wait until the end of the year while you progress with your studies, and that is certainly reasonable.

You want regulatory clarification. You want assurances from the

State. Those are negotiated at a time that the State and you folks

see fit, but as we look at where you are now we can consider the

merits of a stand-alone legislation on what you have requested relative to your proposed legislation and then the question is whether

the Senate’s going to take a position on a route such as the House

has done.

64

But in any event, gentlemen, we do not have an application now.

When are we going to get an application? That application is going

to be very definitive relative to the obligation that we have to move

on the application. We have got a request here for legislation to expedite, which is certainly reasonable. Do we want to get into the

route selection and dictate that, too? I have already given you my

preference on route selection as a consequence of what I feel is in

the long-term and best interests of the State, and you have heard

the Governor.

From my point of view—and I am speaking from the minority position on this—I am willing to take up your proposed legislation,

but clearly the intent of Alaska is the southern route and that is

contrary to the position that is taken by one of the producers certainly.

I do not see the necessity of adding this action to a national energy security bill which we are promoting separately. I think the

two should be separate. I am not suggesting that gas is not in the

national energy security interests of the country, but I think we

have to take this systematically, and until we have the results of

your evaluation at the end of the year I would think it would be

very, very difficult to move, if you will, on even your proposed legislation now.

But I am open to that depending on the progress, because if you

reach the end of the year and this thing is still economic or there

is still more time needed for more evaluation of scarcity of capacity

or increases in price, I think it would be premature to suggest that

the Senate take this up until we have a little more clarification relative to the points I have made.

I have a couple more questions. I am going to take the prerogative of the minority, which I used to take as the prerogative of the

chair, and, since the producers are seldom together, I would like to

ask you two questions. I would like you to respond quickly and I

do not think you need a lot of detail.

But this involves the realization that you are the major holders

of gas and also the major holders of oil and as a consequence there

is discussion that it would take 10 years to develop oil from ANWR.

I am going to ask you the question that, if you were allowed to go

in under an expedited permitting process and a major discovery

was made, how long it would take you to move the oil over the existing Trans-Alaska Pipeline or use the Badami line?

The second question is the allegation that these reserves are only

a 6-month supply for the Nation, yet the indication that the reserves are somewhere between 6.5 and 15 billion barrels, how significant is that to the Nation’s supply? You can take it in any order

you want, or is there any volunteers or do you want me to call on

somebody? There we go, Exxon is first.

Mr. KOONCE. I will take it, Senator Murkowski. I will take the

second one last. I think any quantity of oil is important to our Nation today and the best thing we can possibly do for our energy security is find additional sources of domestic crude oil. So whether

it is 6 billion or 16 billion to my way of thinking is not the relevant

question. If it is there, we ought to be going after it.

Now, in terms of timing, you have to start with exploration, of

course. If we had a lease sale next week, the first thing that would

65

have to be done is to have some modern seismic running across

ANWR. That would have to be interpreted, prospects identified,

wells drilled, discoveries made. That process would take I would

say a minimum of 2 years. It could well take 3.

So 2 to 3 for evaluation, discovery, delineation, appraisal. Then

if you had a project, if you had a discovered reserve that was commercial, it typically takes about 2 years to construct the field facilities required in the lower 48 and then, as you well know, those

have to be brought up around Point Barrow in the third year, the

construction year. So between engineering, construction, engineering design, construction in the lower 48, and construction on the

North Slope, that will probably be 3 or 4 years.

So now we are talking from now until the time you could have

something built, in the range of 5 to 7 years. But the factor that

I have not mentioned at all is permitting. It is the same one we

are here to discuss today for Alaska gas. Now, you have got to add

permitting into that equation for all the activities.

Senator MURKOWSKI. You are asking for expedited permitting on

the gas line.

Mr. KOONCE. I am just saying that if Congress and the State

could expedite the permitting associated with the activity that I

just described, then you maybe could be in production in 6 to 8

years. If you, say, had a very expedited permitting process and it

took only about 12 months, the normal process—and my colleagues

can comment on this if they choose, but the normal process—we

probably allow 3 to 4 years for that permit, which would put you

up in the 10-year range.

Senator MURKOWSKI. Well, if you went over the existing Badami

line that would cut that time down.

Thank you. Anybody else.

Mr. SULLIVAN. Senator Murkowski, if I could briefly. Anadarko

is maybe not well known as a producer from the North Slope, but

in fact we are. We have been proud to be a partner with Phillips

in the exploration and development of the new Alpine field, the

newest field to start production on the North Slope. It was discovered in 1994 and began production in late 2000, a 6-year time

frame from actual discovery to development, and, notably, in a

unique and new development model that mitigated the impact on

the surface and the overall environment.

I think there is one window on the potential time frame of development in ANWR. On the question of the 6-months supply or ultimate potential, the resource potential of ANWR is well understood

to be significant and I would say, without wanting to be cavalier,

if as an industry we cease exploring for anything that did not have

more than a 6 months potential supply for the United States we

would rapidly cease exploring altogether.

The incremental production potential from ANWR is a significant

supply source for the United States’ security for a long time to

come.

The CHAIRMAN. Mr. Malone.

Mr. MALONE. Senator Murkowski, Alaska is blessed to be rich in

energy sources—coal, natural gas, and oil, all of which fit into the

national energy plan that is being developed and that is being disVerDate 11-SEP-98 13:53 Mar 25, 2002 Jkt 000000 PO 00000 Frm 00068 Fmt 6633 Sfmt 6602 J:\DOCS\78-277 SENERGY3 PsN: SENERGY3
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cussed. All three are needed in order to meet the needs of this

country.

Also, I would concur with my colleagues that the volumes are

needed and that if we based all our economic decisions on a finite

time frame many fields would not be developed. It is the incremental amount that would enter the United States we support.

As to the time to bring the field on line, again I think all our

exploration and development experience would be similar, but, Senator, if you were to have your seismic and your exploration and development and engineering done and then you approached this as

a Nation the same way we did when we tried to put somebody on

the moon, when all resources were brought to bear, with those two

areas completed you could get oil to the pipeline and down in 2 to

3 years.

Senator MURKOWSKI. Thank you.

Mr. MARUSHACK. Senator, 99.5 percent of my work is commercializing gas. But just in general, on the ANWR assumption we

would use to the extent that we could the Alpine model and your

assumption is that all the permitting is in place already and the

discovery has been made, so I would agree with my BP colleague

that it would take from 3 to 4 years just to do the production delineation and production and bring that gas on line, which we think

is similar to the Alpine model which was state of the art.

Senator MURKOWSKI. Mr. Chairman, I have one more question,

either on a second round——

The CHAIRMAN. Let me do this. Vice President Cheney is going

to be speaking to the Democratic caucus at 1 o’clock, and I need

to excuse myself to attend that. Why do I not just turn the hearing

over to Senator Murkowski. You go ahead. You have one additional

panel of witnesses and you can go ahead with this panel as long

as your questions dictate.

Senator MURKOWSKI. They have been waiting a long time. I appreciate that, Senator Bingaman. Thank you.

I am curious to know, from the standpoint of the three producers

what your reserve holdings of natural gas are on the MacKenzie

Delta? And I am going to follow that up by the question, if the

northern route were built when and how much of that reserve

would be developed prior to going into the Alaska reserve?

Any order at all would be sufficient for me.

Mr. MALONE. Just from BP’s perspective, we hold no delineated

reserves in the MacKenzie Delta. We have acreage, but it has not

been drilled and developed.

Mr. MARUSHACK. Phillips the same answer. We have no reserves

in Canada.

Senator MURKOWSKI [presiding]. Exxon?

Mr. KOONCE. Senator, we estimate there are about 9 trillion

cubic feet discovered and ready to be developed in the MacKenzie

Delta, and we hold 60 percent of that interest.

Senator MURKOWSKI. 60 percent of 9 trillion?

Mr. KOONCE. Yes, sir.

Senator MURKOWSKI. If the northern route were built, when and

how much of that reserve would be developed prior to pulling down

your share of the Alaska reserves?

67

Mr. KOONCE. Well, we anticipate that the MacKenzie gas can be

developed, as I indicated in my earlier statement. So we think that

project will stand alone and will go forward with or without Alaska

gas. My point was, if they went forward together there would be

some obvious synergies to both projects.

Senator MURKOWSKI. You are familiar with the Corps’ relative

generalization concerning the difficulty of permitting the northern

route and the discussion that has taken place from time to time

suggesting that merely, is it, 230 miles of marine pipeline, or is it

320?

Mr. KOONCE. 240, I think.

Senator MURKOWSKI. 240, that would be offshore of ANWR, and

that would be buried 15 feet deep beneath the bottom. Is there any

place else where we have got that technology, where we have the

dynamics of ice scouring and the long period of time where the ice

gives you a situation where you can not pull your pipeline or you

cannot address it, that there is a long framework between compressor stations, with the necessity of having total reliability?

I have heard that you might have to loop that line to ensure that

you had a backup. Are these considerations that you have evaluated?

I would also like to hear your views on, realistically, the difficulty of permitting. We are making some progress, but it reminds

me of a crab walking down the beach on the issue of ANWR. We

are moving, but the directions are questionable. I am curious to get

your evaluation of the realism of permitting.

You heard the Corps of Engineers reference that, unless the

State changes its mind, it is going to be dead on arrival.

Mr. KOONCE. Senator, I did not mean to imply that we think the

northern route or the southern route is without problems. They

both have a lot of problems that need to be worked through by all

the constituencies that are interested in them. The comment was

made earlier about technology and I do not think that was an accurate comment. We know how to bury pipeline as deep as we need

to below ocean bottoms and we do it all the time and oftentimes

in much deeper water than we are dealing with here.

I am not aware of it having been done in an ice regime to this

length. We are considering similar kinds of pipelines offshore

Sakhalin Island in Russia, for example, ExxonMobil is, which have

similar ice regimes. So we believe the technology exists to do this

and we think it exists to do it reliably and that there would be certainly no need to loop a line. If ice scour were the concern, laying

two lines would not be any better than laying one.

Basically, if ice was going to scour that line it would catch them

both. So we do not really see that as a significant issue. We think

the line can be buried deep enough to get away from the ice scour

and that the ice scour can be identified quite well scientifically.

Senator MURKOWSKI. Would the three producers be satisfied if

the committee went ahead separately on the course of regular business before the committee to take up the proposed legislation covering review and EIS and the pipeline director and limited judicial

review, subject to your evaluation at year end on the status of the

project? Because it would be a little difficult and highly unusual to

approve something that is not economic at the end of your study

68

and lends itself to a recognition that we still do not have an application, which I will leave you with a last question: Do you anticipate anything to occur between now and the time you finish your

study that would lead you to submit an application for this pipeline?

Mr. Marushack.

Mr. MARUSHACK. Phillips believes that we have tried to take a

systematic approach to seeing what we need to move the pipeline

forward as quickly as possible and we have tried to be very realistic. The numbers you have seen quoted out there are just reference

case numbers. They will change, they will absolutely change.

Maybe the two routes will come together, maybe they will fall

apart.

But one thing is for sure. It is going to be in the upper billions

of dollars no matter what. So what we have tried to do then, given

that it is going to be very costly very risky, we have tried to chip

away and find areas where we could reduce that risk, and we tried

to do it as early in the process as we can so we can get the gas

on stream as quickly as possible.

Our hope is that the combination of the legislative package that

is available to other parties with the complete understanding that

a brand-new EIS has to be put together, that we hope that there

could be enabling legislation, the fiscal legislation would be passed

so that we could move directly into finalizing our preliminary work,

our feasibility work, if you will, keep our team in place, address all

the other concerns, and see if there is any other partnership issues

we have to do, but work forward in a seamless fashion, moving toward an open season concept and a filing of the application as

quickly as possible.

What you are suggesting, Senator, would probably be a delay in

some period of time and we would hope that that would not be the

case. Having said that, we are going to try to work with this committee on everything we need to move forward.

Senator MURKOWSKI. I am not ready to acknowledge a full EIS.

That depends on route selection. Nevertheless, you are telling me

that in your recommendation we should go ahead and pursue in

general the proposed legislation and you would deal with the State

independently on what you feel the incentives there.

Of course, one of the difficulties that is not usual for a committee

or a role of government to ascertain is the particular request that

you folks have to provide relief only when market gas prices in the

lower 48 fall below the levels that would not otherwise support a

project of this magnitude, and that is a condition of your company

as opposed to BP and Exxon.

Mr. MARUSHACK. Sir, Senator, we think it is a realistic understanding that this project is still going to be extremely risky and

extremely difficult to do. What we are trying to do is, again if we

could have a tax proposal that we think shares the costs and benefits amongst all the constituents out there, we think that works.

One thing about our proposal—I wish Senator Thomas was still

here. He asked about other proposals out there, other incentives.

There are section 29 credits available. There is coalbed methane.

There are other things out there for difficult reserves. We think

this helps make our project also competitive.

69

The thing we have done is, it only costs the Federal Government

any money at times when it benefits the consumer. If prices were

very, very low because of bringing on this huge amount of gas, the

consumer and the government benefits, and we have put a mechanism in there to stabilize that. Under high-priced scenarios there

is no payment from the government, no credit from the government

whatsoever. So we think it is a win-win and it does not cost anything in times when prices are high. We think it actually gets the

project done.

Senator MURKOWSKI. Mr. Malone, are we going to get an application at the end of the year?

Mr. MALONE. Did you say my name?

Senator MURKOWSKI. We have everything else.

Mr. MALONE. Senator Murkowski, right now I think the answer

is no. There is going to have to be a lot of work done in order to

meet that deadline. In my statement I mention that we have an

opportunity to maybe get all the interested parties together and

begin to try working to make this an economic project and address

the many concerns that are out there.

I think there is a great deal of misinformation. There is a lot of

rhetoric out there, and at a time when the Nation needs to be looking at its energy sources I think the catalyst by this committee to

get us together and see what we can do to make this an active

project, that may still allow for time to move this in legislation, and

maybe we could have an answer, a more positive answer to having

an application by the end of the year if we could all get together

and see if we can resolve this.

Mr. KOONCE. Senator, I would say it is unlikely that there will

be an application by the end of the year. However, I would encourage this committee to continue to consider this legislation. It gets

to be a little bit of a chicken and an egg problem. If the legislation

is in place, then that at least eliminates the risk associated with

permitting. If it is not in place and it takes someone a year or 2,

3, to find an economic project, then when that happens we have to

start this process all over again.

I think as long as the legislation is route-neutral that it makes

some sense, because it allows us, it allows the private sector whoever that may be—producers, pipeliners, whoever—to try to find an

economically viable project that can move forward, and the permitting then does not stand in the way and actually the view of these

economics improves with that legislation in place, because you now

know within some much more prescribed limits how long that permitting process will take.

Mr. SULLIVAN. Senator Murkowski, I might make one brief comment about timing, with your permission. We hope, like you do and

I think like most people do, that the pipeline will go ahead, and

we believe that it will in one form or another; and absent updated

or new legislation to address some of the more commercially oriented terms that I mentioned earlier, those frameworks may be set

very, very early in the process, potentially to the disadvantage of

companies like Anadarko that hold significant potential for reserves yet to be discovered.

70

So that we would suggest some attention be given to those issues

as tariffing, open season access to capacity, and expandability be

considered earlier in the process rather than later.

Senator MURKOWSKI. I want to thank the panel. It would be my

intention to encourage the leadership, Senator Bingaman and the

majority to bring this legislation before the Energy Committee, recognizing it as a step in the continued and necessary progress of

bringing this gas line into a real project.

I think it is an investment and a responsible investment in the

process, and the recognition of the testimony here relative to your

continued review, continued work and expenditure of money in addressing the economics. Probably 3, 4 months ago the economics

were a little different because the price of gas was different. As we

pull down available gas, why, the price may go back up again. So

the economics cannot change, but some will want to end the necessity of pursuing this without an application.

But I can certainly see the justification for it as part of the process. I hope we have cleared the air pretty much on the issue of subsidies, because I do not want my colleagues to reflect on this as a

subsidy issue for the industry, because that is not going to fly and

we all know it.

So again, it would be my hope—and I indicated this earlier in my

opening remarks—at the end of this hearing that we will have advanced the process by this hearing today and that work with the

legislature, the Governor, and hopefully we can work collectively,

again in perhaps a less formal manner, to advance the process, as

I said before, either here or in Alaska. I pledge to you my willingness to help in any manner I can.

Thank you very much, gentlemen.

I would call on the next panel and you can come up slowly because I am going to be right back.

[Recess from 1:13 p.m. to 1:15 p.m.]

Senator MURKOWSKI. I want to thank you for staying with us

and I apologize for the delay. We are not going to have one of these

every day and we are very pleased at that.

You may proceed in any manner that you wish. I have got the

second page of the witnesses here somewhere. I got it, I got it. Anybody have to catch an airplane?

[No response.]

Senator MURKOWSKI. I guess not. National is still closed, so everyone does not have to worry about that.

I guess Mr. Mark Aron of CSX is listed first here. If you want

to proceed. We are alphabetical, so let us do it that way. Is that

fair enough? Please proceed.

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

Mr. ARON. My name is Mark Aron. I am vice president of CSX

Corporation. By way of background, CSX has long involvement

with Alaska. We own and operate CSX Lines, formerly Sealand,

which we believe is the premier Jones Act carrier for Alaska. It has

been a wonderful relationship. We are proud of our service and the

dedication of our many people in Alaska.

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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 allAmerican pipeline in an existing corridor. That makes us quite secure.

Secondly, we have the flexibility to serve both foreign and domestic markets. I know the committee is aware that the economics of

those markets differ. By being able to serve both markets, you increase the viability of the project.

Thirdly, we serve the local Alaskan population. I believe our

project would pass by about three-quarters of the population of

Alaska. I have included some cost studies in our testimony and we

believe we are at least cost competitive.

Lastly, we have completed the great majority of the permitting

process and therefore we could expedite construction.

In summary, we are here, we are ready to serve and ready to cooperate to make the gas flow.

Thank you.

[The prepared statement of Mr. Aron follows:]

PREPARED STATEMENT OF MARK ARON, VICE CHAIRMAN, CSX CORPORATION

Mr. Chairman, Members of the Committee:

My name is Mark Aron. I am Vice Chairman of CSX Corporation.

I am here today to testify on behalf of Anchorage-based, Yukon Pacific Corporation, a business unit of CSX and sponsor of the TransAlaska Gas System (‘‘TAGS’’).

You have asked for an update on the status of TAGS and for comments regarding

proposed legislation that may be required to expedite the construction of a pipeline

from Alaska to the lower 48.

Our business unit, Yukon Pacific Corporation was formed in 1982 to sponsor the

TransAlaska Gas System. This system is designed to transport conditioned North

Slope natural gas from Prudhoe Bay to Valdez via an 800 mile, chilled, high pressure pipeline buried in the existing Congressionally-dedicated TransAlaska Pipeline

Corridor. This corridor currently supports that TransAlaska oil pipeline. In Valdez

the gas will be chilled to its dew point at 260 degrees and thereby converted to liquid form. It will then be shipped as LNG to markets in Japan, The Republic of

Korea and The Republic of China on Taiwan and, if needed, to the West Coast of

North America. Because it would be wholly-within Alaska TAGS offers the benefits

of supplying needed-gas to Alaskan communities and optimum pipeline security.

Yukon Pacific holds the major permits, authorizations and licenses for the construction and operation of TAGS. These include Presidential Approval to export

72

* The exhibits have been retained in committee files.

Alaskan natural gas pursuant to the Alaska Natural Gas Transportation Act, a Department of Energy Export License, the Federal Right-of-Way required to cross federal land, a conditional Right-of-Way from the State of Alaska, Federal Energy Regulatory Commission approval of the export site in Valdez and a clear definition of

FERC’s role and jurisdiction and a Facilities Air Permit (PSD) for the LNG and marine facilities. TAGS has undergone two full-blown NEPA reviews.

In sum, TAGS has completed almost all of its major permitting work. A more detailed description of all of the various permits and approvals held by Yukon Pacific

is attached as an exhibit.* The remaining major permit is the Corps of Engineer

404 permit and Yukon Pacific is currently engaged in a three-year field program to

obtain that permit.

As a result of the considerable information and engineering required to obtain

these permits and authorizations, Wilbros Engineering, a major international engineering firm, has produced an investment grade quality cost estimate for the pipeline and Kellogg, Brown and Root, which designs and constructs over 95% of the

world’s LNG facilities, has produced a cost estimate for the LNG and marine facilities. I have included with my written testimony a chart that shows the costs in relation comparison to ultimate project size. Thus, the cost for the Alaskan facilities to

produce 9.2 million tons of LNG per year is 6 billion dollars and to produce 18.4

million tons per year of LNG will cost 8.3 billion dollars.

More important, however, are the cost of service figures for delivering Alaska

North Slope natural gas to West coast markets and to Asian markets. One of the

advantages of TAGS is the capability of serving multiple markets. This has the advantage of allowing the project to base its economics on long term 25 year contracts

with its Asian customers (who traditionally pay much higher prices than we do in

the United states) while still being able to meet the needs of the much less stable

and relatively short term West Coast natural gas demands. West Coast markets can

be served via LNG tankers to western Mexico with a portion of that gas moved via

pipeline to southern California. In the alternative, tankers could deliver LNG directly to the western United States. Several major companies have recently proposed building new LNG receiving terminals in California. In either case, LNG can

be delivered to the U.S. on a cost-effective basis.

Comparing a four billion cubic foot a day LNG project with a four billion cubic

foot a day overland pipeline yields the following results: The cost of service for the

overland line to the US/Canadian border is approximately $2.07 MMBTU. Similarly,

the cost of taking LNG to the west coast is $2.01 MMBTU. I have included as an

exhibit to my testimony a discussion of the methodology for reaching these cost of

service numbers.

In short, Mr. Chairman, the demand of natural gas in the Asia markets we seek

to serve in the form of LNG is approximately 60 million tons per year. We see an

additional 30 million tons per year potential demand in Baja and western Mexico

and the western United States. While TAGS is not an overland pipeline through

Canada, we believe it has markets which enable it to meet economies of scale and

that it will make a major contribution to providing natural gas to Americans via

a shorter, all American system.

CSX and Yukon Pacific are not opposed to any of the other proposed projects

being discussed and believe that the marketplace will and should decide which

project will proceed. Nor are we asking for specific legislation as we believe TAGS

is ready to go and can stand on its own. However, it is important that TAGS not

be placed at an artificial competitive disadvantage vis-a`-vis other proposals, including overland pipelines. In this regard, I urge that the Committee ensure that any

legislative incentives developed to encourage commercialization of Alaska’s North

Slope natural gas apply to and allow for the option of delivering that gas via an

LNG project such as TAGS.

Senator MURKOWSKI. Thank you very much for that statement.

Mr. Heyworth, the Chairman, Citizens Initiative for the All-Alaska Gasline.

STATEMENT OF SCOTT HEYWORTH, CHAIRMAN, CITIZENS

INITIATIVE FOR THE ALL-AMERICAN GASLINE

Mr. HEYWORTH. Thank you, Senator Murkowski. I wish to thank

you and Senator Bingaman for inviting me to testify here today.

73

My name is Scott Heyworth. I was born in Alaska. I am currently serving as a public safety commissioner for the municipality

of Anchorage under our mayor, George Wuerch. I am a former port

commissioner under then-mayor Tony Knowles. I am also the

chairman of the Citizens Initiative for the All-American Gasline,

which is the subject of my testimony here today. I have been a

member of the Anchorage Independent Longshore Union for 28

years and all my fellow union brothers and sisters mourn the

losses of our fellow union policemen and firefighters, along with

military and civilian casualties, and strongly support the work of

the construction crews, the fire, medical, police and rescue volunteers, as do all Alaskans.

We have our corporate boardrooms, our economic forecasts and

the various gas pipeline scenarios, our hearings, our jurisdictions,

our political parties. Yet we also need to look at our rock-bottom

principles of democracy which brought forth this great country, this

capital, and this very room at this precise moment in time.

One of those principles which our forefathers fought and died for

is the right of citizens to petition their government. The Alaska

State Constitution, section 6, Declaration of Rights, reads as follows: ‘‘The right of the people peaceably to assemble and to petition

the government shall never be abridged.’’

Giving oil companies Federal incentives, tax breaks, tax credits,

accelerated depreciation, special interest considerations, are not the

answer to the United States’ energy problems. Changing the

ANGTA treaty is just one of the myriad problems. It is not an answer.

The answer is to build the one project you have heard so little

about today, the all-American LNG route to Valdez paralleling the

Trans-Alaska Pipeline System, which this committee has the jurisdiction over. Which would you rather have control over, a 3,000-

mile gas pipeline in a foreign country, Canada, or two parallel 800-

mile pipelines going down the exact same corridor in the United

States of America? It is simple, defensible, and in the best interest

of all Americans.

Alaska State Constitution, article 8, section 2, gives Alaskans a

say in the commercialization of their State’s natural resources, and

Alaskans are strongly saying they want their natural gas to be

commercialized in their State and therefore in America, not Canada.

In March, May, and June of this year, I commissioned three

statewide polls and they all show that the majority of Alaskans

support the all-American route to Valdez by over a two to one margin. In our largest city alone, Anchorage, they favored the allAmerican 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

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necessary signatures. The citizens of Alaska are signing it in record

numbers. The response can only be deemed phenomenal.

Alaskans have this issue patriotically figured out. Despite being

distracted over concerns over the threat of terrorism this country

is now facing, building a gas pipeline in America, not Canada, is

their choice. They support the one project that is already permitted, already engineered, is environmentally sound, and has

signed project labor agreements with most Alaskan unions. It

brings the most jobs to Americans, provides the most revenues to

our State treasury, provides in-State gas use of our own resource,

something any Canadian route does not do, and provides gas to our

own U.S. West Coast cities where the real energy shortages are.

El Paso Natural Gas has proposed five LNG receiving terminals

on the West Coast which could receive Alaskan LNG. There are no

gas shortages in the Midwest or Chicago. Cheaper Canadian and

domestic gas is closer to that area than any 3,900-mile gas pipeline

from Alaska.

These are extraordinary times and it takes extraordinary vision

to see past ancient political myths. It is time to reevaluate oil industry special interest legislation, sever our dependence on Mideast

natural resources, and protect oil and natural gas reserves on the

North Slope. We cannot build this gas pipeline through Canada

just because it is economically beneficial to the oil companies. We

need to put Alaska’s energy interests first.

Unlike the Governor’s or the producers’ proposed legislation, the

Citizens Initiative, which establishes a State gas authority, does

not need any Federal legislation to build this all-American project

because it would be a publicly owned entity.

Finally, Senators, if any of us advocating to open ANWR to lessen our dependence on foreign or Mideast oil and gas supplies, then

I am sure, using the same logic, that we would also advocate to

build the all-American gasline to Valdez to avoid going through a

foreign country for security reasons. I believe Americans today understand this very simple concept.

Thank you very much.

[Attachments submitted by Mr. Heyworth have been retained in

committee files.]

Senator MURKOWSKI. Thank you, Mr. Heyworth.

Our next witness is Mr. Mike Stewart and Dennis McConaghy,

co-chair executive officers of Foothills Pipe Line. We have brought

up Foothills a good deal today. We look forward to your statement

and testimony and some clarification. Particularly, I would like you

to address the status of the alleged $4.2 billion liability associated

with your filing with FERC, and where is it and what is the disposition of it likely to be, because it seems to have continually come

up in numerous discussions and I have yet to hear a resolve finally

being put to bed one way or the other.

STATEMENT OF MICHAEL STEWART AND DENNIS

McCONAGHY, CO-CHIEF EXECUTIVE OFFICERS, FOOTHILLS

PIPE LINES LIMITED, ON BEHALF OF THE ALASKA NORTHWEST NATURAL GAS TRANSPORTATION COMPANY

Mr. STEWART. We will try to do that, Senator. Thank you for the

opportunity to appear in front of you today. I am co-chief executive

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officer of Foothills and also an executive vice president with

Westcoast, Inc. With me is Dennis McConaghy, the other co-CEO

of Foothills and an executive vice president of Trans-Canada Pipelines. I will deliver the oral statement and Mr. McConaghy will

take the lead on any Q’s and A’s.

Foothills is jointly owned by Westcoast and Trans-Canada, the

two major pipes in the Canadian natural gas business. Foothills is

the operator of the Alaska Northwest Natural Gas Transportation

Company, a U.S. partnership formed to construct and operate the

Alaska portion of the Alaska Highway pipeline project. Foothills

and Trans-Canada are the two current active owners of the Alaska

partnership.

In addition, Foothills is the Canadian sponsor of the Alaska

Highway project and the majority owner and operator of the Canadian portions of the pre-built eastern and western legs of the

project. I would just note that today those pre-built legs are delivering over 30 percent of the natural gas that comes from Canada

into the United States today.

I would also note that we are the company that has kept the

Alaska Highway pipeline project alive over these past few years.

Senator, at the outset I want to state something emphatically:

No new Federal legislation is required to expedite the construction

of a pipeline to deliver Alaskan natural gas to markets in the lower

48 States. A comprehensive legal, regulatory, and diplomatic

framework specifically designed to expedite construction of the

pipeline is already in place. That framework consists of ANGTA,

President Carter’s decision and report of 1977 to Congress selecting

the Alaska Highway pipeline project as the superior project to deliver Alaska gas to market, the agreement on principles between

Canada and the United States, which has the force and effect of

an international treaty, the joint resolution by which Congress approved the President’s decision, and the U.S.-Canada agreement,

the Northern Pipeline Act in Canada which granted certificates of

public convenience and necessity to Foothills for the construction

and operation of the Canadian segment of the project, and finally,

the certificate of public convenience and necessity issued by FERC

to the Alaska partnership.

The ANGTA framework has not been modified, repealed, or diminished in either the United States or Canada. It is as viable

today as it was when it was initially enacted. It provides a regime

that is flexible enough to accommodate the expeditious construction

of a competitive, efficient, and modern natural gas transportation.

Simply put, ANGTA ain’t broken, so do not try to fix it.

The next point I want to emphasize is, not only is new legislation

not required, any legislation that attempts to create an alternative

or parallel regulatory process to ANGTA will delay increase of the

pipeline for several years by reopening contentious debates over

routes and projects. Such legislation will take the progress of developing an Alaska gas pipeline back to square one.

Let me amplify. New legislation will require FERC to spend substantial time to determine whether or not to issue certificates to

new applicants, it is inconsistent with the existing Canada-U.S.

agreement and more than likely will invalidate that treaty. If a

new project or route were selected, new legislation would have to

76

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.

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[The prepared statement of Mr. Stewart and Mr. McConaghy follows:]

PREPARED STATEMENT OF MICHAEL STEWART AND DENNIS MCCONAGHY, CO-CHIEF

EXECUTIVE OFFICERS, FOOTHILLS PIPE LINES LIMITED

INTRODUCTION

Mr. Chairman, Senator Murkowski and Members of the Committee, thank you for

the opportunity to appear today before the Committee.

We are the Co-Chief Executive Officers of Foothills Pipe Lines Ltd. (‘‘Foothills’’).

Foothills is jointly owned by Westcoast Energy Inc. (‘‘Westcoast’’) and TransCanada PipeLines Limited (‘‘TransCanada’’), the two major players in the Canadian

gas pipeline business. Foothills is the operator of the Alaskan Northwest Natural

Gas Transportation Company (the ‘‘Alaska Partnership’’). The Alaska Partnership

is a U.S. partnership formed to construct and operate the Alaska portion of the

ANGTS. Foothills and TransCanada are the two current active owners of the Alaska

Partnership. In addition, Foothills is the Canadian sponsor of the ANGTS, and the

majority owner and operator of the Canadian portions of the Eastern and Western

Legs of the ANGTS.

We are appearing today on behalf of the Alaska Partnership and Foothills.

Our testimony today will discuss the current status of the Alaska Natural Gas

Transportation System (‘‘ANGTS’’ or ‘‘Alaska Highway Project’’) and will address the

question of whether any federal legislation is required to expedite the construction

of a natural gas pipeline from Alaska.

NO NEW REGULATORY LEGISLATION IS REQUIRED

Legislation To Expedite Construction Already Exists

No new federal legislation is required to expedite construction of a pipeline to deliver Alaska North Slope natural gas to markets in the lower-48 states. A comprehensive legal, regulatory and diplomatic framework, specifically designed to expedite construction of the pipeline, is already in place. This framework provides the

most effective means to ensure expeditious development of the pipeline.

This framework consists of the following:

• Alaska Natural Gas Transportation Act of 1976 (‘‘ANGTA’’). The express purpose of ANGTA is to ‘‘provide the means for making a sound decision as to the

selection of a transportation system for delivery of Alaska natural gas to the

contiguous States . . . and . . . to expedite its construction and initial operation . . .’’ To that end, ANGTA established a process through which the Alaska Highway Project was designated by the President and approved by the Congress as the superior project for the delivery of Alaska gas. The Alaska Highway

Project was selected after an exhaustive consideration of several alternatives,

including a project which would have proceeded east from Prudhoe Bay connecting with a Mackenzie River Valley pipeline in Canada and an LNG project proposing to deliver LNG to southern California. In addition, ANGTA imposes specific requirements on federal agencies to expedite decision making on permit applications for the Alaska Highway Project and places limits on judicial challenges to agency decisions.

• Decision and Report to Congress on the Alaska Natural Gas Transportation System, (‘‘President’s Decision’’). The President’s Decision advised the Congress of

the President’s selection of the Alaska Highway Project as opposed to the other

competing projects, detailed the reasons for that selection, and enumerated comprehensive terms and conditions for the construction and initial operation of the

project.

• Agreement Between Canada and the United States of America on Principles Applicable to a Northern Natural Gas Pipeline (‘‘U.S.-Canada Agreement’’). The

U.S.-Canada Agreement designates the Alaska Highway Project as the superior

project and states specific terms and conditions under which the project would

be built with the joint cooperation of the U.S. and Canadian governments.

• Public Law 95-158. Through this Joint Resolution, the Congress approved the

President’s Decision and the U.S.-Canada Agreement.

• Northern Pipeline Act (‘‘NPA’’). Through the NPA, the Canadian Parliament

granted certificates of public convenience and necessity to Foothills for the construction and operation of the Canadian segment of the ANGTS. The Act also

established the Northern Pipeline Agency and gave it the authority to oversee

the construction of the system in Canada.

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• 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 rightof-way across all federal lands in Alaska, the necessary Clean Water Act Section 404

wetlands permits for the pipeline, and numerous permits, authorizations and rightsof-way for the construction of the pipeline in Canada. In addition, a significant

amount of environmental assessment work has occurred for the ANGTS.

The ANGTA framework has not been modified, repealed or diminished in either

the U.S. or Canada. It is as viable today as it was when initially established. It provides a regime that is flexible enough to accommodate the expeditious construction

of a competitive, efficient and modern natural gas transportation system.

New Legislation Will Delay Construction

Because of the ANGTA framework and the actions that have already been taken

pursuant to the framework, no new federal legislation addressing the authority of

federal agencies is required to expedite construction of the Alaska gas pipeline. In

fact, any new legislation that attempts to create an alternative or parallel regulatory process to ANGTA would have the opposite effect.

Consideration of any legislation that would create an alternative or parallel regulatory regime to ANGTA will have a significant detrimental impact on the efforts

to expeditiously construct an Alaska natural gas pipeline. It is our view that such

legislation will undermine the ANGTA framework and will delay construction of the

pipeline for several years by triggering a new competition between different projects

and routes.

FERC would have to spend substantial time and effort to determine whether to

issue certificates to new applicants. Such legislation will be inconsistent with the

U.S.-Canada Agreement and, more than likely, invalidate that treaty. If any new

project or route were selected, new legislation would have to be enacted in Canada,

and a new agreement between the U.S. and Canada would have to be negotiated.

Likewise, updating the environmental assessment work that has been done for

ANGTS will be far less time consuming than preparing new comprehensive Environmental Impact Statements for any new project or route.

Such legislation could also result in the filing of an application for alternative

projects that will not have the level of support that the Alaska Highway Project enjoys. For example, an ‘‘over the top’’ route through the Beaufort Sea would encounter significant opposition from the State of Alaska, Alaska Native groups, the Yukon

Territory and all of the national environmental organizations. A project over this

route may not be able to acquire necessary environmental permits.

Any federal legislation that establishes a new regulatory regime for the construction of an Alaska gas pipeline will take the whole process of developing such a pipeline back to ‘‘square one’’ by reopening the contentious debates over routes and

projects. In addition, it is highly unlikely that the expedited permitting and limited

judicial review provisions of ANGTA could be replicated in federal legislation enacted today. As such, any project developed under a new regime would encounter

significant delays in the permitting and authorization stage.

Any New Legislation Should Do No Harm to the ANGTA Framework

Proposals have been made for legislation that would provide federal fiscal support

to improve the economics of an Alaska natural gas pipeline. Moreover, different

stakeholders have called for federal legislation addressing other related issues, such

as the use of Alaska and union labor, the use of North American steel, and access

to the pipeline for new gas producers. This Committee may determine that legislation addressing some or all of these issues will help expedite construction of the

Alaska gas pipeline.

With respect to fiscal legislation, we believe that the Alaska Highway Project can

be financed in the private markets without incentives or support from the federal

government. However, such support, if properly structured, could indeed improve

the economics of the transportation system in a way that generates a greater net

back to the producers of the gas. A greater net back could result in more willingness

on the part of the producers to commit the gas to the marketplace.

The Alaska Partnership is not opposed to legislation that addresses labor, source

of steel, access to the pipeline for new gas producers or other similar issues provided

such legislation does not undermine the ANGTA framework and does not impair the

ability to develop and/or to finance a viable project.

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STATUS OF THE ALASKA HIGHWAY PROJECT

As the holder of the priority right to construct the Alaska natural gas pipeline,

the Alaska Partnership has been focused on several related areas of activities as it

proceeds to remobilize the ANGTS—Project Design, Engineering and Development;

Partnership Expansion; and Producer Engagement.

Project Design, Engineering and Development

Over the past three years, the Alaska Partnership has undertaken a comprehensive study aimed at modernizing all aspects of the project. This study was possible

because of the extensive amount of engineering, terrain, environmental and other

information available along the route of the pipeline as a result of the prior work

of the sponsors. This work has convinced us that a fully modern and economically

viable project is doable. In part, as a result of this effort the Alaska Partnership

decided earlier this year to request the State of Alaska to continue its review of the

application for right-of-way on state lands in Alaska. We are now working closely

with the Joint Pipeline Office established by the State of Alaska to update the information previously filed with the State so the authorities can complete their analysis

and issue the grant of right of way.

Partnership Expansion

In the initial stages of the Alaska Highway Project, numerous U.S. energy companies were partners in the Alaska Partnership. However, during the decades of the

1980’s and 1990’s when the producers of Alaska natural gas were unwilling to commit that gas to lower 48 markets because of the generally low energy prices, all of

the U.S. partners withdrew from the Alaska Partnership. Now that long-term market conditions, primarily projected supply and demand balances, appear to be favorable, Foothills and TransCanada, as the two remaining partners, have offered to the

current holders of the withdrawn partner interests an opportunity to rejoin the

Alaska Partnership. The negotiations with these companies have been productive

and are ongoing.

Producer Engagement

An important first step toward commercial viability of an Alaska gas pipeline is

a commercial agreement between the producers and potential shippers who, in turn,

enter into transportation contracts with the owner and operator of the transportation system. In this regard, the Alaska Partnership has pursued discussions with

the producers for the last several months. After several discussions with the producers over the last year, it has been agreed that we will develop a commercial proposal

to present to the producers before the end of this year.

CONCLUSION

Mr. Chairman, we share this Committee’s objective to expedite construction of the

Alaska natural gas pipeline in order to make Alaska’s immense natural gas resources available to consumers in the lower 48 states. As the holder of the priority

right to construct and operate that pipeline, the Alaska Partnership is doing everything possible to make this project a reality.

The Alaska Highway Project is economically and environmentally superior to any

alternative project. Since it parallels an established transportation corridor, construction will present far less environmental risk and disruption than a pipeline

through undisturbed areas and will be much less challenging from a technological

perspective. The ease of access to the right-of-way, less environmental risk, and lack

of technological challenges translate directly into lower costs of construction for the

Alaska Highway Project. In addition, we have acquired many of the major certificates, authorizations and permits needed to begin construction.

These are not the only advantages we enjoy, however. Unlike any other project,

the Alaska Highway Project has been designated and approved by the Congress and

the Government of Canada after careful consideration of competing projects and

routes. By virtue of that status, we have available to us all of the expedited permitting provisions of the ANGTA framework.

No new federal legislation is required to expedite construction of the Alaska Highway Project. All of the necessary legal, regulatory and diplomatic provisions already

exist in the context of the ANGTA framework. Any legislation that attempts to create a parallel framework or to create so-called competition to the ANGTA approach

will only confuse, complicate and delay the project.

The ANGTA framework was specifically adopted by the United States and Canada

to expedite the construction of the Alaska Highway Project when market conditions

justified the cost of delivering Alaska gas. We believe those market conditions will

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soon be in place. We implore you and the Committee to refrain from considering legislation that would undermine this framework.

Senator MURKOWSKI. I gather, Mr. McConaghy, you are going to

respond to the questioning. I asked a question relative to the filing

that you have done with FERC. You have accumulated about $4.2

billion relative to—I assumed that was going to be in the response,

but it did not come about.

Mr. MCCONAGHY. Let me be more specific about exactly where

we sit in that presently. I am happy to inform you that we have

the agreement of all the former withdrawn partners to be in a process to have them re-enlist back into the Alaskan partnership that

is specifically cited within the ANGTA statute. We are on a time

frame to have that re-enlistment, as represented by an MOU, a

memorandum of understanding, completed ideally within the next

month, and with that as a foundation the commercial proposal that

Mike referred to, we would hope to be able to generate and have

placed before the producers before year end. That is an ambitious

schedule, but that is the process that Foothills, Trans-Canada,

Westcoast, and the six others, one of whom is also represented here

this afternoon, Williams, is part of.

That is where we sit in the specifics of solving that. The condition of their re-enlistment, of course, would be essentially release

from that accumulated liability, and we have some confidence that

we will be successful in that. That would set the ground for the

commercial coming together of the holder of the certificates and the

producers, a long-awaited event.

Senator MURKOWSKI. If you were to initiate that, would that result in refiling with FERC and basically releasing that filed liability, which is now considered to be a cost of the project by some producers?

Mr. MCCONAGHY. What I would anticipate is that, with the reenlistment 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.

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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 twopipeline option. This approach immediately creates conflict between

the United States and Canada: Which line is going to go first? The

first line can lower the value of the reserves connected by the second line, delaying the need for the gas, possibly for a long time.

The Alaskans have always assumed that their line would go first,

but two-thirds of their line goes through Canada and Canada will

most likely have the ultimate say in which line goes first. I think

it is hard to imagine Canada making a decision that is going to

lower the value of their resources.

Now, let us look at the best solution. This is the one-pipeline solution, so-called ‘‘over-the-top route,’’ because from Prudhoe Bay

offshore to the MacKenzie Delta, then up the MacKenzie Valley to

the pipeline interconnects starting near Edmonton, Alberta. Our

approach calls for laying a 36-inch pipeline from the MacKenzie

Delta to Edmonton, followed by a 36-inch line from Prudhoe Bay

to the MacKenzie Delta. That would be followed by a second 36-

inch pipeline up the MacKenzie Valley and a second 36-inch pipeline offshore to Prudhoe Bay.

This approach has great cost and market advantages. Since the

equipment to construct a 36-inch pipeline is available, many mills,

including those in the United States and Canada, can supply that

pipe. Also, the volumes would be staged into the market rather

than come all at once. This route certainly gets away from the Canadian conflict also.

Well, let us compare the economics and environmental impact of

the two pipeline options versus the over-the-top route. We have a

chart that we are putting up. Based on comparative third party

analysis, the capital construction cost of the ANGTS route is in the

$10 billion range. It has to go 2140 miles to get to Edmonton. The

route goes through 900 miles of mountains. It also does not traverse any future major exploration potential areas. It is supposed

to be 48 inches in diameter and carry 4 BCF per day.

The MacKenzie Valley line would be 1,350 miles long and would

cost $3.5 billion to get to Edmonton. It would be 30 inches in diameter and carry 1.2 BCF. So together the two pipelines cost $13.5

billion and cover some 3,500 miles.

Our route, the over-the-top route, would be only 1,700 miles long

and would not go through any mountains and would go close to or

through the future major exploration areas and would cost $7.8 billion. About 90 percent of the line would be in Canada, where costs

are lower and utility corridors and pipeline right of ways are in

place on a lot of the route.

The most telling difference in the approaches is the producer realization after all transportation costs are deducted. This is what

really sets the value of the resources. In my testimony in front of

this committee last September I said that the high gas prices at

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that time would not hold and that we need to look at this project

in the $2 price range.

This illustration shows a netback closer to today’s price, $2.50,

which is more like the futures price in Chicago. The ANGTS route

is clearly uneconomic, with very little to no value at the wellhead

under this scenario. It would take very large subsidies, probably in

the $5 or $6 billion range, to make it attractive and you would still

have the Canadian conflict situation. The producer netback in the

over-the-top route is in the 75 to 90 cents per MCF.

Now, Alaska’s preference towards the ANGTS route is easily understood. If all things were equal, it is more desirable politically to

have the pipeline come down through the State, provide gas to

Fairbanks, provide more short-term construction jobs within Alaska. The problem is that all things just are not equal. Two pipelines

at twice the cost cannot beat one.

Also, the State will make about $100 million more per year off

the taxes and State royalties with the over-the-top route, and they

will receive the maximum possible value for their reserves. That is

what will help to create permanent jobs in the State and provide

a big boost to the Alaskan economy.

There is a clear choice for the best way to do this project and it

is the most important energy project that we have in North America. One pipeline at half the cost of the alternative is the best approach and a political consensus between the United States and

Canada and eventually Alaska can be achieved. It is a truly international project and joint discussions between the United States

and Canada as to which project should be considered, along with

what is the best way to get the project moving.

How does the United States benefit? The over-the-top route provides the largest supply of natural gas at the lowest cost, and it

can be the fastest project constructed. It will not be shut in periodically due to high tariffs, thereby denying the consumers of the

much-needed gas, and the U.S. Treasury alone should make $5 to

$10 billion more in income taxes off that route due to the higher

value of the reserves.

We have seen our country come together in the past few weeks

and I think we can see it come together on this project. It is about

the future of the United States and Canadian economies, and the

best answer for the U.S. Senate would be not to take any actions

that would artificially limit U.S. support of this project. I feel Canada will play a pivotal role in the decision and I am sure they

would find that kind of action either puzzling or threatening.

We fought this same battle 25 years ago and did not get a project

built, and we cannot afford to do that again. Mr. Chairman, we are

only asking for a fair playing field, a provision to speed up the regulatory and review process, and the equivalent of any economic

support that might be offered to any other pipeline.

Thank you.

[The prepared statement of Mr. Hoglund follows:]

PREPARED STATEMENT OF FORREST HOGLUND, CHAIRMAN AND CHIEF EXECUTIVE

OFFICER, ARCTIC RESOURCES COMPANY

Mr. Chairman, Members of the Committee:

I am here representing Arctic Resources Company (ARC), a special purpose company formed to develop and build a natural gas pipeline connecting the natural gas

83

* The charts have been retained in committee files.

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] *

How can we tap that potential? The most economic pipeline system must be built.

The lower the cost of the system, the more natural gas will be found and produced.

The ‘‘Over-the-Top’’ pipeline is today the only pipeline project that is economic. This

is the most important energy project that we know of to supply significantly larger

volumes of clean-burning natural gas within the next 7 to 15 years. Without these

new sources, the U.S. economy will most likely have to endure short supplies of natural gas and rely on coal, imported oil and LNG to meet new demand. I have often

likened the importance of this project, the first transportation system for Arctic natural gas, to the first railroad built to California for the U.S. or to the West Coast

for the Canadians. Let’s look at the options.

Two-Pipeline Option

[Chart 2]

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You will hear a lot today about the currently preferred route of the State of Alaska, the Alaska Natural Gas Transportation System (ANGTS). That system parallels

the Alyeska oil pipeline right-of-way to Fairbanks then follows the Alaska Highway

to northeastern British Columbia. That is not far enough to get to the main hub

of existing gas pipelines for take-away capacity, so it will need to extend to interconnects near Edmonton, Alberta. One of the main problems of the ANGTS route is

that a second pipeline will be needed to tie in the Canadian reserves. This immediately creates conflict between the U.S. and Canada. Which line goes first? The

first line can lower the value of the second line by delaying the need for the gas,

possibly for a very long time. The Alaskans have always assumed that their line

would go first, but think about this—approximately two-thirds of their line goes

through Canada and you can be assured that Canada will have the ultimate say

in which line goes first. It is hard to imagine our Northern friends making a decision that would lower the value of their own natural resources.

‘‘Over-the-Top’’ Route

Now let’s look at the best solution. That is the one pipeline solution, the so-called

‘‘Over-the-Top’’ route, or as we refer to it as the Northern Gas Pipeline Project

(NGPP). This one pipeline solution enables both Prudhoe Bay gas and Canadian

Arctic (NWT, Yukon and Nunavut) gas to be tapped. The line goes from Prudhoe

Bay, offshore [Chart 3] to the Mackenzie Delta, and then up the Mackenzie Valley

to the pipeline interconnects near Edmonton, Alberta. Our approach calls for a

phased implementation of the project. In Phase 1 we would lay an initial 36-inch

pipeline from Edmonton, Alberta north to the reserves in the Mackenzie Delta. In

Phase 2 we would extend the initial 36-inch line over to the Prudhoe Bay unit allowing staging of the volumes into the markets. That would be followed by Phase

3—a second 36-inch pipeline from Edmonton up the Mackenzie Valley. In Phase 4

we would lay a second 36-inch line over to the Prudhoe Bay unit, allowing for a full

deliverable capacity of 4 BCFD. This would be an open-access line with spare capacity for the volumes from new exploration finds. This project has great cost, supply

reliability and market advantages, since materials, equipment and construction

services are available to construct 36-inch pipelines and many pipe mills, including

mills in Canada and the U.S., can supply this size of pipe.

Economics

Let’s compare the economics and environmental impact of the two-pipeline option

versus the ‘‘Over-the-Top’’ route, using released or third party numbers.

[Chart 4]

The capital construction cost of the ANGTS route is estimated at $10 billion and

it is 2,140 miles long from Prudhoe Bay to interconnects near Edmonton and crosses

approximately 900 miles of pristine mountains. Furthermore, it does not go through

the major future exploration potential areas. Current industry proposals suggest a

pipeline 48 inches in diameter carrying 4.0 BCFD. The associated and necessary

Mackenzie Valley only line would be an additional 1,350 miles long with an added

cost of $3.5 billion to get to pipeline interconnections near Edmonton. It would have

a diameter of 30 inches with a design capacity of 1.6 BCFD. Together, the two pipeline projects would cost $13.5 billion and would have a combined length of 3,500

miles, leaving two environmental footprints.

The ‘‘Over-the-Top’’ route would be approximately 1,700 miles long—approximately 350 miles offshore and 1350 miles onshore—and would not cross any mountains. Furthermore, it would go close to or through all present and future exploration areas in the regions. Approximately 90% of the line would be in Canada.

The most telling difference in the two approaches is how much of the eventual

proceeds will be available to the producer. That is defined as the wellhead netback,

proceeds after all transportation costs are deducted. In my testimony before this

Committee last October, I said that the high gas prices of that time would not hold

and that the project needed to be looked at in a $2.00/Mcf price environment. Illustration No. 4 shows the wellhead netbacks at today’s futures price that are closer

to $2.50/Mcf in Chicago. Spot prices have slumped even further in recent weeks. The

ANGTS route is clearly uneconomical, as is the Mackenzie only pipeline, with essentially no wellhead netback. It would take very large subsidies—perhaps $5 to $6 billion—to make the two pipeline approach work financially. And, you still have the

Canadian conflict situation and there remains a higher chance of cost overruns. It

has been estimated that if both of the pipelines were to be constructed at the same

time, construction costs would be 20% to 30% higher due to lack of construction resources, materials and equipment. The bottom line: economics do matter and they

point overwhelmingly to ‘‘Over-the-Top’’.

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Alaska’s Situation

Alaska’s preference of the ANGTS route is easily understood. If all things were

equal, it is clearly more desirable to have the pipeline come through the state, provide gas to Fairbanks and other communities along the Alaska highway, and possibly even to Anchorage some day, and to provide more short-term construction jobs

in Alaska. The problem, though, is that all things are not equal. Alaska is pushing

for a system that is uneconomical, will require two pipelines to be built, and creates

conflict with Canada, where approximately two-thirds of their pipeline and additional takeaway capacity lines must be approved by and go through that nation. I

do not believe Canada will approve the ANGTS route, lower the value of Canadian

reserves and require the construction of a second line to deliver the Mackenzie Valley gas to market.

I cannot understand why Alaska desires to trade short-term economics when it

knows that at today’s prices, it will make about $100 million or more per year off

of higher taxes and state royalties with the ‘‘Over-the-Top’’ route. The ‘‘Over-theTop’’ will enable the State to receive the maximum possible value for their existing

and future reserves. That should be the overriding objective of the State of Alaska.

It is quite clear to us that the one pipeline approach is the best on all counts.

We have noticed that Alaska has tried to use its Congressional political muscle to

outlaw the ‘‘Over-the-Top’’ route, but that may work against them in the end and

U.S. consumers and the citizens of Alaska will suffer as a result.

The Myths of ‘‘Over-the Top’’

The major myths associated with the ‘‘Over-the-Top’’ route fit in the following categories:

First Myth: Arctic offshore construction is unproven and risky environmentally.

There are currently offshore pipelines in similar environments, and more recently

off Prudhoe Bay, and no major construction companies or major oil companies have

said it is not feasible. Canada already has regulations in place for pipelines of this

nature. The present design calls for the pipeline to be buried approximately 15 feet

below the ocean floor. Historical ice scour data for the proposed area of construction

is in the 1 to 2 foot range. This will be a conditioned natural gas pipeline. If a leak

or rupture ever occurred, the gas would vaporize into the air and would not leave

a spill like an oil pipeline. It is important to note that with current metallurgical

and pipeline test standards, it is unlikely that a pipeline carrying conditioned natural gas would suffer such a structural failure.

The real environmental problems lie with the two-pipeline approach. Two environmental footprints, scarring of 3,000 miles versus 1,700 miles, while also scarring 900

miles of mountains, rather than a single purpose pipeline from Prudhoe Bay up the

Mackenzie Valley, would occur with this approach. The major environmental problem is not getting the gas to flow due to economics, thereby requiring the U.S. to

use more coal and imported oil rather than clean-burning natural gas.

Second Myth: It will hurt the whaling industry.

Migratory Bowhead whales pass through this area twice each year. Present construction methodology has the offshore portion of the pipeline being laid during the

winter and summer seasons. When summer construction is carried out, it would be

scheduled around whale migration and other wildlife or subsistence issues. The line

would be buried below the ocean floor, with no surface structures to impede the

movements of the whales or other mammals in the area. Once laid, the pipeline is

out of sight and out of mind.

Third Myth: The pipeline is a step toward opening up ANWR for drilling.

This project has no bearing on the ANWR question. One is either in favor of or

against the development of ANWR. This pipeline project is designed to connect existing Prudhoe Bay reserves and related future exploration areas where leases are

available.

Fourth Myth: Existing regulatory and international agreements prohibit the

‘‘Over-the-Top’’ route.

The Federal Energy Regulatory Commission and the Department of Energy have

testified that that is not true.

How To Do the Project

The real question is not which route. The real question, I believe, is what is the

best way to get the project built? There are basically two approaches, the ARC approach or a project led by the major oil companies. Let me first discuss the ARC

approach.

Twenty-five years ago, the same two routes were considered. The industry fought

for 3 years and spent around $750 million in this effort. The major oil companies

wanted an ‘‘Over-the-Top’’ onshore route similar to the ‘‘Over-the-Top’’ offshore

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route, but the Canadian Government placed a ten-year moratorium on pipelines up

the Mackenzie Valley and blocked it, due to unsettled Aboriginal land claims. I was

Vice President of Natural Gas for Exxon at that time and in that effort learned a

lot about how not to get projects done.

ARC at this time is the only company sponsoring the ‘‘Over-the-Top’’ route. Our

approach is twofold: create the most economical project, and eliminate as many

roadblocks as possible. We know this approach is not conventional, and do not expect to get the immediate support of the major reserve holders. However, it is the

best way to do the project. The 4 main features of our proposal are: (Chart 5)

1. The best route—best economics. This feature has been covered.

2. Significant Northern Canadian Aboriginal ownership. This is perhaps one of

the most controversial parts, but we consider it very important. The Northern Canadian Aboriginals own part of the lands through settlement of their land claims with

Canada and they are in a position to help the project considerably. We wanted to

include them up front and in a meaningful and significant way. They have formed

a 100% Aboriginal owned Pipeline Company, which is named Northern Route Gas

Pipeline Corporation (NRGPC). This company would issue the debt for the pipeline.

Arctic Resources Company (which is planned to be a consortium of the founders, the

major reserve holders, the major gas customers, and the Aboriginal for profit

groups, pipeline companies, NGO’s and other interested parties) through its Canadian affiliate, ArcticGas Resources Corp., would be the program manager for

NRGPC. ARC would oversee the project development, financing, engineering, construction, and ongoing operations; and would be in place to manage the repayment

of the bond obligations.

3. Our financing concept is to use municipal type, taxable, non-recourse revenue

bonds, with the revenue stream guaranteed by shippers throughput agreements at

a negotiated toll level agreed to by U.S. and Canadian regulatory authorities. This

is very similar to many infrastructure projects in place today. Some examples are

toll ways, stadiums and airports. This will be 100% debt financed and by not having

the more costly equity component, the project is able to pay the Aboriginal landowners sufficient land use fees and still keep the overall toll low. This approach is

the best way to eliminate roadblocks and keep the lowest toll possible. It has the

added benefit of creating a revenue stream for the Aboriginals that will end up helping their progress dramatically. The same type of approach can be used in Alaska,

also.

4. The major oil companies have said on several occasions that this is a worldclass project and a world-class company is needed to run it. Once they and others

join the consortium, ARC will truly become a world-class company and a world-class

international consortium. In the meantime, we are telling our story, gathering Aboriginal support, and preparing to file our project with the NEB in Canada.

Summary

There is only one clear choice for the best way to do this project the most important energy project of this new century for North America. (One pipeline at half the

cost is the best approach.) (Say this upfront also.) A political consensus between the

U.S. and Canada, and eventually Alaska, can be achieved. It is truly an international project and we believe that joint discussions between the U.S. and Canada

as to the best project, and the best way to get it approved, should be encouraged.

The ‘‘Over-the-Top’’ route provides U.S. consumers with the opportunity to benefit

from the largest supply of natural gas from both Alaska and Canada. It can be the

fastest project because it will not be shut in due to high tariffs as gas prices fall.

Additionally, the U.S. will make at least $5 to $10 billion more on income taxes.

Alaska will also benefit by $100 million or more per year for the same reason.

We have seen our country come together in the past few weeks after a terrorist

attack and we should see it come together with our Northern ally on this project.

This is about the economic future of the U.S. and Canada. It is about the best answer for U.S. and Canadian gas consumers and taxpayers. We ask that the U.S.

Senate not take any actions that would artificially limit our options for delivering

Alaskan and Canadian natural gas to market. The recent adoption by the House of

Representatives of an amendment prohibiting a ‘‘certain pipeline route’’ in the Saving America’s Future Energy Act (SAFE Act), H.R. 4,was an affront to our neighbor

Canada and, if ultimately enacted, a financial roadblock to the delivery of Arctic

natural gas to U.S. markets.

We are only asking for a fair playing field, a provision to speed up the regulatory

and review process and the equivalence of any economic support that might be offered to any other project. The U.S., Canada and Alaska will all benefit from the

most economic project that will provide for the greatest exploration incentive for

new reserves.

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Senator MURKOWSKI. Thank you very much. I appreciate that

statement, Mr. Hoglund.

Mr. Keith Bailey, we appreciate your participation and the fact

that you have come down on relatively short notice, and, hopefully,

having sat through this process, you have either reaffirmed or testimony or changed it. So please proceed.

STATEMENT OF KEITH E. BAILEY, CHAIRMAN,

THE WILLIAMS COMPANIES

Mr. BAILEY. Well, I will try to be brief in my oral comments and

appreciate the fact that the pretrial testimony will be incorporated

in the record.

Senator MURKOWSKI. Without objection.

Mr. BAILEY. Obviously, in light of the hour and the fact that

much of what can be said has been said, I am going to try also not

to retrace too much of the path that we have been around.

Williams certainly is not at odds with the producer point of view

that whatever answer comes out of this, if the private sector is

going to be involved, will have to be market-driven, it has to meet

the economic tests that stimulate the capital investment necessary

to build the facilities. But our bottom line at this point is that we

question the need for additional legislation. Again, that is at this

point in time. Obviously, there may come a point in time when

some targeted legislation would make sense. We simply do not believe that that is now.

Frankly, when and if that time comes, it would be our hope that

the legislation is just enough and not too much. I will come back

to that thought in a moment.

We also believe that as a practical matter, for all of the reasons

that have been recited today, the original ANGTS route is the one

and the only one that is being considered which offers as a practical matter a timetable that has the potential for completion to

have gas in the lower 48 when it is needed to sustain the country’s

economic growth.

Finally, we would urge caution in consideration of any legislation

that is prescriptive in nature as to the sourcing of either materials

or labor.

I want to flush out each of these thoughts. You have heard the

producers talk about their preliminary assessment that indicated

that, based on current estimates, the pipeline would only return a

10 to 11 percent return, which from their perspective was inadequate economic incentive to move forward on the project, and if

at the end of the day that in fact is the sort of return being offered

we would share their view.

But what they did not say, but what I suspect they would conclude, is that if those expected returns were in the 13 to 14 percent

range that the conclusion that they reached would be the same,

simply because the rates of return that companies like Phillips and

Exxon and BP look for typically are in the high teens.

But for those of us in the regulated gas pipeline business, returns at or slightly below 15 percent can be acceptable so long as

we have appropriate balancing of the risk and the project structure, and that is what we would be working to achieve in meeting

that market-based test.

88

So it would seem to us to make sense to concentrate on a route

that already enjoys the support of a broad spectrum of the pipeline

community, simply because much of the investment we believe will

need to come from the pipeline community because of the economic

realities of the project. Again, that project is the original ANGTS

route.

There is a second reason, and again it has been talked about to

some degree today, to a lot of degree today: because much of the

time-consuming preliminary work with regard to permitting and

siting the pipeline route has already been done and, while some of

that may need to be refreshed, I think it is clear from the testimony today and from some of the material you shared with the

committee, that the ability to do that, whatever the difference, is

substantial with regard to time and it is likely to be measured in

years instead of months from any other route versus the one that

is already permitted and sited.

We also believe time is of the essence. Our analysis suggests that

Alaskan gas will be needed and it will be needed along with an expanded LNG import capability to meet the needs of our economy

this decade, and that is even if the exploration and development of

the remaining growth basins in the United States and in Canada

fully live up to their promise. Again, we recognize that the economy

has a very strong linkage in the scale of the economy to energy consumption. It is much easier to look at the physical demand and

look at the balance of that equation than it is to look at the price

volatility. It is that physical requirement that we base our judgment on.

Finally, we suggest that the committee be very cautious about

prescriptive legislation regarding the sourcing of materials and

labor, because this style of legislation risks potential litigation by

those what want to use it for their particular advantage and that

sort of litigation results in both delays and cost increases, neither

of which are a luxury that this project is going to be able to afford.

Remember, then, the sheer magnitude. As earlier witnesses

pointed out, this project will consume, I have heard one estimate

that it will consume the world’s steelmaking capacity for a full

year, and that there are only a small handful of manufacturers

who can produce either the type of steel or the diameter of pipe

that the producers’ studies have suggested are most economic, and

none of those are currently in North America.

It is clear that a lot of pieces do need to come together. There

is little margin for error and in the best of cases all the participants are going to need to move forward in good faith and at the

outside limit of their risk tolerance. I do not think this can become

something that has multiple objectives and that you begin hanging

Christmas tree ornaments on, because it could easily collapse of its

own weight.

We ought to have one objective. That is to move Alaskan gas to

the lower 48 in the most economic way possible, and we are in support of that and we believe that that can be accomplished. We believe that the most likely way it will be accomplished is through

a renewal and a reemergence of the original ANGTS project.

Thank you.

[The prepared statement of Mr. Bailey follows:]

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

Williams appreciates the opportunity to submit comments for the hearing record

in the Committee’s consideration of Alaska natural gas pipeline issues. We believe

it is imperative that industry, government, and other affected parties work together

to make the long-discussed Alaskan natural gas pipeline system a reality.

Summary

Williams and its predecessors have been involved in the effort to make the Alaskan natural gas pipeline a reality since the 1970s. Based on our experience, it will

require the cooperation of all interested parties—industry and government—to accomplish this goal. Williams was instrumental in developing the Alaska Natural

Gas Transportation System (ANGTS) project, serving as the U.S. lead for that

project until the mid 1990s. Williams believes that the framework created by the

Alaska Natural Gas Transportation Act (ANGTA) still offers the best hope for developing a successful project and doing so in the least amount of time. We urge the

Committee to preserve the ANGTA framework and to give the parties involved the

opportunity to move forward under it prior to considering any additional legislation.

Introduction

Williams is a diversified, asset-based energy company active in most aspects of

the petroleum and natural gas industries. We are a transporter, gatherer and processor, refiner, producer, retailer, and marketer of natural gas and petroleum products and ethanol. Over the last 15 years, Williams has had more experience building

large diameter, cross-country pipelines than any other company in North America.

We are currently constructing the Gulfstream pipeline, the first deepwater, long

haul transmission pipeline in North America. In fact, we believe this $1.6 billion

project is the largest energy infrastructure project under development in the country.

In addition, Williams has a large presence in Alaska. Williams owns and operates

the largest refinery in the State, located near Fairbanks, and supplies much of the

jet fuel and other petroleum products consumed in the State. We also own a small

percentage of the Trans-Alaska oil pipeline system. We have approximately 500 employees and assets of approximately $500 million in the State. We understand what

it takes to build and operate energy facilities in a northern climate. In addition, we

have a substantial presence in the natural gas transportation and natural gas liquids industries in Canada, allowing us to understand the Canadian perspective on

the gas pipeline.

Background

Williams and its predecessors have been deeply involved in the Alaska natural

gas pipeline project since it was first conceived in the 1970s. A subsidiary of Williams, Northwest Pipeline, led the development of the Alaska Natural Gas Transportation System (ANGTS) proposal that was selected, pursuant to the Alaska Natural Gas Transportation Act (ANGTA) of 1976, as the project to receive expedited

regulatory approval. At its peak, Williams had more than 750 people working on

the project. Frankly, we believe Williams knows more about the Alaska Highway

route, particularly the Alaska portion, than any other company in the industry.

The collapse of natural gas prices in the wake of deregulation in the early 1980s

was good for consumers, but it also rendered the Alaskan natural gas pipeline

project uneconomic and it languished for many years. However, advances in technology, growing natural gas demand and a stronger price outlook for natural gas

are again combining to make a project feasible. In fact, it is Williams’ opinion that

Arctic supply will be needed during this decade in order to satisfy North American

demand for natural gas. The North Slope producers have initiated new studies of

various alternatives and project sponsors are updating their analyses. At Williams,

we have activated our Arctic gas project team, with representation across North

America. We have initiated a number of studies to update project economics and to

identify unique value-added project opportunities. We have also participated in numerous meetings with the producer group, other pipeline companies, U.S. and Canadian Federal governments, provinces, territories, the State of Alaska, and native

communities in an effort to advance an Arctic gas pipeline project.

ANGTA

In Williams’ view, the framework established by ANGTA, and the Alaska Natural

Gas Transportation System (ANGTS), that was designated as the preferred alternative under the ANGTA process, still represents the best path forward for building

an Arctic gas pipeline. Although there are a number of commercial issues associated

with the ANGTS, including the status of withdrawn partners, that must be adVerDate 11-SEP-98 13:53 Mar 25, 2002 Jkt 000000 PO 00000 Frm 00092 Fmt 6633 Sfmt 6621 J:\DOCS\78-277 SENERGY3 PsN: SENERGY3
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dressed, the parties involved have recently initiated discussions aimed at resolving

these issues. We believe that prior to undertaking the passage of additional legislation these parties should be given an adequate opportunity to revive the partnership

and allow the ANGTS project to move forward. If that effort fails, Congress can still

act to allow alternative projects if that is deemed appropriate or necessary, and little time will have been lost. We have concluded that the ANGTS option, and particularly the Alaska Highway route, represents the most promising alternative for

several reasons:

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

The Arctic pipeline project will be the largest, most complex pipeline project ever

undertaken in North America and, consequently, the issues it will face are significant. The highway route has been studied extensively and is well understood. Utilizing the knowledge gained and the work previously done on the ANGTS route makes

good business sense and, in our opinion, good public policy. In our view, any successful project must follow this route if it is to be built this decade, or for that matter,

ever.

• The highway route has overwhelming political support.

No Arctic pipeline will be built without the support of both U.S. and Canadian

governmental authorities. To radically change the route will, at a minimum, delay

the project potentially for years. Certainly Alaskans have made it abundantly clear

that the highway route is preferred.

• The ANGTS project has obtained some of the required permits.

Although updating some of the ANGTS permits will be necessary, a new project

would require much greater regulatory review and consideration, a process that

could cause considerable delay, even under an ‘‘expedited’’ review process.

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

The amount of gas and possibly gas liquids flowing through a gas pipeline down

the Alaska Highway would provide an opportunity for further economic development

in the State of Alaska. Whereas a gas-to-liquids project or LNG export project likely

do not make commercial sense on a stand-alone basis, these and others may make

sense as a compliment to the main gas pipeline through the State. Further, communities along the route could potentially benefit through access to their State’s natural gas, an option they have not previously had. It would be unwise to choose a

route that eliminated this flexibility, for it is highly unlikely that two pipelines originating from the Alaska North Slope will ever be built.

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

Demand growth for olefins and polyolefins is strong. We think it is possible to

build a gas processing facility near Fairbanks, along with an ethane cracker and a

polyethylene plant. This would allow the shipment of polyethylene pellets to Anchorage via the Alaskan railroad for export to world markets. It would also facilitate

the development of additional natural gas infrastructure in the State. There is more

that needs to be known before we can conclude that such a development is economically feasible. World petrochemical markets are competitive, costs tend to be higher

in Alaska, and the ultimate composition of the gas will affect the economics of any

such project. Williams has such a review well underway, but even if this option isn’t

feasible today, following the highway route will keep it as an option for the future.

If another route is chosen, this option is lost forever.

Next Steps

Although we believe the ANGTS project offers the most immediate chance of success, it is not without challenges. The relative costs of a pipeline along the Alaska

Highway route compared to one following an over-the-top route are still unknown,

and producers have a legitimate interest in trying to obtain the highest price for

their gas as is possible. Also, while certain commercial issues with the long dormant

ANGTS partnership have to be resolved, Williams is optimistic that these issues can

be resolved, and in a reasonable timeframe.

We believe the Federal government can and should help facilitate the development of an Arctic gas pipeline, for it is clearly in the national interest to see this

project become a reality. The State of Alaska has stepped up its activity in this regard within the last year, and we hope the Department of Energy will want to help

facilitate a resolution. Indeed, hearings such as this reinforce our awareness that

Congress is interested in seeing this process move forward, and that is helpful.

91

Some have suggested that Congress should pass new legislation that would make

expedited regulatory approval available to other projects that might be proposed. We

believe this is premature. ANGTA was developed through an extensive process that

took into account the various interests of all of the parties involved, and the basic

facts that led to the creation of ANGTA have not fundamentally changed. If all parties work together we believe that the ANGTS project can successfully be developed

under the existing ANGTA framework. Recently discussions among the various parties with an interest in the project have accelerated in an attempt to resolve outstanding issues and move the project forward. While the commercial interests of the

companies involved will inevitably create the normal tensions that exist in any such

negotiation, the ANGTS framework establishes a set of parameters within which we

can all operate, allowing market forces to work, but on an expedited basis.

In our view, if the Committee desires to aid the process, the better approach at

this point would be to reaffirm that the ANGTA framework is still operable and to

encourage all involved to reach agreement. If such an agreement should require additional governmental action to update or augment ANGTA, then that would be an

appropriate time for legislation.

If the parties are unable to reach agreement and it becomes clear that no project

can be built under the ANGTA framework, then Congress should evaluate other options and act accordingly.

Conclusion

The dream of an Alaskan natural gas pipeline is once again alive and much work

is being undertaken to make that dream a reality. For that to happen, the interests

of many parties will need to coalesce around a single project, perhaps a project that

no one party believes is ideal from its perspective. When the Federal Power Commission and President Carter selected the ANGTS project as the designated project

under ANGTA, they reached conclusions that are still valid today. The United

States government and the Canadian government have worked together to make the

project possible. What is needed now is time and support for the various parties to

work together toward commercial arrangements that will make this project a reality.

Senator MURKOWSKI. Thank you very much.

I will be very brief, because we have been at this since 10 o’clock.

Mr. Aron and Mr. Heyworth, your presentations are appreciated,

and the CSX effort has been long under way and it continues to

be a consideration, and obviously it is directed at the export market

and the export market has been evaluated relative to what it would

cost to develop the CSX liquification at Valdez and export it into

primarily the markets of Asia and found to be a continuing potential. But the reality of signing contracts has always been one subject to the economics of that, as opposed to Mr. Heyworth’s proposal that this gas be utilized in the United States in the form of

LNG, which presents us with the difficulty of permitting LNG terminals in the United States.

It is not an impossible process, but it is not an easy process, either. That of course is competing with foreign gas potentially coming into the United States that enjoys the exemption of not having

to comply with the Jones Act.

I thought it was reassuring, the testimony we had from Foothills

relative to clarification of the status on contingent liability, and I

want to compliment you on that. Your reflection from time to time

on the potential litigation if the project does not come your way,

I will leave the lawyers to speculate because that is kind of outside

our jurisdiction.

With regard to statements I made previously, though, I want to

clarify. When I said I was going to recommend to the majority that

we proceed with legislation, it would not be—it would not in any

way diminish the status of the Foothills permits that are in existence now and coordinated by the Canadian government as proVerDate 11-SEP-98 13:53 Mar 25, 2002 Jkt 000000 PO 00000 Frm 00094 Fmt 6633 Sfmt 6602 J:\DOCS\78-277 SENERGY3 PsN: SENERGY3
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posed by former President Carter. I would see the necessity of moving in an effort to expedite permitting and judicial review, pipeline

directors and so forth.

But I am not suggesting by any means that the legislation as

proposed, which would put the producers basically in the same position as Foothills as far as expediting permitting, is necessarily an

appropriate function of this committee until such time as we have

an economically viable project and/or an application, because it

kind of puts this committee in the position of potentially, potentially, eliminating one of the participants. That is my current reading, at least.

I also want to—I hope I do not get too many questions on what

that means. But I also want to recognize Mr. Hoglund’s statement.

I believe that your interest is in promoting the project, as opposed

to having any Canadian Arctic gas; is that correct?

Mr. HOGLUND. Right.

Senator MURKOWSKI. Finally, Mr. Bailey, in your testimony,

which I did read—and I did read all your testimonies last night—

you proposed the feasibility potential of taking gas liquids out in

Alaska and marketing them in the markets of the Pacific Rim.

Could you elaborate a little more on that potential? Is that an economically viable prospect in your opinion? You folks are in the

business of refining and pipeline and gas liquids and a lot of

things.

Mr. BAILEY. Well, one of the issues you ultimately need to deal

with is converting the wellhead gas into pipeline quality gas. You

can certainly build systems that run a wet gas system and take it

over long distances, as Alliance pipeline recently demonstrated.

But it is more expensive and it does affect the economics.

Our thought had been that, with the ANGTS route or an Alaskan route that you have the ability at any point across Alaska of

treating and processing the gas, and at the point that that occurs

it represents some additional potential, we believe, for petrochemical development, which again would seem to be consistent with

some of the economic development goals of the State.

Senator MURKOWSKI. Does that complement your refinery operation to some extent or could it?

Mr. BAILEY. It could be complementary, but it is not necessarily.

Again, we suggested Fairbanks as the place that it would be done

because it is an existing complex, towers and others already there.

But it could be done at other points as well.

Senator MURKOWSKI. I have no further questions.

Dennis.

Mr. MCCONAGHY. Yes, I would just like to qualify one point from

our earlier remarks, which was the nexus between the ANGTS and

ANGTA legislation and the Canadian treaty, and just to emphasize

the point that any new legislation would have to begin that process

again in Canada to coordinate a Canadian response to any new legislation.

Again, I just wanted to emphasize in our record that the ANGTS

formulation does bind the two countries together and that is

unique to that formulation. Thank you.

Senator MURKOWSKI. I want to thank all of you. I think we have

advanced the process a little bit and I look forward to working with

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the producers and the other interested parties in a follow-up here,

perhaps not in a formal hearing, but a more informal setting.

I wish you a good day.

[Whereupon, at 1:55 p.m., the hearing was adjourned.]

(95)

APPENDIX

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA,

Washington, DC, September 25, 2001.

Hon. JEFF BINGAMAN,

Chairman, Committee on Energy and Natural Resources, Dirksen Office Building,

Washington, DC.

DEAR MR. CHAIRMAN: I want to thank you in advance for holding a hearing regarding construction of an Alaskan natural gas pipeline. We believe that tapping

the natural gas resources on the Alaskan North Slope is key to meeting gas demand

anticipated by 2015. For this reason, INGAA strongly supports the construction of

an Alaskan natural gas pipeline that would be able to deliver supplies to the Lower

48 States before the decade is out.

The INGAA Foundation recently commissioned a report outlining some of the

issues involved in the construction of a pipeline from Alaska. I ask that the enclosed

report, entitled Future Natural Gas Supplies from the Alaskan and Canadian Frontier, be made of part of the record of your hearing on October 2nd. The report assesses the commercial feasibility of a pipeline project to transport natural gas from

Alaskan and Canadian ‘‘frontier,’’ and finds that such a project can be built with

minimal environmental impact and substantial long-term economic benefits to both

the frontier region and North America as a whole. While the report does not favor

or recommend any specific pipeline project, INGAA does believe that routing issues

should be resolved as soon as possible so that construction can begin.

The INGAA Foundation report finds that proven frontier natural gas reserves represent more than 10 percent of the North American natural gas reserve base of 375

Trillion cubic feet, a proportionately greater amount than the Alaskan oil reserve

base that existed when the TransAlaska Oil Pipeline was built in the 1970s. Any

‘‘frontier’’ pipeline project remains viable with prices at between, $3 and $4 per million Btu (MMBtu) delivered into Chicago, the report says. Assuming timely approval, frontier gas could be flowing into the North American natural gas grid by

2007.

One key point raised in the report is the need for additional pipeline capacity beyond just building an arctic frontier pipeline. Any such pipeline would have to interconnect with existing systems in Alberta. These existing pipelines, however, are already operating at levels close to maximum capacity. Therefore, thousands of miles

of additional pipeline capacity within Canada and United States will need to be constructed so that natural gas delivered through a new pipeline can flow beyond its

terminus in Alberta, and into major U.S. markets.

Please let me know if you have any questions. Thank you for the opportunity to

make this report a part of the October 2nd hearing record.

Respectfully,

JERALD V. HALVORSEN,

President.

NORTHERN ALASKA ENVIRONMENTAL CENTER,

Fairbanks, AK, September 27, 2001.

DEAR SENATOR BINGAMAN: On behalf of the Northern Alaska Environmental Center, I would like to submit these comments as written testimony for the Senate Energy and Natural Resources Committee’s hearing on natural gas. The Northern Center is a non-profit environmental organization, based in Fairbanks, whose mission

is to protect wilderness, natural habitats, and the quality of life in Interior and Arctic Alaska through advocacy and education. The Northern Center has been an active

96

participant in discussions regarding the development of Alaska’s North Slope natural gas—both within the Alaskan environmental community and within the Fairbanks Chamber of Commerce.

Below is our statement on natural gas development on Alaska’s North Slope. Of

particular importance to note are (a) our non-opposition to natural gas development

and transportation—provided certain conditions are met; (b) our opposition to any

pipeline development in frontier areas such as offshore of the Arctic National Wildlife Refuge; and (c) our contention that the project go through a new and complete

Environmental Impact Statement process with no regulatory short cuts in the

issuance of permits. It is also important to note that we do not support any specific

pipeline route at this time.

The Northern Alaska Environmental Center believes that the United States, as

a member of the world community, must aggressively reduce. Its dependency on fossil fuels, through energy conservation, transition to cleaner burning fuels, and increased development and use of renewable sources of energy. To prompt this transition, the Northern Center believes the State of Alaska should adopt an aggressive

policy of energy conservation standards for new building construction and vehicle

purchases, and should launch a new program using state funds to support rural, alternative energy development, emphasizing renewable energy.

The Northern Center also recognizes that natural gas is a cleaner-burning fuel

than are others used in the Fairbanks area and in many parts of the world. As such,

the Northern Center considers natural gas a transitional fuel source in the move

toward reduced and more conservative use of fossil fuels in favor of renewable energy resources.

The Northern Center recognizes that energy is a strategic resource, required by

all Alaskans and essential to their physical and economic well-being. With this consideration, the Northern Center believes the development of North Slope natural

gas reserves to be a reasonable certainty. However, unplanned and poorly conceived

development, as abetted by comparatively low energy prices, can cause significant

long-term environmental, economic and health damage, particularly for the pollutant-prone Fairbanks bowl and the fragile interior Alaska environment. Therefore,

the Northern Center wishes to remain as involved as possible in the public debate

and dialogue on natural gas and its impacts on the Alaskan and Fairbanks North

Star Borough environs and seeks to participate and provide assistance throughout

the process of permitting and construction.

If Alaska’s proven North Slope natural gas reserves are developed, the Northern

Center believes the following conditions must be met:

• Any project must minimize deleterious impacts on local communities and traditional lifestyles and respect the basic human right to a clean, safe, and healthy

environment.

• The pipeline should remain as close as possible to present utility corridors (excluding RS 2477 rights-of-way). No pipeline development should traverse wilderness frontier areas including offshore of the Arctic National Wildlife Refuge.

• The State of Alaska should develop a comprehensive energy production and

management policy as a precondition to its issuance of a permit for construction

of the pipeline.

• The State and federal government should conduct studies that assess all reasonably anticipated impacts accruing from the gas pipeline, including the degree

of pressure on the Arctic Refuge that may be expected from the addition of the

pipeline to the North Slope.

• The project must go through a new Environmental Impact Statement process.

There must be no regulatory short cuts in the issuance of permits.

• Any project must include Best Available Technology and Best Management

Practices including, where environmentally appropriate, Seasonal Construction

Techniques. (can we provide a citation of reference for these?)

• There must be a permanent, adequately funded, and independent, formal citizen advisory council for the gas and oil pipelines that includes representation

by conservation organizations, as well as local citizens, and that reports directly

to the Governor.

• The project must escrow sufficient funds for Dismantling, Removal and Restoration (DR&R) of all project facilities and impacts in a way that regulatory agencies can ensure that the original ecosystem characteristics of the corridor have

been restored as facilities are taken out of service. This ‘‘return to original condition standard’’ and the escrow of DR&R funds must be stipulated in all permits and reviewed in the EIS.

97

Thank you for this opportunity to provide comments to your committee.

Sincerely,

ARTHUR HUSSEY,

Executive Director.

ALASKA CONSERVATION ALLIANCE,

Anchorage, AK, September 28, 2001.

Hon. JEFF BINGAMAN,

Energy and Natural Resources Committee, Dirksen Senate Office Building, U.S. Senate, Washington, DC.

DEAR CHAIRMAN BINGAMAN: The Alaska Conservation Alliance, on behalf of our

member groups, wishes to provide this statement of our position on the development

and transportation of Alaska’s North Slope gas for consideration in your Committee

hearing on Alaska Natural Gas Pipelines. The Alaska Conservation Alliance is a

statewide coalition of conservation groups and businesses representing over 35,000

individual members.

While our complete position statement on this complex issue covers a wide and

diverse array of issues, the following best sum up our basic position:

We strongly oppose all proposed natural gas lines from Alaska’s North

Slope that invade frontier wilderness ecosystems with new routes and infrastructure where it presently does not now exist, including the offshore Arctic National Wildlife Refuge or across the Arctic or Yukon Flats National

Wildlife Refuges. We are concerned also about impacts on the Porcupine

Caribou Herd prime habitat winter range presented by the Dempster lateral route. Further, we support a full public EIS process to examine the environmental impacts of all proposed plans, routes, siting, and stipulations

for such projects within the existing established transportation routes.

You will note that we are strongly opposed to the so-called ‘‘over-the-top’’ route

in the Beaufort Sea off the coast of the Arctic National Wildlife Refuge. Of the

routes currently under active consideration, this route has the greatest potential for

adverse environmental impacts and will be vigorously opposed by the state and national environmental communities.

Also, please note the Alaska Conservation Alliance is not at this time supporting

any specific gas project or pipeline route, though any project must meet all state,

federal and Canadian environmental laws as well as implement ‘‘best available technology and procedures’’ in order to minimize environmental, public health, and safety concerns.

We look forward to providing further input to your committee to protect Alaska’s

environment. We would appreciate this statement being included in the formal hearing committee report.

Sincerely,

KEVIN HARUN,

Executive Director.

PG&E CORPORATION,

Bethesda, MD, October 1, 2001.

Hon. JEFF BINGAMAN,

Chairman, Senate Committee on Energy and Natural Resources, Washington, DC.

DEAR MR. CHAIRMAN: The Senate Committee on Energy and Natural Resources

will hold a hearing on October 2, 2001, to look into the status of proposals to build

a pipeline system accessing the vast Alaska natural gas reserves. I understand the

committee may also discuss the potential for legislation to expedite the construction

of an Alaskan pipeline.

PG&E Corporation has a direct interest in the development of the Alaska natural

gas pipeline system. A subsidiary of the corporation is one of the original partners

in the Alaska Natural Gas Transportation System (ANGTS). Our Pacific Northwest

pipeline, Gas Transmission Northwest, is the Pre-Build Western Leg for ANGTS

that was constructed in 1980. The corporation also owns significant pipeline assets

in California, which connects to the Pacific Northwest system. So, in total, PG&E

Corporation’s pipeline infrastructure will play a critical role in delivering Alaskan

gas to major markets in the West. It is with that role in mind that I would like

to provide our views on the issues before your committee.

98

We believe new legislation is not necessary at this time. The 1976 Alaska Natural

Gas Transportation Act and subsequent regulation provide an adequate legislative

and regulatory framework for the various interested parties to move forward with

the development of this important infrastructure. In addition, a 1977 agreement between the United States and Canada (Agreement Between the United States of

America and Canada on Principles Applicable to a Northern Natural Gas Pipeline,

29 U.S.T. 3581, 1977, T.I.A.S. 9030) is essentially a bond with our Canadian neighbors necessary because any delivery of gas to the United States requires connecting

pipelines in Canada.

The primary focus today must be the commercial framework for the project, not

new legislation that revisits issues already decided by Congress. To that end, the

original ANGTS partners are reinstating the partnership. We expect to engage in

commercial discussions with producers and others as soon as it is practical to establish a business framework for moving ahead with the project. We are very concerned

that additional legislation now, and the regulatory proceedings that follow, would

impede these business discussions and ultimately delay the Alaska gas pipeline

project.

PG&E Corporation is committed to being a part of the effort to move the Alaska

pipeline project forward. As you know, natural gas is produced as a byproduct at

fields, like Prudhoe Bay, where there already is active oil production. Because infrastructure is not in place to transport that natural gas to market, most of it is reinjected into the ground. These supplies could produce a reliable domestic source for

our nation. We need to work together in a timely way to create the pipeline system

that will enable us to access them.

I greatly appreciate your interest in this issue. Please feel free to contact me with

questions or if I can be of assistance at any time in the future.

Thank you.

Sincerely,

THOMAS B. KING,

Senior Vice President.

ASSOCIATION OF ANCSA REGIONAL CORPORATION

PRESIDENTS & CEOS, INC.,

Anchorage, AK, October 2, 2001.

Hon. JEFF BINGAMAN,

Committee on Energy and Natural Resources, U.S. Senate, Washington, DC.

Re: Testimony to the United States Senate Committee on Energy and Natural Resources

DEAR SENATOR BINGAMAN: On behalf of the Association of ANCSA (Alaska Native

Claims Settlement Act) Regional Corporation Presidents & CEOs, I appreciate this

opportunity to provide written testimony on the proposed Alaska gas pipeline. This

is one of the most important issues facing Alaskans today.

While this Association has been in existence for a number of years, it was formalized in 1998. The membership is comprised of all the Presidents and CEOs of the

Thirteen Regional Native Corporations formed under the Alaska Native Land

Claims Settlement Act of December 18, 1971. Our Mission is to promote and maintain ANCSA, ANILCA (Alaska National Interest Lands Conservation Act), and economic enterprise through cooperative efforts and advocacy in order to foster the continued growth and economic strength of the regional corporations on behalf of their

shareholders.

We believe it is imperative that an Alaska gas pipeline be built following the Alaska Highway route. This project would follow a route previously designated by Congress and certified by international treaty and would clearly be the speediest response to the current North American demand for natural gas.

Most importantly, a highway route would keep development onshore. Alaska Natives and their leaders strongly oppose the so-called ‘‘over-the-top’’ route—an offshore pipeline underneath the unstable ice of the Beaufort Sea. The culture and

livelihood of the Inupiat people of Alaska’s North Slope depend on hunting the

bowhead whales that migrate through the Beaufort Sea. Because these whales are

extremely sensitive to noise and seismic activity, offshore development through the

Beaufort Sea would permanently threaten the Inupiat subsistence culture. This is

not acceptable and we believe an ‘‘over-the-top’’ route should not be considered as

an option.

It is also important to our shareholders that Alaskan communities be given access

to gas, not only in Fairbanks and Cook Inlet, but in rural communities where energy costs are persistently high. It’s unthinkable we would ship natural gas out of

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our state without Alaskans being able to use it for residential energy needs as well

as economic development opportunities.

The Native corporations of Alaska support opportunities for additional participants in the pipeline project. There are several major Alaska companies, including

the Arctic Slope Regional Corporation; Cook Inlet Region, Inc.; NANA Regional Corporation and Doyon, Limited, which are capable and interested in being pipeline

partners.

Certainly, one of the most important issues to our shareholders is that any federal

legislation provide for Alaska hire and Alaska Native hire, as well as the use of

Alaska businesses. Alaskan Natives will benefit from access to good-paying, longterm jobs in construction, engineering, operations and natural gas related process

industries. An ‘‘over-the-top’’ route would diminish these opportunities. Many of

Alaska’s Native Corporations and their subsidiaries are already well established in

arctic oilfield engineering and pipeline operations and have significant expertise to

contribute to this project. We believe any federal legislation should include strong

provisions stating Alaska residents and contractors should be employed when they

are available and qualified. The gasline sponsors should also be required to enter

into an agreement to provide for employment and training of Alaska Natives.

It is important to our corporations that federal legislation include provisions for

future access to the pipeline. Alaska Native Corporations own title to millions of

acres of land on the North Slope, including land in the Central Arctic Foothills, one

of America’s premier natural gas provinces. Lands in the Yukon Flats and Nenana

Basins also have potential. We need access to the pipeline to move discoveries to

market. Through ANCSA provision 7(i), the natural revenues from these discoveries

will benefit all Native corporations and their shareholders.

Last but not least, the CEOs of Alaska Native Corporations want to ensure that

we have at least one seat on any gas pipeline oversight committee that is formed.

In closing, I have enclosed copies of our report recently released entitled ‘‘Native

Corporations—Building a Foundation for Alaska’s Economic Destiny’’ for the Committee’s information and thank you for the opportunity to submit this testimony

today.

Sincerely,

VICKI OTTE,

Executive Director.

CITY OF VALDEZ, AK,

Office of the City Manager, October 5, 2001.

Senator JEFF BINGAMAN,

Chairman, Committee on Energy and Natural Resources, U.S. Senate, Washington,

DC.

DEAR SENATOR BINGAMAN: On behalf of the City of Valdez, I would like to provide

comments on what the City of Valdez sees as a viable option for construction of a

pipeline for getting Alaska’s North Slope gas to markets. Attached is testimony that

the City of Valdez would like to submit to your committee for inclusion in your deliberations concerning development of Alaska’s North Slope gas.

The City would like to request that if the United States Senate does determine

that incentives are necessary to allow a private venture to construct a pipeline that

any depreciation provisions will apply only to the federal income tax provision. Depreciation of any industrial asset has a very negative effect on a local community’s

ability to collect ad valorm property tax.

For the City of Valdez, the ad valorm property tax is our main revenue generator.

These property taxes are used to fund education, public safety, health care, snow

removal, garbage collection and disposal. A prematurely declining or depreciating

asset still has the same impact and demand for services as a new facility.

Again, if the United States Senate determines that tax incentives are needed to

facilitate the construction of a natural gas pipeline by a private entity, accelerated

depreciation should effect only to the federal income tax provisions.

If you should have any questions concerning the City’s comments, please do not

hesitate to contact me.

Thank you for providing the City this opportunity.

Sincerely,

DAVID DENGEL,

City Manager.

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COMMENTS ON PROPOSAL FOR A NATURAL GAS PIPELINE FROM

THE NORTH SLOPE OF ALASKA

On behalf of the City of Valdez, Alaska, I would like to submit comments on the

status of proposals for the transportation of natural gas from Alaska to the lower

48 states.

The City of Valdez has been instrumental in the formation of the Alaska Gasline

Port Authority (Port Authority). The City of Valdez, the Fairbanks North Star Borough and the North Slope Borough formed the Port Authority in 1999.

The mission of the Port Authority is to enable the development of Alaska’s North

Slope gas to the maximum benefit of all Alaskans. Ownership of the pipeline by this

type of organization will substantially lower the effective cost of transporting gas

from the North Slope to market and improve the economics of such a venture to

a degree necessary to make the development of the North Slope gas resources financially viable.

The goal of the Port Authority is to facilitate the maximum use of Alaska’s natural gas both within Alaska and exported to other markets including the continental

United States.

The Port Authority has formed a team with international experience. The Port

Authority has retained Bill Walker of Walker Walker and Associates, LLC as General Counsel and Rigdon Boykin of O’Melveny & Myers, LLP, an international law

firm with substantial experience with tax-exempt entities, project financing and the

oil industry, as Special Project Counsel.

The Port Authority entered into a Memorandum of Understanding with the Bechtel Corporation. As part of that MOU, Bechtel undertook to develop cost estimates

for the gas conditioning plant, pipeline and LNG facilities. In addition, the Port Authority retained the services of financial advisors Taylor-DeJongh and Merrill Lynch

to perform the financial modeling and act as financial advisors to the Port Authority.

The original premise of the Port Authority was to support the construction of a

project that would take natural gas from the North Slope of Alaska to Valdez, make

LNG and sell it to Asia. As a result of the work performed by Bechtel, Taylor

DeJongh-Merrill Lynch and O’Melvany & Meyers, the Port Authority has a very

comprehensive model, which includes conservative estimates for all aspects of the

project including construction, financing and operations. The costs include development costs, permitting costs, the various financing fees, and interest during construction, working capital, six months debt service reserve, insurance, etc. In a similar fashion the construction cost estimates are all inclusive i.e., all equipment, capital spares, construction, freight, catalysts and chemicals for initial fill, commissioning and start up costs, engineering services, escalation of 8 to 10% depending on

the facility, contingency (approximately 10%), insurance, licensing fees and contractor risk, overhead and fee.

At the beginning of May, 2000 Bechtel completed its EPC study based on the

above premises and Taylor-DeJongh completed modeling the results of that study.

This initial base case study was very valuable for the Port Authority because it gave

them a ground up ‘‘new look’’ construction cost estimate (based on 55,000 man hours

of Bechtel time) for the gas processing facility, pipeline and LNG facility construction elements which could serve as a basis for modeling other alternatives. In addition, it gave the Port Authority a realistic and conservative financial model for looking at alternative solutions to improving the project economics.

The Port Authority has reached two basic conclusions: First, the economics of the

project are clearly affected by the amount of liquids both in the form of NGL’s separated out on the Slope and inserted into the oil pipeline and the amount of propane

separated out as liquid propane gas (‘‘LPG’’) in Valdez. The value of these liquids

as demonstrated in the financial runs is substantial. Second, this project needs to

be combined with other potential projects in order to share the huge cost of the pipeline and gas conditioning facilities.

Based on the cost information developed by Bechtel, the financial modeling and

the changing world market for gas and LNG, the Port Authority now believes the

most economic and beneficial project to both Alaska and the producers is a twoproject 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

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$7.0 Billion to $4.85 Billion—a savings of $2.15 Billion in construction costs for each project or a total savings of $4.30 Billion.

The concept of the Two Project Line contains the following components:

• A Conditioning Plant on the North Slope which would have the capacity to condition sufficient gas to insert 6 billion cubic feet per day (bcfd) into a pipeline • A 550 mile 56′′ diameter pipeline operating at 2220 maximum pounds per

square inch from the North Slope to Delta Junction • A 150 mile 44′′ diameter branch line carrying 3 bcfd to the Canadian Border

along the Alcan highway (The Foothills Route) • A fractionation plant in Calgary (or in the U.S.) to extract the liquid propane

gas from the Lower 48 branch of the line • A 256 mile 46′′ diameter branch line carrying 3 bcfd to Valdez • A spur line to Anchorage from Glennallen • A fractionation plant to extract the liquid propane gas in Valdez • A 15 Million Ton per year LNG Plant (at full ramp up) and port facilities in

Valdez

Construction Cost

Conditioning Plant (assuming no efficiencies from existing plant)—$4.2 Billion

Pipeline (including the two branches)—$9.7 Billion

LPG Fractionation Plant—$450 Million

LNG Plant and Port Facilities—$3.65 Billion

Construction Cost Total—$18.0 Billion

(includes escalation and $1.8 Billion contingency)

Soft Costs

Interest during construction—$4.9 Billion

Owners contingency—$900 Million

Debt service reserve—$1.0 Billion

Financing fees, working capital, etc.—$1.0 Billion

Total—$7.8 Billion

Minus pre-completion revenue—–$3.2 Billion

Total Financing required—$22.6 Billion

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

The Port Authority is not claiming that this represents the best or only project

that should be developed. The Port Authority has offered to make our research and

numbers available to any qualified user and hopes further optimization of the design and costs will yield better results. The financial modeling performed by the

Port Authority has demonstrated that this design and cost structure (as conservative as it may be) is financially viable and should be economically attractive to the

Producers, Alaskans and the State of Alaska.

Obviously the financial returns of any project depend on cost assumptions, interest rates and the projected sales price of gas, LNG and LPG. Outlined below are

an estimate of the range of returns for the various parties involved based on the

Bechtel numbers and the Taylor-DeJongh modeling using conservative historical

numbers for the price of gas, LNG and LPG for the bottom of the range and a percentage of today’s prices as the upper part of the range. These benefits also include

the revenues from the Propane, which is transported down the line in a gaseous

form and extracted as a liquid at the end of the line.

Producers—$2 Billion to $3 Billion per year State (royalties, severance tax, corporate income tax and share of $370 Million)— $750 Million to $980 Million

All communities in Alaska divided by population with the smallest receiving a minimum of $50,000—$111 million per year

For the construction of infrastructure to deliver gas to non-pipeline corridor communities—LNG tank trucks and barges—or to lower the cost of alternate fuels—$37

million per year

The Port Authority believes that its ownership of the Project will result in eight

primary benefits:

1. Income from the venture will be tax-exempt as a result of an IRS ruling received by the Port Authority in January, 2000. Substantial cash—Billions of Dollars—which would otherwise be used to pay income taxes in this project would be

available to pay debt.

Dr. Pedro Van Meurs, energy consultant to the State of Alaska, has stated that

the benefit of the tax exemption may range in the order of magnitude of $10 to $20

Billion on an undiscounted current dollar basis.

2. Financing structure:

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a. The Port Authority believes it can finance this facility with virtually 100%

debt;

b. The Port Authority will have a substantially lower hurdle rate for capital

employed than a private organization would require;

c. Some of the debt would be financed with tax-exempt bonds;

d. The project’s debt would be non-recourse to the State, the founding municipalities and the producers.

3. The Port Authority has substantial political advantages both within and outside Alaska.

4. Income to the state and communities—The enabling ordinances establishing

the Alaska Gasline Port Authority sets forth that income of the Port Authority shall

be distributed as follows:

a. 60% to State of Alaska;

b. 30% to all Alaska municipalities on a per capita basis. The goal of the Port

Authority is that under normal operating conditions, this would produce a minimum of $148 million to be split each year among the municipalities;

c. 10% to be retained by the Port Authority which will be used for infrastructure to provide gas to non-pipeline corridor communities or to lower the cost of

alternate fuels for remote communities.

5. There will be more certainty of gas for in-state usage.

a. The Port Authority will insure that a spur line will be built to allow the

Cook Inlet/Anchorage area, etc. access to North Slope Gas.

b. The Port Authority can use retained revenues to develop LNG transport

to other communities accessible by road or water.

6. More control over price to consumer of in-state gas usage.

For example, gas to Anchorage or Fairbanks could be in the $1.80 per mmbtu

range. $3.00 Chicago price

–$1.20 Tariff from Canadian Border to Chicago

$1.80

7. No need to give up tax revenue, royalties, etc. to subsidize the project.

The port authority concept has been used for other large infrastructure projects

in this country. These quasi-public entities have constructed ports, airports, roads

and other infrastructure.

Representatives of the City of Valdez and the Port Authority are available to meet

with you and members of your committee and your staffs to answer questions and

to go into greater detail about the financial viability of the Port Authority to move

North Slope gas to market.

For more information or questions please contact: David Dengel, City Manager

City of Valdez, Alaska (907) 835-4313 ddengel@ci.valdez.ak.us

STATEMENT BY AMERICAN IRON AND STEEL INSTITUTE (AISI)

AISI is a non-profit association of North American companies engaged in the iron

and steel industry. The Institute is comprised of 39 member companies, including

integrated and electric furnace steelmakers, and 155 associate and affiliate members who are suppliers to or customers of the steel industry. For more news about

steel and its applications, view American Iron and Steel Institute’s website at http:

//www.steel.org.

We appreciate the opportunity to comment on supply issues surrounding the construction and permitting of new pipeline capacity from Alaska through Canada and

into the lower forty-eight states. Natural gas is a clean and abundant energy source

and raw material and we believe that it is in the interests of the United States,

and also of Canada, to expedite the construction and operation of the pipeline.

The U.S. steel industry has the capacity and expertise, and certainly the need,

for a project of the magnitude proposed to move Alaska gas to markets.

NORTH AMERICAN PRODUCERS HAVE THE COMPETENCE TO SUPPER STEEL AND PIPE

The North American oil and natural gas pipeline industry has developed an extensive network of pipelines servicing the integrated energy market on this continent. The vast majority of the steel line pipe used in that network has been produced by North American manufacturers, in both the USA and Canada, who have

consistently developed the sophisticated capability using high strength steels to

meet and exceed the needs of the energy transmission industry. North American

producers pioneered steels for Arctic Grade line pipe in the early 1970’s and since

that time have provided thousands of miles of large diameter pipe for high pressure

energy pipeline systems. In the late 1970’s, after careful design of the pipe line, exVerDate 11-SEP-98 13:53 Mar 25, 2002 Jkt 000000 PO 00000 Frm 00105 Fmt 6601 Sfmt 6621 J:\DOCS\78-277 SENERGY3 PsN: SENERGY3
103

tensive testing and international bidding, two North American producers were

awarded contracts to supply all of the pipe for the selected Alaska gas pipe line

project. At that time the pipe specified was highgrade steel line pipe up to 56 inches

in diameter. Since that time, the capabilities of North American suppliers have continued to develop, becoming more sophisticated based on continued experience and

extensive investment.

Pipe supply for the currently proposed project would extend over several construction seasons and with appropriate planning, the capacity of steel and pipe producers

in North America could be harnessed to manufacture the quantities required. As recently as 1999/2000, three North American steel pipe producers supplied over

1,000,000 tons of steel for the 2,000 mile Alliance Pipeline running from Northern

British Columbia to Chicago. This was both the most technologically advanced and

largest pipeline construction project ever in North America.

Collectively, North American steel and pipe producers have the most extensive experience supplying sophisticated steel and pipe for projects on this continent.

THERE ARE SIGNIFICANT BENEFITS IN THE SUPPLY OF STEEL AND PINE

FROM NORTH AMERICA

The benefits of sourcing North American materials and particularly steel for a

North American project are many, including:

• Security of supply

Multiple sources of pipe, particularly from the same continent would add to

the supply capability for the project. This is a major project and a number of

supply sources will be required to meet delivery deadlines.

• Significant economic spin-off effects

The economic activity generated within North America from the supply of

steel and the fabrication of pipe and related services will have a significant multiplier effect.

• Employment generation

Depending on the route and quantities of steel and pipe required, there would

be up to 10,000 work years of direct employment from North American steel

supply. In addition almost 4,000 additional work years would be used to manufacture the pipe from steel.

• Ease of obtaining regulatory approval

In the past a significant factor in the Canadian regulatory approval process

has been the economic benefit for Canada. Supply opportunity for steel and

pipe, probably the major supply component for the project, would expedite this

objective.

• Potential generation of new investment

Given sufficient opportunity, steel and pipe producers are likely to invest in

enhancing their supply capability on the basis of this project.

• Cost competitiveness

In project after project, North American producers have demonstrated full

commercial competitiveness on sophisticated pipeline projects.

Some of the pipeline designs proposed would be significant steps beyond designs

utilized in major pipeline systems to date. The history of the North American steel

and pipe supply industry is to be a leader in such developments, with a major spinoff benefit being the subsequent commercialization of this technology for use in

other cold temperature applications, energy industry fabrication (offshore platforms,

etc), off-road transportation, military and other sophisticated uses.

STEEL INDUSTRY

The North American steel industry is currently experiencing a crisis, driven by

a global steel glut that has resulted in unprecedented imports of steel into the USA

and Canada. Based on the serious damage being done to the USA steel industry,

President Bush initiated a series of initiatives aimed at curbing the worldwide overcapacity 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,

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steel for this project should be melted, poured and processed into pipe in North

America.

RECOMMENDATIONS TO MOVE FORWARD

Past projects have shown that for any given volume of natural gas required to

be transported a number of possible pipe designs are possible. In the late 1970’s Foothills Pipelines won the right to construct the Alaska Highway Pipe Line Project

in part by designing a line that could in fact use steel and pipe manufactured by

North American producers in contrast to the competing proposal. These options still

exist.

It is our contention that all design options capable of meeting the throughput

needs of the project and yet providing North American steel and pipe suppliers with

the best opportunity to supply, should be considered. Put another way, a pipeline

should not be designed in a manner that excludes a significant number of capable

suppliers. Not only would an inclusionary approach provide more commercial options to the pipeline builders but would also offer additional security of supply

through broadening the supply base, avoiding the risk of foreign trade disruptions,

greater economic spin-off benefits to the North American economy and presumably

ease the process of obtaining regulatory approval, particularly for that portion of the

project in Canada. It is apparent that the interests of the USA would best be served

by:

• Facilitating the early construction of this important energy project.

A secure and plentiful natural gas supply is necessary for the continued

growth of the US economy. • From the initial conception through to final design stage, considering options

that allow the maximum participation by North American suppliers of materials

and services.

To garner the maximum benefits for the North American economy, domestic

steel and pipe supply considerations must be considered and nurtured at the

earliest stages of project development.

• Adopting a procurement process for the supply of materials that encourages

North American supply on a fully competitive basis.

• Ensuring sufficient lead-time in awarding supply contracts to allow any proposed investments to be moved to completion.

Given the opportunity, it is entirely possible that experienced steel and pipe

producers in North America would invest in enhanced capability to meet the requirements for this important project. The benefits to the pipeline industry and

the North American economy would be huge.

We appreciate the opportunity to comment on the importance of this project to

the economy and in particular to the North American steel industry and its workers.

STATEMENT OF STEPHEN J. WUORI, GROUP VICE PRESIDENT—PLANNING AND

DEVELOPMENT, ENBRIDGE INC.

EXECUTIVE SUMMARY

Enbridge Inc. employs approximately 6,000 people in Canada and the United

States. We operate the world’s longest crude oil and liquids pipeline system, which

includes Enbridge Pipelines Inc. We also operate and have an interest in Enbridge

Energy Partners in the United States, and have interests in the Alliance and Vector

natural gas pipeline systems.

As a leader in energy transportation, distribution and services in North America

and internationally, Enbridge is keenly interested in assisting the development of

a cost effective transportation infrastructure for northern natural gas.

With a large and growing North American demand for natural gas expected to

reach 30 tcf annually, it is essential that the industry develop the most innovative,

efficient and reliable transportation infrastructure to deliver northern natural gas

to market. Northern gas development is a logical extension of our business, as

Enbridge is the only Canadian pipeline company that has constructed, owns and operates a major buried pipeline in northern permafrost.

Enbridge has consulted closely with the Alaska North Slope and Mackenzie Delta

gas producers. Based on our work to date, Enbridge’s main perspectives on northern

pipelines are as follows:

• The projects must be producer driven and economically robust.

• All stakeholders must be included.

• Clear rules are needed for the regulatory reviews.

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• Co-operative decision-making by Canada and the United States will be required.

• Enbridge has maintained route neutrality. However, based on our studies and

discussions, an overall comparison favours the northern route based on its widely acknowledged lower cost advantage of approximately US$ 2 billion or approximately 30 cents/mcf lower transportation cost from Prudhoe Bay to Alberta.

Enbridge calls for the best project to be selected based on a complete assessment

of its merits. Enbridge urges the United States Senate Energy and Natural Resources Committee to oppose any intervention to prematurely preclude a northern

route from Prudhoe Bay. Such a move could jeopardize accessing Prudhoe Bay natural gas because of inferior economics on a southern route, it would remove the decision from the producers who will be exposed to the greatest financial risks, and it

could strand Mackenzie Delta gas for many years to come.

INTRODUCTION

Chairman Bingaman, Ranking Member Murkowski, thank you for the opportunity

to provide testimony for the record on behalf of Enbridge Inc. on the proposed Alaska Natural Gas Pipeline.

Enbridge Inc, as a leader in energy transportation, distribution and services in

North America and internationally is keenly interested in assisting the development

of cost effective transportation infrastructure for northern natural gas. Enbridge employs approximately 6,000 people in Canada and the United States, and we are Canada’s most diversified energy pipeline and distribution company.

Enbridge operates the world’s longest crude oil and liquids pipeline system. We

own and operate Enbridge Pipelines Inc. and affiliated pipelines in Canada that

ship crude oil from Edmonton, Alberta to the Toronto, Ontario area and from Montreal, Quebec to Sarnia, Ontario. The American segment of Enbridge’s system is

Enbridge Energy Partners, L.P. in which Enbridge owns a 14.5 per cent interest.

It runs southeast from the Canada-USA border in Manitoba to the international

border near Marysville, Michigan with an extension across the Niagara River into

the Buffalo, New York area. Together, these pipeline systems have operated for over

50 years and now comprise approximately 9,000 miles of pipeline. They carry almost

three-quarters of Canada’s crude oil production and they deliver approximately 2.2

million barrels of crude oil and liquids per day.

Enbridge’s natural gas transmission business is carried on through the Alliance

and Vector pipeline systems. We own a 21.4 per cent interest in Alliance Pipeline

that carries 1325 mmcf/d of natural gas 2,200 miles from northeast British Columbia to the Chicago hub. Enbridge also operates and owns 45 per cent of Vector Pipeline that delivers natural gas from the Chicago area to southwestern Ontario.

The energy industry in Canada and the United States has long operated on a continental North American basis, and the transportation sector has been developed in

a way that supports this structure. Last May, Enbridge took a major step toward

expanding our North American footprint and scale of operations by completing the

acquisition of Midcoast Energy Resources. Midcoast is a Houston-based pipeline

company with regional offices in Texas, Alabama, Kansas, Louisiana, Mississippi

and Alberta. Midcoast transports, gathers, processes and markets natural gas and

other petroleum products through more than 80 company-owned pipelines across

4,100 miles in 10 states, the Gulf of Mexico and Canada.

Enbridge owns and operates Canada’s largest natural gas distribution company,

Enbridge Consumers Gas, which distributes gas to 1.5 million industrial, commercial and residential customers in Ontario, Quebec and New York State. Enbridge

Consumers Gas has been in business for over 150 years. Enbridge is currently developing a natural gas distribution network in New Brunswick. We are also involved

in the distribution of electricity and we have invested in the development of new

technologies and renewable energy through businesses engaged in fuel cells and

wind power.

NORTHERN PIPELINES

With a large and growing North American demand for natural gas expected to

reach 30 tcf annually, it is essential that the industry develop the most innovative,

efficient and reliable transportation infrastructure to deliver northern natural gas

to market.

Enbridge has the experience, expertise, technology and infrastructure to design,

build, own and operate liquid hydrocarbon and natural gas pipelines. While the

North presents unique challenges to pipelining, we believe Enbridge has developed

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the expertise to meet the demands. Indeed, northern gas development is a logical

extension of our business.

Enbridge is the only Canadian pipeline company that has constructed, owns and

operates a major buried pipeline in northern permafrost. Enbridge Pipelines (NW)

has carried crude oil 550 miles from Norman Wells, Northwest Territories along the

Mackenzie River valley to northern Alberta since 1985. More recently, Enbridge

built a small diameter pipeline to deliver natural gas from the Ikhil field to the residents of Inuvik, which is the principal community in the Mackenzie Delta. The company has also built and operates the natural gas distribution system in Inuvik,

which is north of the Arctic Circle. This project successfully applied the buried pipeline, chilled gas concept to protect the environment, which will most likely be used

for major gas transmission systems in the North. We are confident we have developed leading-edge environmental protection techniques and pipeline integrity technologies that are unique to northern permafrost conditions.

Enbridge has consulted closely with the Alaska North Slope and Mackenzie Delta

gas producers to offer our insights and suggestions about their feasibility studies.

We have undertaken several technical studies and we have responded to the producers’ requests for information. These are extremely large and complex projects,

which we believe will require the participation of both producers and a pipeline company.

Based on our work to date, Enbridge’s main perspectives on northern pipelines

are summarized below:

1. The Projects Must Be Producer Driven and Economically Robust

Enbridge sees itself as a service provider for the producers, and not yet a proponent of one project or another. Our fundamental premise is the projects must be

economically viable from the standpoint of the producers. They have earned the

rights to the gas from long-term, expensive and ultimately successful exploration

programs. They bear the largest risks, which entitles them to determine the

projects’ key design, routing and financing elements. Pipeline and other companies

who will become involved will only do so if the project economics are inherently robust.

2. All Stakeholders Must Be Included

Enbridge’s experience with northern pipelines reinforces our strong belief that all

northerners must be included in decision-making and must share in the opportunities, benefits and risks. In Canada, this fundamental point was firmly established

25 years ago at the time of the last great effort to promote a northern pipeline. The

need for inclusiveness is not in doubt. Northerners have every right to protect themselves from potential negative impacts and to share in the benefits generated, provided they also add value to the overall process of energy commercialization.

The settlement of land claims and the establishment of northern boards and agencies have dramatically transformed the ability of northerners to be represented at

the decision-making table. These developments have fostered a fundamental change

in attitude among northerners toward pipeline development. Indeed, most northern

aboriginal groups in the Mackenzie Delta Valley have negotiated a memorandum of

understanding with a core group of Mackenzie Delta natural gas producers to create

an opportunity for equity participation in a stand alone Mackenzie Valley pipeline

project. Future agreements will ensure all northerners share the benefits, as would

be expected of any landowner in the proximity of a major resource development.

3. Clear Rules Are Needed for the Regulatory Reviews

Northern pipelines bring together a unique array of technical, environmental, economic, social, cultural and political factors. The potential for multiple regulatory reviews (there are up to 17 regulatory agencies involved in Canada) causes concerns

about pipeline development. However, all parties have publicly committed to establishing a streamlined review process. Enbridge is confident the efforts by all levels

of government in Canada will produce an efficient and responsible regulatory process.

4. Co-operative Decision-Making by Canada and the United States Will Be Required

Northern natural gas development needs to be a continental solution to a continental energy problem. As such it requires continental decision-making. Canada

and the United States will each make their decisions on the basis of their own country’s needs. But the sheer size of the reserves, the proximity of the fields, and the

combined demand in southern markets make it clear that decisions on northern

pipelines will have to be made in an unprecedented cooperative, perhaps continental, fashion.

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Canadian and American regulatory systems were not designed for projects of this

complexity. Both governments must therefore work closely together to coordinate reviews and approvals so that the project(s) can be evaluated in a timely and efficient

manner.

5. Route Neutral—With Observations

Enbridge believes northern natural gas should be brought to market as a strategic

North American initiative if it can be done economically and in a manner that is

environmentally safe and respects the rights of northerners. The energy security

and economic benefits to all North Americans will be very significant. As President

Bush has stated, the key imperative is that northern gas be developed.

Enbridge believes that either the southern or northern routes would bring enormous benefits. As a service provider to producers, Enbridge is route neutral. However, based on our studies and discussions, an overall comparison favours the northern route based purely on its widely acknowledged lower cost advantage of approximately US$ 2 billion or approximately 30 cents/mcf lower transportation cost from

Prudhoe Bay to Alberta.

The following summarizes our key findings on a route comparison:

• Reserves access. Both routes would connect the 30 tcf of proven reserves at

Prudhoe Bay, but only the northern route would include the 610 tcf of proven

reserves in the Mackenzie Delta in a single pipeline system. This is the most

significant proven but undeveloped natural gas asset in Canada, and decisions

to exploit or defer it will have very important strategic impacts on Canada and,

by extension, on the United States’ energy picture. Enbridge believes it is unrealistic to build two massive independent northern pipelines in the same time

frame, one from Prudhoe Bay via the southern route and a stand alone Mackenzie Delta Valley pipeline.

• Both routes are technically feasible. The southern route crosses five mountain

ranges and numerous rivers, and by virtue of its added length, its environmental footprint would be much larger. But there is no question as to the technical feasibility of constructing and operating a pipeline along this route.

On the northern route, there is no mountain terrain and fewer river crossings.

Enbridge has taken a careful look at the subsea challenges and we believe a ‘‘near

shore’’ pipeline (approximately 4-5 miles from land) can be safely and economically

constructed, operated, and maintained. We would propose installing the pipe 6 feet

below the seabed in a water depth of 10-15 feet where the ice is seasonal (winter

construction) and where the bottom is not subject to ice scour.

• Timing of regulatory approvals. While the Alaska Highway route has a rightof-way and approvals from the earlier reviews in the 1970s, it will not be clear

until the North Slope producers unveil their proposed project whether and how

much these approvals will require ‘‘refreshing’’. The northern route would require a greenfield review process, as would a pipeline up the Mackenzie Valley.

We estimate it would take approximately three years to complete a full regulatory review and obtain government approvals, followed by another three to

four years of construction until start-up.

• Socio-economic benefits. Any northern pipeline project would provide significant

benefits to the people living in the regions through which they would pass. The

Alaska Highway route would arguably offer greater economic benefits from construction and operation to northerners on the basis of its greater length and

cost. Moreover, it could facilitate the distribution of natural gas in certain areas

of Alaska, such as Fairbanks.

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

prices.

CONCLUSION

Let the best project be selected based on a complete assessment of its merits.

Enbridge urges the United States Senate Energy and Natural Resources Committee

to oppose any intervention to prematurely preclude a northern route from Prudhoe

Bay. Such a move could jeopardize accessing Prudhoe Bay natural gas because of

inferior economics on a southern route, it would remove the decision from the producers who will be exposed to the greatest financial risks, and it could strand Mackenzie Delta gas for many years to come.

Honourable Senators, this is an historic moment in North America’s energy future

that comes around once in a generation. Enbridge urges the United States to take

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the long-term view of what is best for both countries by waiting for all the facts

as presented by the project proponents in the weeks and months to come.

Thank you.

STATEMENT OF THE YUKON TERRITORY REGARDING THE PROPOSED NATURAL GAS

PIPELINE FROM ALASKA TO THE LOWER 48 STATES

In these times, many people do not want a natural gas pipeline in their backyards. However, the Yukon would be happy to have the proposed natural gas pipeline from Alaska to the lower 48 States run through its backyard if it serves the

interests of the United States.

That was our view before September 11, and it is our stronger view today.

In a real sense, this is a national security issue for the United States. The proposed pipeline, carrying 4.5 bcf per day, would allow the United States to back out

820,000 barrels of imported crude oil per day, much of that coming from the Middle

East. Recall that in July 2001, the United States imported an average of 697,000

barrels of crude oil per day from Iraq.

The time for action is now.

The proposed Alaska Highway Route offers these unmatched advantages:

• It is the route designated in the treaty between Canada and the United States.

• The gas wells already have been drilled and are producing natural gas which

is largely re-injected into the ground.

• The rights-of-way already have been secured by Foothills in the Yukon and

parts of Alaska.

• The permits have been issued.

• Outstanding native claims are being resolved.

• The environmental studies have been done and demonstrate the least damage

to the North American environment.

• It offers the quickest relief because it involves the cutting of no new transportation corridors, no new construction access highways, no LNG liquefaction or

regasification plants, and construction can begin simultaneously from twenty or

more facings along the existing highway. Before September 11, it was estimated

that this pipeline could be constructed within 36 months. With a national security priority, we are confident that it now could be constructed in far less time.

• It brings a wealth of jobs to the Canadian and United States construction, petroleum and steel industries, among others.

• It has been endorsed by the National Governors Conference, the Pacific Northwest Economic Region, the Natural Resources Defense Council and the State of

Alaska.

• It brings $22 billion in tax revenue to the United States with no increase in

taxes. That $22 billion would cover the amount which this Congress has just

authorized to help rebuild from the devastation in New York.

Why, then, are we not proceeding at once? It is the view of the Yukon Territory

that the ownership of the proposed pipeline is the issue that needs to be addressed

most urgently. The pipeline companies and the big oil producers are jockeying for

position.

Foothills, which owns the rights-of-way and the permits for the project, claims reimbursement for sunk costs that already have been written off. That position hardly

serves the urgent needs of the United States for gas.

Some of the oil producers, in trying to squeeze out Foothills, are suggesting alternate routes:

• Their proposed ‘‘over-the-top’’ route already has been blocked by the State of

Alaska and never will be constructed because of the enormous threat it poses

to the environment. This route would require an underwater line in the Beaufort Sea from Alaska’s North Slope, alongside the Arctic National Wildlife Refuge, to the MacKenzie Valley, through waters that lie beneath several feet of

ice for much of the year. A rupture of this line could send 220,000 barrels of

natural gas liquids into the arctic environment every day until it was repaired

or shut down for many months.

• The MacKenzie Valley Route involves a project in which not a single producing

well has been drilled, none of the rights-of-way have been secured, native claims

are unresolved, and for which a new transportation corridor would be required.

Its completion would take many years longer than the Alaska Highway Route,

and that delay would not serve the interests of the people of the United States

who need this gas for their electric plants in California and their homes and

factories in the Great Lakes area.

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• 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 ExxonMobil and BP—will not have any interest in this pipeline when it is built and operated. Perhaps it will be built by others, such as Foothills, Duke, El Paso, Williams

or Enron. Duke Energy already has announced its intention to acquire Westcoast

Energy, which owns fifty percent of Foothills Pipe Lines Limited.

Like most Americans, the Yukon does not care who ends up building or owning

this pipeline. But, like our Alaskan neighbors, we believe that the pipeline should

be built as soon as possible. By enacting such a Senate resolution, you will have

taken a major step toward protecting the security of the United States and the interests of its citizens and consumers.

Respectfully submitted on behalf of the Yukon Territory:

WILLIAM E. WICKENS, JOSEPH S. HOOVER, JR., Miller Thomson Wickens & Lebow

LLP.

STATEMENT OF THE MINISTER OF RESOURCES, WILDLIFE AND ECONOMIC DEVELOP- MENT, GOVERNMENT OF NORTHWEST TERRITORIES, YELLOWKNIFE, NT CANADA

INTRODUCTION & OVERVIEW

The Government of the Northwest Territories is grateful for the opportunity to

provide these comments to the United States Senate Energy and Natural Resources

Committee as it reviews the status of proposals for the transportation of natural gas

from Alaska to the lower 48 states and considers legislative proposals to expedite

the construction of a pipeline from Alaska.

The Government of the Northwest Territories fully respects the right and obligation of the United States Congress to establish appropriate national energy policy

within the framework of its bilateral and multinational trade agreements. Moreover,

the Government of the Northwest Territories appreciates both the current national

security and economic context in which the Committee is considering these issues.

Accordingly, the views expressed herein are intended to be advisory in nature, and

offered with deference to the prerogatives of this Committee as it weighs the issues

involved in optimizing development of Alaska’s natural gas resources.

The Government of the Northwest Territories submits that there are a number

of critical factors that should be thoroughly analyzed in making any governmental

decision—to the extent it should be a governmental decision—with regard to the relative merits of alternate routes for bringing natural gas from northern Alaska to

U.S. markets. Among these factors are (1) the economic costs of the pipeline, (2) the

energy security implications, (3) the environmental impacts and risks, (4) the potential for other issues to cause delay, (5) the potential for development of future additional natural gas resources, and (6) the implications for economic development

along the route and national economic benefit.

The position of the Government of the Northwest Territories on these matters is

that a sufficient analysis of these factors has not been performed to summarily preclude, as a matter of law, one of the most promising routes. In this light, the Northwest Territories expresses its serious concerns with respect to Section 701 of H.R.

4, and urges this Committee to refrain from taking similar action.

Indeed, the weight of the analysis available to the Government of the Northwest

Territories provided by producers, researchers, and policy analysts supports the

view that the Beaufort Sea/Mackenzie Valley option is the most promising, least

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* All attachments have been retained in committee files.

costly option to get Alaskan natural gas to the U.S. market place sooner, rather

than later. Insofar as the Government of the Northwest Territories fully expects

that a stand-alone project from the Mackenzie Valley will be built, the true incremental economic and environmental costs associated with connecting Alaskan gas

to the Mackenzie corridor is significantly less than any alternative currently under

review.

Regrettably, there is a significant amount of misinformation with respect to the

Beaufort Sea/Mackenzie Valley route. The purpose of this document is, in part, to

address some of the erroneous claims and to provide the Committee additional facts

that should be part of the record for the Committee’s decision-making process.

ALTERNATE PIPELINE ROUTES MAY LEGALLY BE CONSIDERED

As a threshold issue, it is important to establish that consideration of pipeline

routes other than the ANGTS route is not legally precluded or mooted by prior government approvals or agreements.

There has long been an acknowledgement of the need for American gas to flow

from the producing regions of that country through Canada to American consumers.

Such an acknowledgement resulted in the signing of the Agreement between the

Government of Canada and the Government of the United States of America concerning Transit Pipelines (the Pipeline Transit Treaty) in 1977.

This Treaty provides for the unobstructed flow of hydrocarbons between the two

jurisdictions. It is a treaty of general application and, as such, deals with any transit pipeline, not a specific pipeline route or project. This characterization of the general nature of the Treaty was confirmed by Prime Minister Chretien in a letter to

Premier Stephen Kakfwi of the Northwest Territories dated January 25, 2001 in

which the Prime Minister wrote:

The Alaska Natural Gas Transportation System (ANGTS) is a viable option to transport Alaskan gas, if gas producers choose this route for commercializing their gas resources. The Canada-U.S. Agreement on ANGTS,

however, does not preclude the possibility of alternative projects being developed, including an offshore Beaufort Sea/Mackenzie Valley option.’’ [Attached as Attachment 1] *

This position was reiterated as recently as September 5, 2001 in a letter from Ambassador Kergin to Secretary Abraham. In this letter, written in response to Section

701 of H.R. 4, an attempt to prohibit an offshore Beaufort Sea pipeline route, the

Ambassador argued that ‘‘industry should not be restricted in its assessment of

[pipeline] routing proposals, that government should not foreclose routing options

prior to industry completing its assessment, and that all routes should be afforded

equal, fair consideration.’’ [Attached as Attachment 2]

In addition to the Pipeline Transit Treaty, there exists a project-specific agreement between our two countries, the Agreement Between Canada and the United

States of America on Principles Applicable to a Northern Natural Gas Pipeline. Unlike the Pipeline Transit Treaty, this Agreement speaks to a specific pipeline project

to bring Alaskan gas from Prudhoe Bay through Canada to markets in the United

States. The details of the routing are well known and need not be repeated here.

Proponents of the Alaska Highway route have made much of this Agreement and

have argued that its very existence precludes the consideration of any other route.

As outlined above, the Government of Canada does not subscribe to this view.

The Staff Report of the Federal Energy Regulatory Commission, submitted to the

Senate Committee on Energy and Natural Resources last January, detailed a number of concerns relating to the purported exclusivity of the ANGTS routing and the

continued application of the approvals granted to that routing in 1977.

In its Report, FERC concluded that the mere existence of the Alaska Natural Gas

Transportation Act (ANGTA), the legislation that covers ANGTS, does not preclude

an application for a proposal to transport Arctic natural gas being filed under the

terms of the Natural Gas Act. Thus, the ANGTA ‘‘does not bar proposals that might

compete with ANGTS.’’

One may safely conclude, then that neither the Treaty nor the Alaska Natural

Gas Transportation Act precludes an alternative route from being considered and

approved by regulatory authorities.

EXISTING APPROVALS MAY NO LONGER BE VALID

Not only is it perfectly legal and appropriate to consider alternate routes for Alaskan gas, it is also unclear whether the prior authorizations can be utilized for the

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project currently being proposed on the Alaska highway route in view of the many

changes from the original project. It is worth noting that many of the same advocates of the immutable nature of the Agreement are not adverse to amending it if

required by their interests. Merely because the revived ANGTS project follows the

earlier route does not mean that it is the project originally approved for that route—

indeed, it appears to be quite a different project:

• The Alaskan Joint Committee on Natural Gas Pipelines recommends in its proposals to Congress that the Dempster Lateral route be eliminated from consideration under ANGTA (Proposal # AH 1) and that a package of tax incentives

including accelerated depreciation, investment tax credits and downside tax

credits be provided in support of the ANGTS line (Proposal # T2). As the Agreement clearly envisages both a Dempster Lateral pipeline (a portion of which

was to be paid for by American shippers through their participation in the cost

of service of this leg) and the private financing of the project, the amendments

proposed by the Joint Committee would result in a substantially different

project from the one approved by both governments in 1977.

• There is certainly a proposed change in the ‘‘capacity’’ of the ANGTS as presently being presented by its proponents. The original capacity of the line was

for 2.5 billion cubic feet (bcf) per day, with an eventual increase to 3.2 bcf. The

line as currently modeled is expected to ship some 4 bcf per day, a significant

capacity change.

• It is notable, moreover, that the project was clearly intended to move Alaskan

gas through Canada to lower 48 markets with both a ‘‘western’’ and an ‘‘eastern’’ leg established under the Agreement to carry the gas to California and

mid-west markets. There is no provision within the Agreement that allows for

the removal of any significant volumes of product from the line during transshipment through Canada. The sponsors of the revived ANGTS-route project appear to have omitted the critical downstream system connections the original

project mandated.

In its own report, FERC noted that many of the elements of the ANGTA, and

hence FERC’s conditional approval granted in 1977, may not apply in the current

regulatory environment. The Commission began by observing that in order to facilitate the construction of the ANGTS line to meet the perceived energy crisis being

experienced in the United States:

Congress established special procedures, and modified certain aspects of

the regulatory process, such as streamlining environmental review, consolidating certain Federal authorities that would otherwise be exercised by various executive branch departments and agencies, curtailing the opportunity

for competition in transporting Alaska natural gas supplies, and sharply

limiting judicial review.

FERC questioned whether such limitations on environmental review, competition

and judicial recourse would be acceptable in today’s environment. Next, the Commission considered the specificity of the approvals granted and noted that the President’s Decision approving ANGTS describes the project with ‘‘some specificity’’ and

has, by virtue of its approval by Congress, the force of law. FERC then raised the

question as to the applicability of the original approvals and noted that ‘‘to the extent a proposal is made that differs in route or capacity from that envisioned in the

Commission’s report, the conclusions therein might no longer be valid.’’

While FERC does not directly say so in its analysis, it is obvious that the proposed pipeline project designed today would differ significantly from one designed

twenty-five years ago. The Report’s conclusions, while not determinative, undercut

the attempted prohibition of alternative routes for Alaskan gas and raise the issue

of the specificity of the original approvals and their continued application.

KEY FACTORS THAT SHOULD WEIGH IN THE DECISION

The Commitment to Market-Driven Energy Decision-Making

The Government of the Northwest Territories is committed to the application of

market-based principles in the development of the north’s petroleum resources.

In this, we are consistent with the position expressed by the Right Honourable

Jean Chretien, Prime Minister of Canada, in an address to the Canadian Association of Petroleum Producers in April of this year. In his speech, the Prime Minister

noted that Canada’s energy development

. . . will be governed by an unswerving commitment to competitive markets

and fair regulation.

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The GNWT further believes that it is the duty of governments to facilitate the

investment decisions of producers through the establishment of regulatory processes

that are fair, inclusive and timely. It is not the duty of governments to interfere

in market-based decisions, as any such interference will almost surely result in an

economically inefficient outcome.

In this conclusion we are also consistent with that of the Honorable Pat Wood III,

Chairman of the Federal Energy Regulatory Commission, who was quoted in a September 22 article in the Los Angeles Times as saying:

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

Such an embracing of markets as the most effective vehicle for ensuring energy

supplies is occurring throughout the world as countries that once were firmly committed to central planning and government intervention have come to realize the

benefits of market competition over government mandate.

In the context of this Committee’s work, this means that the key economic stakeholders should not have their views of their own self-interest superseded by a government decision that does not take costs fully into account. The most credible study

of the relative costs is probably that performed by Purvin & Gertz, an independent

and renowned engineering consultancy and not a project sponsor seeking to justify

the conclusions that best serve its own interest, for a group of industry participants.

Although the entire study remains confidential and proprietary, Purvin & Gertz has

granted permission to quote the portion of the executive summary which addresses

relative project economics:

Assuming that similar volumes of gas are transported, the Beaufort Sea/Mackenzie River Valley pipeline route costs approximately 30% less than the competing TransAlaska/Alaska Highway Route. Total project costs for the Alaska

Highway route are estimated at $12.0 Billion in comparison with the $8.3 billion for the Beaufort Sea/Mackenzie River Valley route.

Building a ‘piggyback’ route, that allows gas from the Mackenzie Delta to

combine with gas originating at Prudhoe Bay on its way to the continental gas

market, presents the lowest cost pipeline investment option. Assuming that 2.5

Bcfd of Alaska gas originating in Prudhoe Bay is combined (or piggybacked)

with 1.5 Bcfd of Mackenzie gas for a total of 4 Bcfd, the total pipeline investment is $7.1 billion. This value is almost 15% lower in comparison with the case

that transports 4 Bcfd of gas solely from Prudhoe Bay via the Beaufort Sea/

Mackenzie River Valley route.

Assuming 4 Bcfd of gas is transported to Fox Creek, Alberta, for delivery into

the continental market, the transportation unit cost of service for 4 Bcfd of

Prudhoe Bay gas via the Alaska Highway route is $US 1.41 per MMBtu versus

$1.14 for 4 Bcfd for the mixed gas (Prudhoe Bay/Mackenzie Delta) via the Beaufort Sea/Mackenzie River Valley route. .

The Alaska producer gas netback price for the 4 Bcfd Alaska Highway route

is $0.50 per MMBtu (excluding any NGL credit). This assumes a gas market

price of $US 2.59 per MMBtu and a price differential of $US 0.68 per MMBtu

between Fox Creek and Henry Hub. . . . The Alaska natural gas producer gas

netback price for the 4 Bcfd Beaufort Sea/Mackenzie River Valley route is $0.77

per MMBtu. This assumes no additional credit as a result of piggybacking of

Canadian gas is assigned to the Alaska producer. [Purvin & Gertz, Inc., Alaskan Gas Development Strategies, October, 2000, Page V-30]

As a result of this work and the follow-on analyses by companies involved, the

Government of the Northwest Territories fully expects that commitments will be

made to the construction of a pipeline from the MacKenzie Delta to Alberta in the

near term, with or without any commitment of Alaskan gas throughput. Of course,

if Alaskan gas were to be linked to this route for transportation to market, the size

and extent of the pipeline would be different, and both Alaskan and Mackenzie

Delta producers would benefit from improved transportation economics.

A Mackenzie Valley pipeline would travel some 1,140 miles from the Delta to connect with the existing western Canadian pipeline system. Should the route include

Prudhoe Bay gas, the line would enter the Alberta system at or near Gordondale.

Absent this gas, that is with the need to transport only 1.2 bcf of Delta gas, the

line would enter the system some 186 miles farther north at or near Zama, Alberta.

Access at this more northern receipt point would, of course, reduce the capital cost

of the pipeline from current estimates.

Delivery of Mackenzie Delta gas to the market, perhaps years in advance of Alaskan gas, is likely to change continental gas market dynamics. There is a risk that,

if Alaskan gas is not economically linked to the same transportation system, the

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supplies of Mackenzie delta gas would be sufficient to provide the market’s needs

to the point that any proposal to bear the incremental capital costs of a later Alaska

pipeline could not be supported.

Security Issues

In these sad days of recognizing that we must pay heightened attention to the

security of key energy infrastructure, the security implications of the alternate

routes must be evaluated seriously and objectively.

The suggestion that the ANGTS route is preferable from a security perspective

because more of it would be built on US soil is baseless. There is no negative security implication from the pipeline crossing Canadian soil, and both proposed routes

transit Canada in any event. All of North America is a common energy market

under NAFTA, and therefore share common security concerns that are not a function of national boundaries.

Objective analysis of the national security implications would instead be likely to

turn on vulnerability and risk, and may not favor the ANGTS route. ANGTS would

put the gas pipeline into the same right-of-way with the elevated TAPS crude-oil

line, long recognized to be one of the most exposed and vulnerable of major energy

systems. A major incident on the right of way could potentially disable both systems. Placing the gas pipeline immediately along the Alaska highway would create

further issues of protecting it from unauthorized access. Although shorter and easier

to construct, the Mackenzie Valley pipeline may also offer a less accessible as well

as separate gas pipeline route.

Security of supply is important to any country whose petroleum demands exceed

its domestic production. The United States is blessed with significant domestic gas

production, but nonetheless requires some fifteen percent of its daily demand to be

filled by imports. The vast majority of these imports come from Canada. Current

long-term forecasts of increased lower 48 demand and reduced conventional supply

do, moreover, raise the need for additional gas reserves to be developed in both the

medium and long-term.

In the matter of oil, the United States is less fortunate, with over fifty percent

of its daily demand being filled by imports. As with natural gas, Canada is a significant supplier of this needed oil and petroleum products, providing sixteen percent

of demand. Canada stands to play a increasingly vital role in providing additional

supplies to the United States, with the development of Alberta’s tar sands likely to

be a significant source of new oil.

The existence of the resource base and Canada’s clear intention to provide American access to this base is a given. The price at which this resource base will be

available is another. In the case of oil, the world market sets the price but natural

gas, being primarily a continental product, is determined in the North American

market. Producers and shippers can play a significant role in ensuring that this

price remains attractive to the market.

The long-term natural gas supply source for the U.S. market will likely be the

reserves of the far North, Alaska, the Northwest Territories and the High Arctic islands. However, on their own, the reserves of Alaska and the High Arctic may not

be economical to produce and therefore may never reach the market. Energy security is not helped by these resources if they are not brought to market, and if they

are uneconomic, they will not be brought to market. Linking them through one

transportation system improves their economics of delivery to the market, and

therefore their chances of making a major contribution to continental energy security.

The Government of the Northwest Territories believes the most economical way

to move these three basins to market is through a ‘‘Y’’ configuration that brings the

Alaskan and High Arctic reserves to the Mackenzie Valley and through it to the

south. Such a routing would provide economies of scale and through the joining of

the three basins, would help realize significant unit cost savings thus ensuring these

reserves are available to the market.

Environmental Impacts

Any natural gas project of the scale envisaged here must of necessity have an impact on the environment. How great this impact might be, and how it can best be

prevented and/or mitigated, will be the subject of regulatory hearings in both countries.

As with the other elements of the debate on routes and alternatives, the subject

of environmental impacts has been enlisted in the support of competing routes.

The impacts raised to date range from the seismic sensitivity of the Atigun Pass

in Alaska and the consequent likely shifting of any pipeline travelling through it,

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to prospects of buckets of natural gas liquids washing ashore following an underice explosion.

The clarification of these and other impacts should properly be dealt with in regulatory hearings, and care needs to be taken that unfounded environmental claims,

and threats of litigation based on these claims, do not predetermine route selection.

Any environmental analysis should begin with an admission that there are dangers associated with pipeline transport of hydrocarbons—to deny this would be to

deny reality. The Office of Pipeline Safety has reported that in the period from 1990

through 1999, there were a total of 3917 liquid fuel spills in the United States, resulting in 201 deaths, 2,826 injuries and $778 million in property damage. In fact,

as recently as September 22, the TAPS line in Alaska reported a spill of some 1200

gallons of oil during routine testing of its system.

Yet, more and more pipelines are being put into service and more are planned.

The recent commissioning of the oil pipeline to carry Northstar production of 65,000

barrels per day from six miles offshore Alaska’s north coast to land is only the most

recent example of projects reaching out to new reserves in the offshore. The project

follows on the successful operation, since 1987, of the offshore Endicott Field located

15 miles from Prudhoe Bay. To date, this field has produced some 400 million barrels of oil from under the Beaufort Sea.

Both of these projects enjoyed the support of the State of Alaska.

Over its total length within the NWT, the pipeline right of way would affect only

a limited number of trees. At the north end, the pipeline would cross 93 miles of

the Tuktoyaktuk Coastal Plain. This Plain is characterized by a continuous cover

of shrubby tundra vegetation with the most significant feature of the ecoregion

being its distinctive delta landforms. Wetlands cover 25-50% of the area. Much seismic and exploration activity has been conducted through this area over the past

thirty years.

Moving south, the pipeline would travel 155 miles across the Great Bear Lake

Plain, an area extending from the Mackenzie Delta to Great Bear Lake. Through

this area the predominant vegetation consists of open, very stunted stands of black

spruce and tamarack with secondary quantities of white spruce.

Next would be the Norman Range, an area that extends from the community of

Fort Good Hope on the east side of the Mackenzie River to Willowlake River south

of Great Bear Lake. The route would cover some 108 miles through this area, an

area dominated by open stands of black spruce with an understory of dwarf birch.

As with the Delta, this area has seen significant seismic and exploration work although here the activity has been conducted over the past seventy-five years.

Finally, the pipe would cross 21 miles through the Mackenzie River Plain, before

entering the existing right-of-way of the Enbridge oil pipeline that travels the rest

of the way through the NWT to Alberta. The native vegetation of the Mackenzie

River Plain consists predominantly of medium to tall, closed stands of black spruce

and jack pine. (The vegetation descriptions used are from ‘‘Narrative Descriptions

of Terrestrial Ecozones and Ecoregions of Canada’’ an Environment Canada publication).

Environmental Approval Processes

Any pipeline transversing the Northwest Territories will be subject to regulatory

review by a variety of agencies including the National Energy Board, the Mackenzie

Valley Environmental Impact Review Board, the Environmental Impact Screening

Committee and Review Board for the Inuvialuit Settlement Region, the Canadian

Environmental Assessment Agency, the Department of Indian Affairs and Northern

Development, the Mackenzie Valley Land and Water Board, the NWT Water Board,

the Inuvialuit Land Administration, Inuvialuit Game Council, Sahtu Land and

Water Board, Gwich’in Land and Water Board, and the Government of the Northwest Territories.

While the coordination of such a diverse group of regulators may on the surface

appear daunting, the Chairs of the Boards have met on a number of occasions over

the past eighteen months and have developed an outline for a coordinated regulatory review for a Mackenzie Valley pipeline project. This outline will be available

for public comment in October.

The situation for the Foothills Project is not as well defined. While environmental

reviews were conducted twenty-five years ago, and permits and approvals were

granted, much has changed from a legal perspective in the intervening years.

As noted in the attached legal opinion from Lawson, Lundell, ‘‘the two most significant issues from this perspective have been the introduction of new environmental assessment requirements and the recognition and protection of Aboriginal

rights under section 35 of the Constitution Act 1982.’’ [Attached as Attachment 3]

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In respect of the former, the Lawson, Lundell opinion concludes that the Foothills

Project would not be exempt from review under the Canadian Environmental Assessment Act (‘‘CEAA’’).

Their conclusion states:

. . . it appears clear that the Foothills Project will have to go through an

environmental review process under CEAA before any of the above authorizations could be obtained. There are significant implications for this in

terms of timing. There are also significant implications in terms of the potential for legal challenges to the Project.

The opinion also deals with the development assessment process proposed, but not

yet established, for environmental reviews in the Yukon Territory. ‘‘Land claims agreements in the Yukon have significantly changed project review

and approval requirements in the Yukon since the passage of the Northern Pipeline

Act. The Umbrella Final Agreement (the ‘‘UFA’’) between Canada, the Council for

Yukon Indians, and the Yukon government requires that a new Yukon Development

Assessment Process (‘‘YDAP’’) be put in place in the Yukon. Although the legislation

was supposed to be enacted within two years of the coming into force of the UFA,

it is now six years later and no legislation has been enacted.

Chapter 12 of the UFA sets out the requirements for the YDAP. YDAP applies

to projects and to significant changes to existing projects. A ‘‘project’’ is defined as ‘‘an enterprise or activity or class of enterprises or activities to be undertaken in

the Yukon that is not exempt from screening and review.’’ There is also a definition

for ‘‘existing projects’’ but that refers to an enterprise or activity that has been undertaken or completed. Therefore, unless the Foothills Project is exempted from review under the legislation when it comes into force—which in light of the magnitude

of the Project and its potential effects seems unlikely—it would be subject to review

under the YDAP.

In light of the difficulties that the governments have had in reaching consensus

on the legislation, it could be some time before this legislation comes into force. In

addition, it will likely take some time for those administering the process to develop

the experience and expertise required to handle major project applications. This

could cause significant delays, especially because under section 12.14.1.2 of the

UFA, the federal and Yukon governments may not issue any approvals or provide

financial assistance with respect to a project until the YDAP process has been completed.’’

The Government of the Northwest Territories holds no predetermined position on

the environmental merits or drawbacks of any particular pipeline routing, preferring to leave such an analysis to the legislatively mandated regulatory processes in

both Canada and the United States.

Aboriginal Issues

Another significant change that has occurred since the approval of the Foothills

Project is the recognition of aboriginal and treaty rights under section 35 of the Constitution Act, 1982 and the subsequent judicial developments which have occurred

with respect to the interpretation and protection of these rights.

The Lawson, Lundell opinion notes that the matter of Aboriginal rights is particularly acute in the Yukon Territory because of the lack of treaties in place with the

majority of Yukon First Nations along the pipeline route. Starting at the Alaska

border, the Foothills Project would pass through the traditional territories of the

White River First Nation; the Kluane First Nation; the Champagne and Aishihik

First Nations; the Ta’an Kwach’an First Nation; the Kwanlin Dun First Nation; the

Teslin Tlingit Council; and the Liard First Nation.

Of these seven First Nations, only two have land claims agreements in effect

today. The remainder are at various stages of completion. In addition, the Kaska

Dene from northeastern British Columbia also assert aboriginal rights and title in

the southeast Yukon along the pipeline route.

Some have argued that the Northern Pipeline Act, as legislation passed before aboriginal rights received constitutional protection, may allow some negative effects on

these rights. However, the Act expressly states that it does not affect these rights.

Section 25 of the Act provides:

Notwithstanding this Act, any native claim right, title or interest the native people of Canada may have had prior to April 13, 1978 in and to the

land on which the pipeline will be situated continues to exist until a settlement in respect of any such claim, right, title or interest is effected.

For the First Nations who have not yet concluded land claims agreements, the

legal effect of Foothills’ Certificates and easement must be considered in light of secVerDate 11-SEP-98 13:53 Mar 25, 2002 Jkt 000000 PO 00000 Frm 00118 Fmt 6601 Sfmt 6621 J:\DOCS\78-277 SENERGY3 PsN: SENERGY3
116

tion 25. To the extent that the Certificates or other regulatory approvals infringe

on any aboriginal rights or title of those First Nations, those First Nations may be

able to challenge the validity of those approvals. Government would also have to

meet the consultancy requirements established by the Canadian courts to justify

any infringement of unextinguished aboriginal title or rights.

A pipeline up the Mackenzie Valley would cross four separate Aboriginal land

claim areas: The Inuvialuit Settlement Region; the Gwich’in Settlement Area, the

Sahtu Settlement Area and the Deh Cho Region. Of these four, the first three have

settled their claims. The Deh Cho First Nations continues its discussions with the

Government of Canada toward resolving the issues raised in its proposal for a Deh

Cho process.

As a result of the settlement of these three northern claims, the Northwest Territories is experiencing significant petroleum exploration activity with, for example,

industry having work commitments in the Inuvialuit Settlement Region of $1 billion

(Canadian) over the next four years. Exploration activity is also proceeding in both

the Gwich’in and the Sahtu Areas.

Aboriginal leaders from throughout the NWT have agreed to work together to realize an ownership position in a Mackenzie Valley pipeline. The Aboriginal Pipeline

Group is currently negotiating such a position with the Delta Producers’ Group consisting of Esso Resources, Shell Oil and Conoco. Leaders from the Deh Cho have

not yet determined the role they may play in such a consortium.

It is important, however, that a clear distinction be drawn between the Deh Cho’s

land claim process and its possible involvement in the Aboriginal Pipeline Group.

The latter decision is a commercial determination that individual communities and

their regional body will make based on their analysis of the economic opportunity

presented.

As to the former, Premier Stephen Kakfwi of the GNWT has confirmed that while

the Deh Cho interim measures agreement will be honoured, resource revenue sharing and devolution issues will be negotiated through the Intergovernmental Forum

process while existing regulatory regimes, and not the land claims process, will be

used to ratify the construction of a Mackenzie Valley pipeline.

Developing Access to Future Natural Gas Resources

American gas demand continues to grow while conventional supply continues to

fall. This past year saw Americans consume some 22 Tcf of gas, of which 3 Tcf was

imported, the vast majority of that from Canada. American demand is projected to

grow by some 4.5% annually, reaching 32 Tcf over the next twenty years. Such a

growth would move gas from its current market share of 16% of total energy use

to 35%. This is largely the result of the increased use of gas for electricity generation. A major contributor to the increasing use of natural gas in the electric utility

sector is the lower capital costs and shorter construction lead times of advanced

combined cycle plants in comparison with conventional coal-fired plants.

The U.S. Department of Energy attributes to the lower 48 some 167 Tcf of conventional gas reserves, with the likelihood of an additional 1300 Tcf of unconventional

and currently uneconomic reserves. The conventional reserves represent about eight

years’ consumption at the current rate. This supply base is, however, under increasing pressure as the decline rate from new wells continues to increase. A recent

study by U.S. Energy Information Agency shows that while Gulf of Mexico wells

drilled in 1972 declined from their peak at an average rate of 17 per year, natural

gas wells drilled in 1996 have been declining at an annual rate of some 49%.

Like the American market, the demand for natural gas is expected to grow in

Canada. Ontario, for example, currently receives just under 1 Tcf annually from Alberta. Significant growth is expected in this market as Ontario Hydro decommissions nuclear plants and replaces them with co-generation facilities fueled by natural gas. In addition, the Government of Ontario is under increasing pressure from

neighbouring American states to reduce the sulpher emissions associated with its

coal-burning power generation.

Alberta gas reserves have declined for the past five years, with this past year seeing only 67% of production being replaced by newly discovered gas. Current gas reserves are estimated by the National Energy Board at 38 Tcf, which translates to

under 9 years production. The Alberta Energy Utilities Board estimates Alberta’s

reserves to be somewhat higher, at 43 Tcf. More to the point, and more ominously

for the future, the Alberta reserves have been declining at an increasingly rapid

rate. In 1994, the reserve to production ratio was 12.7, that is, there was nearly

thirteen years of reserves left at the then current rate of production. This ratio has

continued to decline over the past five years and now stands at the nine years mentioned above.

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Of further concern is the nature of these reserves. On balance, they tend to be

scattered and in relatively small pools. Such pools are, of course, subject to rapid

depletion. The National Energy Board, in its recently completed study of short-term

gas deliverability, estimates the decline rate to be as high as 40 percent. Based on

this decline rate, the NEB projects that production from existing wells in the Western Canada Sedimentary Basin will decline by about 3 billion cubic feet per day per

year. This is an unsustainable situation.

The challenge is to find the additional gas that will be needed to meet the increasing demand. While there are many possible supply sources in North America, many

of them are currently not available for development. Offshore California, the east

coast of the State of Florida, the west coast of British Columbia all have great potential to supply gas but all are subject to drilling moratoriums and it is unlikely

that drilling will be allowed anytime in the near future.

The North would seem to be the logical source of the new gas North America will

need. The State of Alaska contains significant gas deposits with known reserves of

nearly 35 trillion cubic feet (Tcf) at Prudhoe Bay and up to an additional 30 Tcf

onshore and offshore the northern coast of the state. The Mackenzie Delta contains

some 9 tcf of proven onshore reserves with estimates of an additional 60 Tcf.

There are at present feasibility studies being conducted on the economics associated with the development of these reserves. There are choices that will have to be

made on how best to bring these resources to southern markets. The Government

of the NWT believes that these choices would be best underscored by a firm commitment to market principles.

A pipeline up the Mackenzie Valley will open up new, relatively unexplored sedimentary basins that will provide additional gas supplies for North American consumers. A Mackenzie Valley pipeline can connect to no less than seven established

and potential natural gas basins Mackenzie Delta/Beaufort Sea, Anderson/Horton

Plains, Colville Hills, Peel Plateau, Great Bear Basin, Mackenzie Plain, and the

Cameron Hills. The Mackenzie Delta is estimated to have 9 trillion cubic feet (tcf)

of proven natural gas reserves and an additional 64 tcf of probable reserves. In the

Fort Liard area, there are 1.5 tcf of proven gas reserves and an estimated 3.5 tcf

of probable reserves.

Further, a recent study by Reinson and Drummond revealed striking geological

similarities between the long-producing Louisiana Gulf Coast, a basin that currently

yields about 5.3 tcf of gas a year, and the Mackenzie Delta. Their study estimated

an additional 30 tcf of Louisiana reserves and 55 tcf, an estimate the authors concede may be conservative, underlying the Mackenzie Delta. The cumulative Louisiana Basin production to date is over 185 Tcf and, in keeping with the parallels

drawn in the study, one could expect similar of greater production levels from the

Delta.

Achieving Economic Benefits

Governments seek to maximize the benefits from resource development within

their boundaries. The Government of the Northwest Territories is no different from

others in this respect.

There are essentially two ways in which a jurisdiction can realize benefits from

resource development within its borders. One is to add value to the product, the

other is to add cost.

In a market where frontier reserves are at the price margin, where they are truly

‘‘price-takers’’ and not ‘‘price-makers’’, any additional costs imposed on their development will only serve to make them less attractive to the market.

If, in an attempt to ensure the development of these uneconomic resources, resources made uneconomic through unrealistic demands for local benefits, government provides project subsidies, the additional cost of the resource is simply moved

from the developer to the taxpayer. Such a situation is not sustainable.

There are a variety of mechanisms by which the economic benefits associated with

a construction project of this magnitude may be equitably shared between U.S. and

Canadian interests. These benefits are not necessarily proportionate to respective

pipeline mileage within the two countries.

There are a number of ways in which the economic benefits to Alaska of gas supply development could be achieved without predetermining a pipeline route for all

north Alaskan resources. These should be explored, and the direct economic benefit

to Alaska of building the less costly route should be understood.

Construction Logistics

For much of its route, a Mackenzie Valley pipeline would follow the river that

gives the Valley its name. This river would also provide the means to transport in

the materiel and supplies needed for the construction of the pipeline, much as it did

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during the construction of the Norman Wells oilfield expansion and the construction

of the Enbridge oil pipeline in the early 80s.

This same river played a similar role during the construction of the Canol Pipeline during the Second World War, a project that saw Norman Wells oil shipped

westerly across the NWT in support of the American war effort in Alaska. Much

of the work on this project was overseen by the U.S. Army Corps of Engineers.

Conclusion

Any decision with regard to a northern pipeline to connect the gas reserves of the

Northwest Territories and Alaska to market should be based on the twin principles

of environmental acceptability and economic efficiency as determined by the market

itself.

The Government of the Northwest Territories is confident that the legislatively

mandated environmental review processes to which a pipeline project will be subject

in both countries will address the environmental issues. The Government is also

confident that, unless they are preempted legislatively, the key economic stakeholders in the Alaskan resources will reach a decision about the optimum route that

their governments should respect.

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