<DOC>
[108th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:93978.wais]
ALASKA NATURAL GAS PIPELINE STATUS REPORT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY AND AIR QUALITY
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
MAY 5, 2004
__________
Serial No. 108-82
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
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------------------------------
COMMITTEE ON ENERGY AND COMMERCE
JOE BARTON, Texas, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
RALPH M. HALL, Texas Ranking Member
MICHAEL BILIRAKIS, Florida HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio EDOLPHUS TOWNS, New York
JAMES C. GREENWOOD, Pennsylvania FRANK PALLONE, Jr., New Jersey
CHRISTOPHER COX, California SHERROD BROWN, Ohio
NATHAN DEAL, Georgia BART GORDON, Tennessee
RICHARD BURR, North Carolina PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming BART STUPAK, Michigan
JOHN SHIMKUS, Illinois ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi, Vice Chairman TED STRICKLAND, Ohio
VITO FOSSELLA, New York DIANA DeGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania TOM ALLEN, Maine
MARY BONO, California JIM DAVIS, Florida
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
LEE TERRY, Nebraska HILDA L. SOLIS, California
MIKE FERGUSON, New Jersey CHARLES A. GONZALEZ, Texas
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho
JOHN SULLIVAN, Oklahoma
Bud Albright, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Energy and Air Quality
RALPH M. HALL, Texas, Chairman
CHRISTOPHER COX, California RICK BOUCHER, Virginia
RICHARD BURR, North Carolina (Ranking Member)
ED WHITFIELD, Kentucky TOM ALLEN, Maine
CHARLIE NORWOOD, Georgia HENRY A. WAXMAN, California
JOHN SHIMKUS, Illinois EDWARD J. MARKEY, Massachusetts
Vice Chairman FRANK PALLONE, Jr., New Jersey
HEATHER WILSON, New Mexico SHERROD BROWN, Ohio
JOHN B. SHADEGG, Arizona ALBERT R. WYNN, Maryland
CHARLES W. ``CHIP'' PICKERING, GENE GREEN, Texas
Mississippi KAREN McCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
GEORGE RADANOVICH, California LOIS CAPPS, California
MARY BONO, California MIKE DOYLE, Pennsylvania
GREG WALDEN, Oregon CHRIS JOHN, Louisiana
MIKE ROGERS, Michigan JIM DAVIS, Florida
DARRELL E. ISSA, California JOHN D. DINGELL, Michigan,
C.L. ``BUTCH'' OTTER, Idaho (Ex Officio)
JOHN SULLIVAN, Oklahoma
JOE BARTON, Texas,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Carruthers, John, Vice President, Upstream Development of
Enbridge Pipelines, Inc.................................... 40
Konrad, Ken J., Senior Vice President, Alaska Gas BP Alaska.. 45
McConaghy, Dennis, Executive Vice President, Gas Development
Transcanada Corporation.................................... 32
Murkowski, Hon. Lisa, a United States Senator from the State
of Alaska.................................................. 6
Wood, Hon. Patrick, III, Chairman, Federal Energy Regulatory
Commission................................................. 19
Additional material submitted for the record:
American Chemistry Council, prepared statement of............ 60
Interstate Natural Gas Association of America, letter dated
May 28, 2004 to Hon. Joe Barton and Hon. Ralph M. Hall..... 62
(iii)
ALASKA NATURAL GAS PIPELINE STATUS REPORT
----------
WEDNESDAY, MAY 5, 2004
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Energy and Air Quality,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2322, Rayburn House Office Building, Hon. Ralph M. Hall
(chairman) presiding.
Members present: Representatives Hall, Whitfield, Shimkus,
Walden, Rogers, Issa, Otter, Barton (ex officio), Boucher,
Allen, Wynn, Green, McCarthy, Strickland, and Dingell (ex
officio).
Staff present: Mark Menezes, majority counsel; Bill Cooper,
majority counsel; Peter Kielty, legislative clerk; Sue
Sheridan, minority counsel; and Bruce Harris, minority counsel.
Mr. Hall. All right. I thank everyone for coming to the
hearing on the Alaska Natural Gas Pipeline, and I especially
want to thank the panelist for her time, her very valuable
time, and being punctual and being right here. And I understand
if you are in a bind, we will go ahead and hear you now. If
not, we will get the opening statements behind us.
I know you hate not to get to hear the opening statements.
If you will bear with us.
The subcommittee will come to order. And without objection,
the subcommittee will proceed pursuant to Committee Rule 4E. So
ordered.
The Chair recognizes himself for an opening statement.
The people of the United States are demanding an ever
increasing amount of natural gas. Americans use roughly 62
billion cubic feet of natural gas everyday. Natural gas is the
fuel of choice because it is clean burning and environmentally
friendly. The problem is we are not producing enough natural
gas to be self-sufficient. So the question is how do we solve
that problem?
Many oil and gas experts will say that there are no more
giant oil and natural gas fields left to be discovered. That
may be true in the Lower 48, however Alaska's North Slope has
over 30 trillion cubic feet of proven gas reserves. If a
pipeline is built, it could deliver as much as 4 to 6 billion
cubic feet of natural gas per day. We have to figure out how to
get it here.
The development of the infrastructure would do several
things. It will require major investments first and the
shouldering of a lot of major risk by those that build the
pipeline from Alaska to the Lower 48. Of course, for the past
two Congresses we have worked on that and we have tried to pass
legislation that would encourage the construction of a pipeline
from Alaska's North Slope to the Lower 48 states. However, such
legislation is yet to be signed into law. In spite of the
outcry we have come to expect that without Federal action the
pipeline will never be built. In spite of that, we hear
rumblings that companies are coming forward to negotiate with
the State of Alaska in order to clear some legal hurdles
necessary to build it.
The newspaper accounts have the thing built already. All of
this activity has occurred despite the fact that Federal
legislation is stalled in the Senate.
Is the Alaskan natural gas pipeline going to be built
without Federal legislation? What is happening in Alaska now
that would give us some encouragement that it will be built?
Finding the answers to these questions is what this hearing is
all about, and I look forward to hearing from the testimony
from the witness.
Today, actually we have an update. Today's Oil Daily
reports that Enbridge has filed an application with the State
of Alaska to negotiate a contract for the construction of the
Alaska pipeline. We look forward to hearing from Enbridge about
all of this and the late breaking news and to explain the
article. This news comes on the heels of an earlier article
this week discussing the competitive nature of the project
between TransCanada and Enbridge. That article even discussed
the possibility that these two entitles would eventually work
together to complete project. This should be a very informative
hearing today.
One question the witnesses probably cannot answer: What
happened to MidAmerican? I have just received a letter rom
David L. Sokol of MidAmerican essentially saying that while it
pulled out of the negotiation with the State of Alaska, the
project needs to go forward and needs to be built for the
benefit of American consumers.
Without objection, I would like to submit this letter as a
part of the record. Without objection, it is so ordered.
[The prepared statement of Hon. Ralph Hall and the letter
follows:
Prepared Statement of Hon. Ralph Hall, Chairman, Subcommittee on Energy
and Air Quality
Thank you for coming to this hearing on the Alaska Natural Gas
Pipeline. I especially want to thank the panelists for attending and
for their written testimonies. I look forward to hearing from each of
you.
The Subcommittee will come to order. Without objection, the
subcommittee will proceed pursuant to Committee Rule 4(e). So ordered.
The Chair recognizes himself for an opening statement.
The people of the United States are demanding an ever-increasing
amount of natural gas. Americans use roughly 62 billion cubic feet of
natural gas every day. Natural gas is the fuel of choice because it is
clean burning and environmentally friendly. The problem is we are not
producing enough natural gas to be self-sufficient. How do we solve
that problem?
Many oil and gas experts will say that there are no more giant oil
and natural gas fields left to be discovered. That may be true in the
lower 48. However, Alaska's North Slope has over 30 trillion cubic feet
of proven gas reserves. If a pipeline is built, it could deliver as
much as 4 to 6 billion cubic feet of natural gas per day. We have to
figure out how to get it here. Developing the infrastructure to do so
will require major investments and the shouldering of major risks by
those that build a pipeline from Alaska to the lower 48.
For the past two congresses, we have tried to pass legislation that
would encourage the construction of a pipeline from Alaska's North
Slope to the lower 48 states. However, such legislation has yet to be
signed into law. In spite of the outcry we have come to expect that
without federal action, the pipeline will never be built, we are
hearing rumblings that companies are coming forward to negotiate with
the State of Alaska in order to clear some legal hurdles necessary to
build it. The newspaper accounts all but have the thing built already!
All of this activity has occurred despite the fact that federal
legislation is stalled in the Senate.
Is the Alaska Natural Gas Pipeline going to be built without
federal legislation? What is happening in Alaska now that would give us
some encouragement that it will be built?
Finding the answers to these questions is what this hearing is all
about. I look forward to hearing the testimonies from the witnesses.
Today's Oil Daily reports that Enbridge has filed an application
with the state of Alaska to negotiate a contract for the construction
of the Alaska pipeline. We look forward to hearing from Enbridge about
this late-breaking news. This news comes on the heels of an earlier
article this week discussing the competitive nature of this project
between TransCanada and Enbridge. That article even discussed the
possibility that these two entities would eventually work together to
complete a project. This should be a very informative hearing today.
One question the witnesses cannot answer: ``What happened to
MidAmerican?'' I have just received a letter from David L. Sokol of
MidAmerican, essentially saying that while it pulled out of
negotiations with the State of Alaska, the project needs to go forward
and be built for the benefit of American consumers.
Without objection, I would like to submit this letter as a part of
the record. Without objection, so ordered.
______
MidAmerican Energy Holdings Company
Omaha, Nebraska
May 5, 2004
The Honorable Joe Barton, Chairman
Committee on Energy and Commerce
U.S. House of Representatives
Washington, DC 20515
The Honorable Ralph Hall, Chairman
Subcommittee on Energy and Air Quality
Committee on Energy and Commerce
U.S. House of Representatives
Washington, DC 20515
Dear Chairmen Barton and Hall: On behalf of MidAmerican Energy
Holdings Company, I would like to reaffirm our strong support for
Congress passing enabling legislation to support the construction of
the Alaska natural gas pipeline as part of comprehensive energy policy
legislation. Alaska possesses the United States' largest untapped
natural gas resource, but this supply cannot reach American consumers
unless Congress takes the steps necessary to facilitate construction of
the pipeline.
As you are aware, MidAmerican has withdrawn its application with
the State of Alaska to develop the Alaska portion of the pipeline.
Unfortunately, we were not able to reach agreement with the State on
the conditions under which MidAmerican could move forward with this
investment. However, this in no way diminishes the need for Congress to
provide the limited incentives to support the construction of the
pipeline included in the Conference Report on H.R. 6.
Rising natural gas prices present one of the most severe challenges
to the United States' economic recovery. High gas prices hamper
economic growth in every sector of the economy, ranging from
manufacturing to agriculture, and are particularly harmful to Americans
on fixed incomes. Every study of America's energy future has
demonstrated that Alaska natural gas is absolutely essential to
addressing the increasingly severe imbalance between supply and demand.
The provisions of the energy bill conference report provide the
appropriate impetus for this project. These provisions all serve to
reduce the capital costs of building the infrastructure necessary to
connect Alaska's stranded natural gas supply to markets in the Lower 48
that desperately need the supply. During consideration of the
Conference Report on H.R. 6, Congress wisely chose to include these
provisions to support construction of the pipeline while excluding
proposals for price support mechanisms that would only serve to distort
commodity market prices. As you continue consideration of these
proposals, I encourage you to maintain that balance. In this way, and
provided that this project is operated as an open access pipeline and
is fully regulated by the Federal Energy Regulatory Commission, all
benefits provided to reduce construction costs should flow back to
consumers on a dollar-for-dollar basis under these conditions.
Through the experience we gained during our consideration of this
investment, I would recommend that Congress consider adding language to
the Alaska gas provisions that would ensure that the legislation
accomplishes its intended purpose--incentivizing construction of this
project at the earliest date possible for the benefit of American
consumers. Such language would place a sunset on these incentives to
encourage all parties to move forward expeditiously, rather than at
some undetermined future date. Whether through legislative language, or
through implementation by the Secretary of Energy, I would encourage
you to consider placing a target date on completion of the project in
the 2011-2012 time frame.
The provisions of the Conference Report on H.R. 6 to promote
construction of the Alaska natural gas pipeline are essential to
addressing this country's energy supply challenges. These and other
measures in the energy bill that promote increased investment in energy
infrastructure are critical to our country's economic future. Enacting
comprehensive energy legislation represents the most important pro-
jobs, pro-growth, pro-consumer action that Congress can take, and it
will be a disservice to the American people if legislation is not sent
to the President this year.
Sincerely
David L. Sokol
Chairman and Chief Executive Officer
Mr. Hall. The Chair recognizes Mr. Boucher.
Mr. Boucher. Well, thank you very much, Mr. Chairman. I
want you to commend you for convening today's hearing on the
very important question of receiving a status report on the
Alaska Natural Gas Pipeline project.
Our natural gas prices have been a concern for sometime.
Earlier this year natural gas prices reached a peak of $7.04
per million BTUs. As the weather became warmer, prices have
declined to around $5,35, but that price is still well above
the average of between $2 and $3 which was common only 3 years
ago.
Federal Reserve Chairman Alan Greenspan testified before
this committee last year stating his concern that high natural
gas prices will have a dampening effect on our Nation's economy
and that the problem will likely worsen over coming years as
more gas fired units are added by electric utilities.
The taking of constructive steps to deliver greater
quantities of natural gas supplies to the United States market
should be a matter of urgent national priority, as should
finding appropriate ways to encourage electric utilities to use
fuels other than natural gas in their newly constructed
electricity generating units.
This morning we are focusing our attention on one means of
increasing natural supply, the construction of a pipeline
carrying natural gas from Alaska's North Slope to the United
States market.
In the H.R. 6 Conference agreement, which is currently
pending in the Senate, a Federal loan guarantee of $18 billion
is provided to sustain and support construction of the
pipeline. The Conference agreement also mandates that the route
for the pipeline proceed in a southerly direction through
Alaska, rather than in an easterly direction under the Beauford
Sea toward the Mackenzie Delta gas field located in Canada.
Another provision of H.R. 6 states that the development of
the Mackenzie field is also desirable and should be encouraged.
This morning I hope that our witnesses will comment on both
the need for and the prospects for construction of the natural
gas pipeline from Alaska. Is the loan guarantee essential for
that construction? Is it appropriate for Congress to designate
a route for this pipeline? It is financially feasible to
construct both the route to Fairbanks, which is mandated in
H.R. 6 and to develop the Mackenzie field, which H.R. 6 also
encourages. Now these are questions that I think deserve our
attention. It is appropriate that we examine them this morning.
And I want to say thank you to our witnesses for taking
time to testify. I hope that they will comment on these and
other pertinent matters.
Thank you, Mr. Chairman.
Mr. Hall. Thank you, Mr. Boucher.
The Chair recognized Ms. McCarthy for an opening statement.
Ms. McCarthy. Mr. Chairman, thank you.
I do not intend to make opening remarks. I would like to
associate myself with the remarks of the Ranking Member. And
look forward to the testimony of the Senator.
Knowing how crazed the schedule is, I would yield back my
time so that we could proceed.
Mr. Hall. All right thank you for yielding back your time.
Well, we have come to Mr. Green approaching. The gentleman
from Texas has 3 minutes, or less for opening statement. You
want to yield back the balance now or----
Mr. Green. I will not give the total opening statement in
deference to our Senator from Alaska, but I just want to thank
you for having this hearing. The concern I have, I have
expressed it many times, on the high cost of natural gas, and
not only for heating our homes or cooling our homes if you are
in my area of the country, but also for the feed stock for our
petrochemical industry. And unless this Congress and this
Administration aggressively deals with this issue, including
the Alaska pipeline, we are going to see the export of another
industry like we have other in the midwest. And that is why I
am glad to have this hearing and hopefully we will aggressively
address it with lots of solutions, whether this Alaska pipeline
is one of them. Obviously, more LNG but also more exploration
in the continental United States.
Thank you, Mr. Chairman.
Mr. Hall. Thank you, Congressman.
Mr. Shimkus, you have an opening statement?
Mr. Shimkus. No, Mr. Chairman. Just to thank you for
holding this hearing. It is very important. Those of us who
follow the committee's work know that we have an expediential
use of natural gas in this country and if we do not move to
meet the demand with increases supply, my farmer is going to
pay more for fertilizer, manufacturing is going to continue to
be driven out of the country. And it is a real crises that the
public really has to get an understanding for.
And I thank you for the time.
Mr. Hall. Thank the gentleman.
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. Mike Rogers, a Representative in Congress
from the State of Michigan
Mr. Chairman, thank you for holding this important hearing as we
discuss the progress of the Alaska Natural Gas Pipeline.
America's manufacturing industry is facing a real challenge with
their competitors around the world. A recent study found that higher
structural costs, including higher natural gas prices, add 22% in costs
to American manufactured products compared with their competitors. This
discrepancy is only expected to grow as the U.S. demand for natural gas
is projected to increase by more than 36% by 2020.
We must take action to help level the playing field for our
domestic manufacturers. The House has approved legislation that would
allow for the construction of a natural gas pipeline from the Alaskan
North Slope to the lower 48 states. The pipeline will improve access to
natural gas and promote competition in natural gas exploration,
development and production. H.R. 6 would also bring muchneeded supplies
of natural gas to the public by providing royalty relief for gas wells
in the deep waters of the Gulf of Mexico and by providing incentives
for marginal wells that would otherwise be plugged. Finally, the
legislation would cut through bureaucratic red tape by streamlining
permitting for natural gas projects on federal lands and ensuring
timely decisions on lease applications.
Mr. Chairman, thank you again for convening this hearing. I look
forward to working with you as we aim to formulate a comprehensive,
national energy policy. U.S. manufacturers, who account for more than
14 million of America's jobs, are counting on us.
Mr. Hall. Now, thank you, Senator, for letting us getting
our opening statements in. That cuts everybody else off, so we
do not have to sit here and listen to them read their
statements to us.
We are honored to have you here today. You are the first
Alaskan born Senator, I am told, to serve that State, a member
of the Senate Energy and Natural Resources Committee, Chair of
the Subcommittee on Water and Power, have to put up with Don
Young and serve on the Veterans Affairs Committee. And we
really are pleased to have you.
I think that she graduated right here from Georgetown,
right, University? And with a degree in economics, a law degree
from the Willamette College. And she has been a member of the
of the Senate and served the Anchorage District Court as a
court attorney for several years. So she has been at all levels
of government. We are very fortunate to have you in the U.S.
Senate. We are especially grateful to have your testimony
today.
The Chair recognizes you for as much time as you might
take.
STATEMENT OF HON. LISA MURKOWSKI, A UNITED STATES SENATOR FROM
THE STATE OF ALASKA
Senator Murkowski. Thank you, Mr. Chairman. I appreciate
the introduction. I appreciate the opportunity to hear the
opening statements from the members this morning. It
demonstrates very clearly that we all come to this issue with a
recognition of the problem that we are facing in this country
when it comes to natural gas, the supply and the demand issue,
and the fact that we have got a real problem.
And in Alaska, Mr. Chairman, I would like to suggest that
we have a solution to the Nation's problem when it comes to our
natural gas reserves.
So I really want to thank you for holding this hearing this
morning on the Alaska natural gas pipeline.
I do not exaggerate, I do not overstate when I say that
there is no more important issue to Alaska. And quite honestly,
few issues more important to our country than getting the
necessary legislation through Congress to build the Alaska
Natural Gas Pipeline. And I appreciate the focus, the spotlight
that through this hearing you are shining on the issue.
I always need to stress that this is not just about Alaska
, this is not just about my State. This is about our country.
And when we look at the issues that are facing our Nation:
Whether it is our national security in a post September 11
world; the health of our national economy; creating more jobs
and achieving and maintaining a healthy environment for
ourselves and our children these are all issues that affect
every single one of us in our districts and in our States.
And the reality is, that natural gas from Alaska's North
Slope has an important role to play in resolving each one of
these major areas of concern.
An Alaska Natural Gas Pipeline will: Enhance our Nation
security and freedom on foreign policy issues by providing a
secure, domestic supply of energy. And as we look at the
situation that our country is currently in with our oil and our
heavy reliance on foreign sources of oil, we cannot stress
enough the need to find those reserves of domestic supply.
We also know that the Alaska natural gas pipeline will
provide a critical feed stock, at a reasonable price, for the
chemical, agricultural and other important sectors of our
economy. These industries are currently facing near
catastrophic conditions including a dramatic loss of markets,
plant closures and layoffs due to the high cost of natural gas.
A natural gas pipeline will create over one million new, well
paying jobs spread across every State in our Nation as well as
providing an abundance of clean burning, environmentally
friendly fuel.
Mr. Chairman, let me very briefly comment on how the Alaska
natural gas pipeline can profoundly help American resolve these
areas, these issues that I have just mentioned.
First, an adequate reasonably priced supply of national gas
is crucial to the economy. Chairman Greenspan recently
testified before Congress that existing natural gas supplies
represent a serious problem for the U.S. economy, and those
were his words. ``A serious a problem.''
Examples abound of the importance of reasonably priced
natural gas to our economy, and I am sure that many of you like
me have received visits and correspondence from industries in
your States about the devastating impact of high natural gas
prices. You mentioned the issue as it relates to the farmers.
Businesses are laying off employees and shutting down. They
simply cannot compete in world markets with the high natural
gas prices.
Residential consumers who rely on natural gas to heat and
cool their homes are also facing the highest prices in history
for this basic, indispensable commodity.
The Alaska Natural Gas Pipeline can play a key role in
alleviating this crisis.
The Alaska natural gas pipeline legislation has also been
called a massive jobs bill. And while creating jobs is not
necessarily the primary goal of the project, it is an important
benefit that cannot be overlooked.
The jobs created by the project will not be ``make work''
jobs. They will be skilled well-paying employment, jobs that
families can be built around, jobs that we can count on. And
these new jobs will not be limited to one State or region, they
will be created in every State of the Nation.
I have included in my testimony, in the written testimony
that you have, information from a recent National Defense
Council study concerning the number of new jobs that will be
created in the State of every member of this subcommittee. And
I think as you look through them, you will see that they are
substantial.
Next, natural gas is the cleanest burning fossil fuel.
Natural gas can displace energy sources with higher emissions.
And thus, using natural gas can help us achieve our Clean Air
goals. It can also reduce environmental compliance costs for a
number of industries, including the electric power sector. In
fact, the great majority of planned new electric generating
plants will rely on natural gas. It makes plain good
environmental sense to make sure these new generating
facilities will have an adequate supply of gas. And this is
part of the reason, certainly, why the Alaska Natural Gas
Pipeline has the support of many environmental groups.
Alaskan gas will provide a secure, stable domestic source
of supply that will enhance U.S. energy security. And the
importance of this secure, domestic source of energy on our
foreign policy options and national security cannot be
overestimated.
The Department of Energy is forecasting that imported LNG
will be supplying an increasing amount of our natural gas needs
over the coming decade. Much of this LNG will come from
unstable regions of the world. Serious questions have been
raised about whether some of the revenues we send to these
regimes to pay for the energy finds its way into the hands of
terrorist organizations. Further, as I mentioned before, we
already import well over half of our petroleum. Do we really
want to be dependent on overseas sources for the majority of
our natural gas as well? I think not. Building the Alaska
Natural Gas Pipeline will diminish our need to import LNG while
keeping precious U.S. dollars here in America.
Now I would like to just speak very briefly about the
interest that has been shown in the Alaska natural gas pipeline
project by the private sector.
A consortium of major producing companies, Conoco Phillips,
BP Exploration and Exxon Mobile have filed applications with
the State of Alaska to build the pipeline. TransCanada, a
pipeline company with vast experience in the North American
natural gas market and the holder of the existing U.S. and
Canadian Alaskan Gas Pipeline construction certificates has
indicated its intent to file for the necessary authorizations
to build the pipeline in Alaska. And further, Mr. Chairman, as
you just noted Enbridge, a Canadian company with extensive
pipeline holdings in Canada has announced that it has filed an
application with the State of Alaska to negotiate commercial
agreements to construct and operate the portion of the pipeline
that will run through the State. So there is no shortage of
interest in the private sector in building this project. But,
all these potential project sponsors have stressed the
necessity of Congress enacting the regulatory and judicial
streamlining and fiscal incentives in the energy bill in order
for the construction of the pipeline to go forward. So it is
critical that we figure out the way to get these pieces through
the Congress so that we can help facilitate this project.
It is also important to note that there have been proposals
to build an Alaska LNG project in the State. The proposals
contemplate building a pipeline from the Alaskan North Slope
into south central Alaska. A gas liquefaction facility would be
constructed there and the North Slope gas would be transported
as LNG to the West Coast markets in the Lower 48. So, again,
there is certainly no lack of creative approaches to bringing
Alaska natural gas to market.
The Alaska Natural Gas Pipeline is one of those all too
rare examples of a project that is a winner from every
perspective. It will help us achieve our environmental goals;
it will help our economy by creating a large number of new,
well paying jobs and it will enhance our national security.
Mr. Chairman, again I want to thank you, thank the
subcommittee for inviting me to testify this morning on this
critically important national project. I look forward to
working with you in the House and my Senate colleagues to enact
legislation bringing all the benefits of this pipeline to my
constituents and to our entire Nation.
Thank you for your interest in this very important subject.
[The prepared statement of Hon. Lisa Murkowski follows:]
Prepared Statement of Hon. Lisa Murkowski, a U.S. Senator from the
State of Alaska
I'd like to thank Chairman Hall for holding this hearing today on
the Alaska Natural Gas Pipeline. I do not exaggerate when I say that
there is no more important issue to Alaska--and few issues of more
importance to our country--than getting the necessary legislation
through Congress to build the Alaska Natural Gas Pipeline. I hope that
this hearing will be an important step in moving this critical
legislation forward.
But, Mr. Chairman, I want to stress that this project is not just
about Alaska--far from it. When we look at the issues facing our
nation:
1) our national security in the post September 11 world;
2) the health of our national economy;
3) creating more jobs and;
4) achieving and maintaining a healthy environment for ourselves and
our children
these are all issues that affect every single one of our districts and
states.
And the reality is, natural gas from Alaska's North Slope has an
important role to play in resolving each one of these major areas of
concern.The Alaska Natural Gas Pipeline will:
enhance our nation security and freedom on foreign policy issues by
providing a secure, domestic supply of energy;
provide a critical feedstock--at a reasonable price--for the
chemical, agricultural and other important sectors of our
economy. These industries are currently facing near
catastrophic conditions including a dramatic loss of markets,
plant closures and layoffs due to the high cost of natural gas;
create over one million new, well paying jobs spread across every
state in our nation and;
provide an abundance of clean burning, environmentally friendly fuel.
Mr. Chairman, I mentioned several important contributions the
Alaska Natural Gas Pipeline can make to our nation's security, economic
health and environment. Let me provide some more details about how the
Alaska Natural Gas Pipeline will benefit America in each of these
areas. First, some brief background.
During the 1990's United States natural gas production grew, on the
average, less than 1% a year. At the same time, U.S. consumption grew
at about 1.4% a year. By 2025 it is expected that total U.S. natural
gas consumption will be about 35 Tcf or about 26% of all U.S. delivered
energy consumption. Such a demand level represents over a 50% increase
from the 2003 level. Domestic gas production is expected to increase
much more slowly than consumption, rising from 19.5 Tcf in 2001 to 26.4
Tcf in 2025. Indeed, depletion rates for new gas wells have been
increasing in recent years. It doesn't take an advanced degree to see
that we will have a supply gap of almost 10 Tcf per year by 2025. Where
will the supply to meet demand in 2025 come from? A portion from
imports. Imports now contribute about 16% of our natural gas supply; by
2025 they are expected to contribute about 23%. Canada will be the main
source of the imports with an important part of the increased Canadian
imports coming from the MacKenzie Delta Pipeline and the Scotian Shelf
in the offshore Atlantic. Just over half the increase in imports is
expected to come from LNG. The remainder of our gas supplies must then
come from increased U.S. production. The increased U.S. production is
expected to largely come from two sources; unconventional sources like
tight sands gas in the Rocky Mountain region and the large natural gas
deposits known to exist in my State of Alaska. Interestingly, both
conventional onshore non-associated production and conventional
offshore non-associated production will increase between now and 2025,
but their share of total U.S. production will ultimately decrease.
Thus, gas from unconventional sources and our large natural gas
reserves in Alaska are crucial if our nation is to meet the anticipated
supply gap.
With that background, let me explain how building the Alaska
Natural Gas Pipeline will help our economy, benefit our environment,
create new jobs and enhance our nation's security.
Let's start from a ``macroeconomic perspective.'' We need
reasonably priced energy to regain and sustain our economic growth.
Chairman Greenspan clearly recognized this when he testified before
Congress on several recent occasions concerning the very significant
negative impact tight and expensive supplies of natural gas have on our
economy. Further, studies have suggested that reasonably priced energy
supplies are a crucial part of an effective policy of full employment.
Indeed, periods of sustained economic growth in America have been
characterized by stable or declining prices for energy. Examples abound
of the importance of reasonably priced natural gas to our economy.
Natural gas is a critical feedstock for much of our chemical industry;
we've all seen the devastating impact recent high natural gas prices
have had on this and related industries. It is also an important input
in many manufacturing industries. Thus, assuring an adequate,
reasonably priced supply of natural gas is crucial to preserving the
well paying jobs in our manufacturing sector.
Further, an adequate, reasonably priced supply of gas will help the
many other industries which rely on electric power to remain
competitive in a global marketplace. The so-called ``demand
destruction'' and movement of jobs overseas that is occurring because
of tight and expensive gas supplies is all too apparent in many parts
of our country. Finally, Alaska's natural gas will also help keep the
rates consumers pay for power and to heat their homes low. Over 60
million Americans rely on natural gas to heat their homes. We need to
assure these homeowners a reliable, reasonably priced supply of natural
gas. A reasonably priced supply of gas will allow homeowners to devote
a greater portion of their disposable income to other pursuits which
will benefit the economy.
Alaskan natural gas is an also important part of our national
environmental policy goals. Natural gas is the cleanest burning fossil
fuel. As a so-called ``premium fuel'' natural gas can displace energy
sources with higher emissions. Thus, using natural gas can help us
achieve our clean air goals. It can also reduce environmental
compliance costs for a number of industries, including the electric
power sector. In fact, the great majority of planned new electric
generating plants will rely on natural gas. It just makes plain good
environmental sense to make sure these new generating facilities will
have an adequate supply of gas. Indeed, this is part of the reason why
the Alaska Gas Pipeline has the support of many environmental groups.
The job creation potential of building and operating the Alaska
Natural Gas Pipeline is substantial and widespread. A recent study
completed by the National Defense Council shows that the total number
of new jobs created directly and indirectly from construction of the
Alaska Natural Gas Pipeline could reach 1.1 million--a very substantial
number of new jobs in an economy that has recently lost several million
jobs. Let me focus on the new jobs that, according to the National
Defense Council study, will be directly created by the pipeline
construction in the home states of members of this Subcommittee; Texas
will gain around 180,000 new jobs; Virginia about 4,500. In the west,
California will gain over 100,000 new jobs, Arizona almost 3,000,
Oregon around 7,500, Idaho about 3,000, Oklahoma over 14,000 and New
Mexico about 2,000. In the Midwest, Missouri will add around 5,000 new
jobs, Ohio around 8,700, Michigan about 8,000 and Illinois around
13,000. In the east, North Carolina will gain close to 6,000 new jobs,
New York about 30,000, Maryland around 4,000, Maine nearly 700 and
Pennsylvania gains over 45,000 new jobs. Finally, in the south, Georgia
should add around 12,000 new jobs, Florida about 9,000 and Louisiana
gains more than 12,000 new jobs.
It is also important to remember that these new jobs will generally
be high-paying professional and trades employment. Jobs that families
can count on; jobs they can build their futures around. The fact that
the pipeline will generate higher income jobs for Americans has another
beneficial impact. State governments should see additional revenues of
about $1.7 billion a year while federal revenues should increase by
about $1.1 billion a year.
Alaskan gas will provide a secure, stable, domestic source of
supply that will enhance U.S. energy security. The value of this
secure, domestic source of energy on our foreign policy options and
national security cannot be overestimated. As I mentioned, imported LNG
will be supplying an increasing amount of our natural gas needs over
the coming decade. Much of this LNG will come from unstable regions of
the world. Serious questions have been raised about whether some of the
revenues we send to these regimes to pay for the energy finds its way
into the hands of terrorist organizations. Further, we already import
well over half our petroleum. Do we really want to be dependent on
overseas sources for the majority of our natural gas as well? Building
the Alaska Gas Pipeline will significantly diminish our need to import
LNG and keep American dollars in the U.S.
Alaskans will also benefit from construction of the pipeline. The
energy bill includes provisions allowing individual Alaskans, Alaskan
Native Corporations and Alaskan owned corporations to have ownership
opportunities in the pipeline. Alaskans will also have the opportunity
to get jobs building the pipeline. Further, Alaskan industry and
residential natural gas users, like other Americans, will benefit from
the availability of this new natural gas supply.
Let me also remind everyone of the interest shown in this project
by the private sector. A consortium of major producing companies,
Conoco Phillips, BP Exploration and Exxon Mobile have filed
applications with the State of Alaska to build the pipeline.
TransCanada, a pipeline company with vast experience in the North
American natural gas market and the holder of the existing U.S. and
Canadian Alaskan Gas Pipeline construction certificates has indicated
its intent to file for the necessary authorizations to build the
pipeline in Alaska. Further, Enbridge, a Canadian company with
extensive pipeline holdings in Canada has also announced it will file
for the necessary governmental authorizations. Thus, there is no
shortage of interest in the private sector on building this project.
However, all these potential project sponsors have stressed the
necessity of Congress enacting the regulatory and judicial streamlining
and fiscal incentives in the energy bill in order for the construction
of the pipeline to go forward. I urge you and the other Members of the
House to continue to work with us to get final passage of an energy
bill which includes this package of judicial, regulatory and financial
incentives so that we can get this project going now.
Finally, proposals to build an Alaskan LNG project have been
offered. The proposals contemplate building a pipeline from the Alaskan
North Slope to Southcentral Alaska. A gas liquefaction facility would
be constructed there and the North Slope gas would be transported as
LNG to the West Coast markets in the Lower 48 states. Thus, there is no
lack creative approaches to bring Alaska natural gas to market.
In conclusion, the Alaska Natural Gas Pipeline is one of those all
too rare examples of a project that is a winner from every perspective.
It will help us achieve our environmental goals; it will help our
economy by creating a large number of new, well paying jobs and it will
enhance our national security.
Mr. Chairman, I again thank you and this Subcommittee for inviting
me to testify this morning on this critically important national
project. I look forward to working with the House and my Senate
colleagues to enact legislation bringing all the benefits of the
pipeline to my constituents in Alaska and to our entire nation.
Mr. Hall. Well, we sure thank you. And before we recognize
Chairman Barton, let me just say that what you have said is
well said, and you touched all the bases I think; national
security, the energy's importance, the lack of confidence in
the present supply and almost suggested a Monroe Doctrine in
adverse or inverse hands on this hemisphere. Because we have
the energy right here if we just can find the methods and the
ways and somebody to fade the odds that it is going to take up
there to make this thing happen. And you have presented it very
well, and we appreciate it.
And your entire speech and words will be put in the record
for everybody to read.
And at this time I am honored to have the chairman of the
Committee on Energy and Commerce, Mr. Joe Barton, to recognize
him for as much time as he wants. I could say 3 minutes or 7
minutes, but he is going to take all the time he wants anyway,
so we will just recognize him.
Mr. Chairman, glad to have you here.
Chairman Barton. Thank you, Mr. Chairman.
I am just going to put my opening in the record.
I want to welcome Senator Murkowski to the committee. We
have had your father here before when he was a Senator. He is
doing an excellent job as Governor. We are glad to have you
here in Washington representing Alaska.
I support the Alaska natural gas pipeline. We need to find
a way to get the energy bill out of your body so we can get it
on the President's desk. If we can do that, that will help make
this project a reality.
So I am going to yield back, Mr. Chairman. But I put my
opening statement in the record.
And I have got a hearing downstairs on Medicare Physician
Reimbursement, so I am going to have shuttle back down there.
But we appreciate you doing this hearing.
And, again, welcome Senator to the House Energy and
Commerce Committee.
[The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy
and Commerce
Thank you, Mr. Chairman, for holding this hearing to determine the
current status of the Alaska Natural Gas Pipeline. During the energy
conference negotiations in the 107th Congress and last year in the
108th Congress, there have been many heated discussions about whether
the Alaska pipeline will ever be built without significant governmental
assistance. Even before the ink was dry on the H.R. 6 conference
report, critics of the provisions for the Alaska natural gas pipeline
project were howling that those provisions were insufficient to prompt
the construction of such an enormous project.
Now, after dust has been collecting on a yet-to-be-enacted H.R. 6
conference report for the past several months, headlines from major
newspapers report that a deal on building the pipeline is imminent. The
first such news report was that MidAmerican was ready to sign the deal
after having worked with the State of Alaska pursuant to that State's
Stranded Gas Act. Now, we hear that TransCanada and Enbridge are vying
for the right to proceed with the State of Alaska. I have also heard
that the producers were negotiating on a separate track with the State
of Alaska. However, despite this flurry of activity, there have been no
filings with the Federal Energy Regulatory Commission.
We need to know if this project can and will proceed even in the
absence of federal legislation. Over 60 million homes in the United
States are heated with natural gas. An ever increasing number of
electric power generators use natural gas to produce electricity.
Thousands of jobs hang in the balance in the chemistry and fertilizer
industries because of high natural gas prices. Something has to be done
to bring more supply on the market or our American way of life will
suffer.
It is estimated that a pipeline from Alaska's North Slope will
bring 4 to 6 billion cubic feet of natural gas per day into the lower
48, which represents approximately 10% of our daily consumption of
natural gas. It is not a question of whether we need the gas. It is a
question of when we will get it.
I look forward to hearing from the witnesses and thank you again
for holding this hearing.
Mr. Hall. Although we do not have any set questions for the
Senator, I recognize Mr. Boucher for any statement he may want
to make or any question he may have.
Mr. Boucher. Well, thank you very much, Mr. Chairman.
I join with you in welcoming the Senator this morning. And
thank you for your expressing the views.
Do you have any comments you would like to make on the
prospects for dislodging H.R. 6 and moving forward with this in
a legislative vein?
Senator Murkowski. Comments about the prospects? I guess I
look at this and say we have got to figure out a way to
dislodge. We have got to figure out a way to successfully move
forward an energy bill or provisions of an energy policy for
this country.
Now, I think everyone on this subcommittee understands and
appreciates the need for affordable, reliable energy across
this country. And we are getting to a point where if we do not
act as a Congress, if we do not act to ensure those reliable
affordable sources, our constituents, the American consumer is
going to say wait a minute. What is going on? What is happening
when we have these shortages or the outages here in the
northwest? What is happening in California? What is going on
when I look at my utility bills and see the high, increasingly
high prices of natural gas. And I think that there is a
pressure building on all of us to move this legislation
through.
It is getting to the point where it is just too important
for us not to do it. We have got to be a little bit creative on
our side, and I take up that challenge.
Mr. Boucher. Thank you very much.
Senator Murkowski. Thank you.
Mr. Boucher. Thank you, Mr. Chairman.
Mr. Hall. Thank you.
Mr. Shimkus, do you have questions?
Mr. Shimkus. Just a statement, Mr. Chairman.
I want to let the Senator know that my father-in-law worked
on the first Alaska pipeline, and he was one of thousands of
citizens from the Lower 48 that moved up to help construct and
build, was then a monumental undertaking, which has proved to
be a very successful undertaking.
So I guess you could say my children are grandchildren of
the pipeline. And so we know it can be done successfully and
with hard work and diligence. And I am very proud of the fact
that I can say that my father-in-law was very involved in that
process.
The one question, just following up on my colleague Mr.
Boucher's question, if H.R. 6 was allowed to be voted on the
floor of the Senate, are there enough Senators to pass it? In
other words, if the filibuster was broken, is there a majority
of Senators that would support the basic bill?
Senator Murkowski. We support the basic bill. We recognize
that what you have sent over to us, we have seen some different
iterations of it. There is still some issues, as you know, on
the Senate side with H.R. 6. And we are attempting to work
through those issues.
I think I can say without reservation that when it comes to
the provisions that provide for the authorization of a natural
gas pipeline, it is probably the least controversial area of
the bill, if you will. People recognize that we need to do what
we can to provide for increased domestic supply, particularly
of natural gas. So I am more optimistic about that component of
the energy bill than some of the others.
Mr. Boucher. And I think the public agrees with your
statement that the last thing we want to be is more reliant on
imported fuels. And if we do not move in this direction, we
will be importing natural gas from countries, as you
identified, could be very unstable. And as we look at the oil
fuel program now that occurred with U.N. and Iraq, who is to
say where that money would end up. And so I think we should
really move to control our own destiny then to be reliant on
other folks.
Thank you, Mr. Chairman. I yield back.
Mr. Hall. Thank you.
Ms. McCarthy, do you have any questions?
Ms. McCarthy. Thank you very much. And thank you, Senator,
for advancing the cause.
I wanted to explore with you the price support mechanism
controversy, because I understand Canada opposes it but in a
press report Conoco Phillips has publicly confirmed that it
will not participate in a pipeline project without a price
floor mechanism. ``We are not going to advance the project
without risk mitigation,'' is the quote from one of the
executives of the company.
How do you see us resolving that dilemma should legislation
pass and the possibility exists, we can then encourage such
progress?
And second, I was heartened by the remarks in your
testimony about the jobs creation. And in Missouri you
anticipate 5,000 of those. I wonder if you would elaborate on
that for me. My steel mill closed and those workers have gone
to other places or careers or retirement. So, I am curious
about what those 5,000 new jobs would be.
Thank you.
Senator Murkowski. Well, first as to the price support. You
have identified the sticking point, the controversial item when
it comes to the tax incentives.
As you may know, we have on the floor of the Senate right
now a FSC/ETI bill and contained in that were the financial
incentives, the tax incentives that the Senate Finance
Committee had moved forward. They have now been placed on FSC/
ETI. We are hopeful that we will have an opportunity to take
that up and resolve that this week.
But the one issue of the price support is something that
has been a bone of contention for some and has generated the
most amount of controversy.
We do have all three tax incentives currently in FSC/ETI.
The price support, accelerated depreciation as well as the
assistance for the conditioning plants. And so I am hopeful
that we will be able to keep all of these tax incentives that
are currently in the FSC/ETI, keep them in the bill.
The comment that you have made and I think that there might
be people here this afternoon who can speak more directly to
the need that they perceive for the floor, for that price
floor. It is something that we need to do all that we can at
the Federal level to help facilitate the construction of this
incredibly massive project. We are talking about a $20 billion
project. We have got the loan guarantee in there, 80 percent
loan guarantee; that certainly helps. But when you acknowledge
that a project of this size this nation has not seen, you are
talking about 3500 mile pipeline. And so, again, anything that
we can do at the Federal level to help facilitate that, I think
will be necessary.
Now, your question about the jobs and how they are
identified in the specific States. It was the----
Ms. McCarthy. My State is Missouri, by the way.
Senator Murkowski. Right. I am just looking to the name of
the report here. It was the National Defense Council that
prepared the analysis for us based on the individual States,
the industries within those States and what we could anticipate
in terms of the job creation.
Now, the fact that you have had your plants shut down, I do
not know how the Defense Council calculates their number based
on what was there in the past or what needs to be there. We can
get for you the specifics on the details, but the numbers are
pretty big regardless of the State that you are coming from.
Ms. McCarthy. No. It was very heartening in your report to
see that. So we will pursue with your staff----
Senator Murkowski. Good.
Ms. McCarthy. [continuing] how they arrived at that and
maybe it was before the plant closed.
Senator Murkowski. I do not know, but we can find that out
for you.
Ms. McCarthy. Mr. Chairman, I know I have taken some time,
but I just did want to follow up on the diplomacy with Canada.
I quite agree these support efforts for the companies engaging
in this project are certainly warranted. How do we address the
diplomacy issue with Canada who is saying--do we just reroute
the pipeline or----
Senator Murkowski. Well, Canada's objection is to the price
floor. We have had, I think, very good relationships, very good
discussions with Canada about the project. As the chairman
mentioned, in the energy bill we inserted, I was the one that
inserted the Sense of the Senate as it related to the MacKenzie
River Delta project acknowledging that the Alaska line should
not supplant the Canadian line; that in fact we will need the
gas from Canada from the MacKenzie Delta. We will need Alaska's
natural gas as well. These are not competing projects. These
are projects that will compliment one another.
And I think if you ask this question of some of the
Canadian folks this morning, I am hoping that they will say the
same thing. But we have had very good discussions about the
project.
We recognize that we are calling this the Alaska Natural
Gas Pipeline. But when you appreciate that a major portion of
this pipeline runs through a foreign country, we have to make
sure that the terms of agreement work for those of us in Alaska
and in the United States, as well as our Canadian partners. And
we are working, I think, very well with Canada on this project.
They understand the importance to North America.
Ms. McCarthy. Thank you, Senator.
Thank you, Mr. Chairman.
Senator Murkowski. Thank you.
Mr. Hall. Thank you.
We have assured the Senator we would have her out of here
of quarter 'til, and it is 20 'til, so we have 5 minutes to
divide between Mr. Otter and Mr. Issa, and Mr. Whitfield. I
thought he left. Now he is back.
Mr. Whitfield. I have no questions.
Mr. Hall. You each have a minute and 45 seconds apiece. And
part of that is gone.
Mr. Otter. Senator, I think that we did not talk also about
outsourcing on jobs lost. I think Ms. McCarthy's comment just
about the potential and what that can do for creating jobs,
certainly jobs in constructing the pipeline itself. But having
that source of energy available and seeing what has happened to
some of our domestic operations, you know, I am fond of saying
because I know pretty well that in Idaho it takes 27,000 BTUs
to make one pound of French fries. Our French fries are moving
north to Canada where the gas is and where they can still grow
potatoes, unfortunately. Fortunately for Idaho, unfortunately
for Alaska you cannot grow potatoes in Alaska.
Senator Murkowski. We do a little.
Mr. Otter. Well, you need 120 frost free days.
But anyway, so I think it will be a real error on our part
not to include those arguments of your fellow Senators and with
our fellow House Members. Because outsourcing is a big problem,
but today what we are seeing in outsourcing and the loss of
jobs, shutdown the potato plants in Idaho, is not because of
the cheaper labor that they may find someplace else, not even
because of the regulations, government regulations that they
may find someplace else. But it is because of the availability
of energy. We do not a plywood factory left in Idaho. There is
33 operations that shut down since 1989 in Idaho. Between 1989
and 1990 there were 33 operations shut down because it takes
235,000 BTUs to make a sheet of 4 by 8 by three-quarter inch
exterior plywood.
So I think it is a big mistake if we do not talk about the
outsourcing and with this available natural gas will bring
about a reversal of part of that.
Finally, let me just mention the vulnerability that we now
have with our fertilizer, with our gas-based fertilizers.
Almost every ammonia plant has shut down in the United States
today. We are now with our agricultural industry, we are now
dependent on Russia and/or Trinidad. Because Russia has got .90
cent gas and Trinidad has got .50 cent gas, and it takes 33,000
cubic feet of gas to make one ton of ammonia fertilizer, a
fertilizer which is terribly important to our agriculture
industry.
So, I appreciate your comments and I appreciate your
support for it, but I think we need to broaden that to say this
is an opportunity for us to beckon back some of the outsourcing
that has already happened.
Senator Murkowski. Well, and I appreciate that comment, Mr.
Otter. And it is something that we need to say all the time
because as we see more and more plants and facilities shutting
down and moving elsewhere, we are not quite sure where; maybe
it is Canada, maybe it is elsewhere because of the cost of
energy. And I started out my statement saying that there is
nothing more important that we can be doing, when you think
about the health of our national economy. The economy just is
not going to work, nothing is going to tick, unless we have got
the businesses here, unless we can operate this country, unless
we can move and power this country, unless we can keep our
lights turned on. Everything else is secondary. And yet we
cannot get folks focused on an energy policy for this country.
We are not connecting the dots when it comes to energy. And
I do not want to think that we got to get to a crises, but we
are approaching a crises when our jobs are leaving this
country, when we cannot set up the businesses that we need to
set up, we need to do more.
And the Alaska Natural Gas Pipeline is not going to solve
all the problems of the world; we are not so naive to suggest
that. But it will help. And we need to as a country, certainly
as a Congress we need to say this is important in order for the
health of this country, the health of this economy across the
States. And we must be focusing more on this.
I appreciate the efforts that the House has made on this
issue. You continually do the good work and are successful in
moving forward energy policy. And I greatly appreciate the
efforts of so many of you.
So, thank you for bringing up that very important issue.
Mr. Issa. And Senator, I will be very brief in the
remaining 30 seconds.
Thanks. They will give us a little more if you will,
Senator.
First of all, as a Californian I want to thank you for the
100,000 jobs in advance. You know, California is in fact the
consumer of that energy. As you know, California has some
resources, but no willingness to tap it is own natural gas in
any meaningful additional way. So we are going to be absolutely
dependent upon outside oil.
We have exceeded what can come in from Texas into
California without a new pipeline.
So one way or the other we are going to be importing either
LNG or with a new pipeline, natural gas into California or the
lights will go out again. And as a member of delegation from a
State in which the lights did go out, we are very aware of the
impact it has to the economy. Jobs have fled California, and
they only now coming back based on the promise that the lights
are going to stay on.
I do have sort of a question and a comment related to the
Canadian concerns and this whole question of a base pricing
guarantee. And that is, if we know we are going to consume it
all, is there any reason that we cannot grant Canada, if you
will, an equal guarantee. Obviously, not tax relief but an
equal guarantee of a base price and the other half of it as a
California, where is the top? Ten years from now what am I
going to be paying for natural gas through that pipeline, and
is there any assurance that essentially I am not funding
against the negative while getting no benefit if in fact what I
project is going to happen, which is we consume allow of
Canada's and all of Alaska's and still need more, are we going
to find ourselves where California has found itself recently,
which is sometimes paying eight times more for natural gas
than, if you will, the average annual rate that as historic?
Senator Murkowski. Well, of course, there is no certainly.
We do not know. I do not have my crystal ball out to be able to
predict that.
Mr. Issa. This committee requires that you bring it when
you come, Senator?
Senator Murkowski. Gosh, I forgot.
But, you know, will we consume it all? Yes. Yes, we will
and then some. And that, as I just said, Alaska's natural gas
are not going to completely eliminate or completely meet the
demand here in this country. We will have to bring in LNG from
outside, from foreign sources. We recognize that.
And as much as I want to say we can be energy independent,
I think there is a reality that we have worked ourselves into a
situation with oil, clearly and we are headed that direction
with natural gas if we do not do something now. And that is why
I have said I believe we have a narrow window of opportunity
for getting Alaska natural gas on line. If we do not move
relatively quickly in the next several years, what you will
have is an effort to meet the demand, you will have LNG
infrastructure built up on your coast should they accept it, on
the East Coast, in the Gulf, all around in order to accept--it
will have the terminals and spend the money on the
infrastructure. We will enter into more long term contracts
with countries like Quatar, Indonesia to accept the natural
gas. And the natural gas up on Alaska's North Slope will again
be stranded.
What is it that we have to do? I think at this point we
have to do all that we can in order to facilitate, encourage
and just make happen natural gas coming down from the Slope.
Mr. Issa. Well, Senator, I thank you for those comments.
I will mention that my wife and son and I had the privilege
of driving literally up to Prudhoe----
Senator Murkowski. Well, good.
Mr. Issa. Not a congressional tour, but on our own dime,
and meeting with the people of your State who overwhelming
support these kinds of projects done in environmental sensitive
ways. And it was a real eye opener to find out that the only
place people object to this project are in places where they
have no idea what Alaska looks like and how your State has
dealt with making sure that we can get the energy and protect
the environment. And I thank you for being a champion for that.
Senator Murkowski. Well, thank you for coming and visiting
in that manner in that way, and spreading the good word. We
appreciate it.
Mr. Issa. Thank you.
Thank you, Mr. Chairman.
Mr. Hall. Senator, your time is up. If you do need to go I
will ask Mr. Whitfield and Mr. Walden to submit to you
questions for you to answer.
Senator Murkowski. That would be appreciated.
Mr. Hall. Is it your position that you do need to stay
within the time limits?
Senator Murkowski. I do have to get back over to the
Senate.
Mr. Hall. We thank you very much. Good testimony. Well
presented.
Senator Murkowski. Thank you.
Mr. Hall. And we are grateful to you.
Senator Murkowski. Thank you for all that you are doing,
Mr. Chairman. Greatly appreciate it.
Mr. Hall. Get that Senate moving over there. Find those two
votes, if you have to send a posse.
Senator Murkowski. I am going to go to work right now.
Mr. Hall. All right.
Mr. Issa. Get over and get the Senate moving, there you go.
Senator Murkowski. Thank you.
Mr. Hall. All right. We now have my very favorite witness
here. Named after a fellow I served with long ago, Patrick
Henry. Well, Patrick Henry Wood the Third. He is Chairman of
FERC and is the longest serving appointment of Governor Bush,
of President Bush's. He is a native of Texas. Received a B.S.
in civil engineering from Texas A&M University, the university,
and J.D. from Harvard Law School.
He has always been one that believed that competition could
do better than regulations. And throughout his career he has
worked to advance pro-customer and market oriented vision of
utility regulation. He is my kind of bureaucrat, and I am glad
to have you.
Pat Wood, we recognize you for your presentation.
STATEMENT OF HON. PATRICK WOOD III, CHAIRMAN, FEDERAL ENERGY
REGULATORY COMMISSION
Mr. Wood. Thank you Chairman Hall. That has a nice ring to
it. Congratulations on your new posting as well.
It is a tough act to follow Lisa Murkowski, but I will give
it a shot. What she was talking about, and I think from the
questions here from you all, it is clear that you all
understand the significant role that natural gas plays in our
Nation's energy future, just like it does in the Nation's
present. It is used in so many processes, agriculture,
chemicals, metals, manufacturing, other heavy industry. A lot
used in electric generation, certainly, as well as the
traditional uses for home and residential and commercial
heating purposes. I think we are all getting the last bills
from the winter and recognizing that in fact the price of this
commodity, which yesterday at the Houston ship channel, which
is kind of a major liquid pricing point, was $6.13 a 1,000
cubic feet. That is about three times what it was back when I
first came to town here in 2001. And that is a significant
impact on jobs, on energy usage, on the entre economy because
it is a fuel that is used for about one-quarter of our total
energy consumption in the country.
Well functioning energy markets need not just the
commodity, but they need the commodity to get to where it needs
to be got. And infrastructure is a real key issue, not only for
us at the FERC but across the industry. A lot of people are
investing billions and billions of dollars in energy
infrastructure and the pipeline needs of the country, not just
from Alaska but across the country are today being met and
being met very well by the model that we have got that directs
resources and investment dollars where they need to be.
This project is unique. It is probably the biggest
engineering project. I think I read one of our fellow witness'
testimony; it is the biggest private sector investment in
infrastructure that we have ever had. It is the great pyramid
of North America and requires I think a significant amount of,
even for one who lives to see the market do a lot of things,
this one might need that extra help. And I think what you all
have considered, both on the House side as well as the Senate
side, in legislation to really facility this project not just
financially but legally to facilitate this project are very
important.
The proposed Alaska Natural Gas Pipeline Act which is
rolled in parts of the last several national energy bills is an
effort to apply many of the streamlining projects that were
used in the mid-1970's to support the Alaska Natural Gas
Transportation Act, ANGTA, and therein lines some of the
issues.
There was a certificate granted to one our witnesses on the
next panel to the predecessor company, the partnership, back in
the late 1970's, early 1980's. A certificate was granted under
ANGTA to actually do just this project. Prevailing price
conditions through that time period, 1980 and 1990's
particularly did not economically justify this project, and so
it's kind of set on the shelf. The prices that we have seen in
the last years certainly bring it back to being an economic
reality.
The proposed legislation would, among other things, require
our Commission to complete an environmental review and issue a
certificate to any proposal backed by an agreement with a
shipper of Alaska gas within 18 months of filing that
application.
A project of this size is significant. Eighteen months is
the press, but we are certainly up to the task.
It would also establish a Federal pipeline director with
sweeping authority to coordinate and control all Federal
activities relating to this project, establish our Commission
as the lead agency for environmental review purposes and, like
the ANGTA project did, would specify a strict compliance with
but also strict time lines on environmental review processes.
Another way that a pipeline could be built would be to
file, as all pipelines are today under the National Gas Act for
Section 7 authority, which our Commission is pretty adept at
doing.
We are relatively clear, but not totally clear, that the
ANGTA the Act from 1977 would not necessarily bar the
Commission from considering a separate application if it came
forward under the National Gas Act, but we are not real clear.
And that could certainly something that would tie up this
project in courts. That is really what our general legislative
approach that I have testified on last year would be directed
toward, is not giving the Commission something that absolutely
needs to get going. But to really limit and to mitigate the
down sides of moving into the courts with a project of this
nature. Court review can kill a project. We have seen that
happen several happens.
Just the time lines to get to market on this one are
significant, probably if not a full decade, the better part of
it. And if that's limited up front or along the way, or called
into jeopardy, that just raises the cost of the project and
makes it uneconomic.
So as clear as Congress can be on what it wants our
Commission and the other Federal agencies to do with regard to
the permitting of this pipeline, and we think that the current
comprehensive energy act that has been considered by both
chambers of the Congress would address fully all of those
issues and allow an investor and sponsor of this project to
move forward and do so with confidence that provided the
environmental issues are satisfied and the other citing issues
are satisfied, that this project can go forward in an
economically and legally viable manner.
I mentioned in some my testimony some details about what
has happened along the way since the 1970's. Just to kind of
cut to the current timeframe, we have had a number of
applicants or potential applicants visit informally with the
Commission, the three people you are talking to on the next
panel being the primary three, but there have been others that
were contemplating different approaches to the pipeline project
in Alaska. And we stand eagerly waiting for one of them to file
an application with us so that we can get started here.
I think just to close my opening comments, Mr. Chairman,
there is probably not a single thing that the Congress can do,
and I would add to that even the important act of the
Electrical Liability statute and things like that that are
certainly important; there is not a single thing we can do that
10 years from now we will look back and say we needed to be
done more than project.
It has got to get going. The use of natural gas, which has
tremendous advantages in combination with liquified natural gas
imports, which are a necessity. I think the ``if'' is kind of
on the side now. Liquified natural gas is a when issue, a W-H-
E-N and a W-I-N issue for all of us. And we are permitting
facilities as we speak going through the very lengthy and
necessary environmental safety and landowner issues on the
liquidified natural gas permitting processes as well. We need
them both. We need Arctic gas, there is other Canadian gas
available. The Canadians have a lot of need for their own gas,
so we are glad to get what they do not need as an export from
Canada. But we need our own gas from Alaska. It requires going
through Canada to get here.
I have made a big effort to make sure that we have a very
close working relationship with our Federal and provincial
regulators in Canada in anticipation of this project. In fact,
I am going this weekend to Nova Scotia to meet with those
groups as well, and the Alaska and Canadian gas pipelines are a
big issue every time we meet.
And I think this year we were under the firm expectation
that there well may be an application in the near future.
So our Commission, my fellow colleagues who send their
regards, and our staff stand ready to process this pipeline in
the time lines envisions in the revised act, the 18 month time
line. It is a lot of work, that is a real environmentally
sensitive part of the world and we are committed to doing the
right job, as Congress asked us to do in the 1970's. We did it
then and we can do it again.
I am here to answer your questions. And that is it.
[The prepared statement of Hon. Patrick Wood, III follows:]
Prepared Statement of Hon. Pat Wood, III, Chairman, Federal Energy
Regulatory Commission
I. Introduction and Summary
Mr. Chairman and Members of the Subcommittee: 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 has estimated that natural gas currently
represents 24 percent of the energy consumed in the United States, and
that demand may approach almost 30 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 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.
Well-functioning energy markets require three basic things: an
adequate energy infrastructure; clear and balanced rules that permit
efficient commerce between market participants; and effective
regulatory oversight. These key elements have led to robust competition
in energy markets, with resultant benefits to customers. Toward that
end, we will make every effort to process and act upon any applications
for Alaska gas transportation projects as efficiently as possible,
working with the applicants, other federal and state agencies, Native
Americans, shippers, end users, and other interested parties, to ensure
timely, reasonable decisions.
II. Statutory Background
Applications for authorization to construct and operate an Alaska
natural gas transportation project may currently be filed under either
the Natural Gas Act (NGA) or the Alaska Natural Gas Transportation Act
(ANGTA). I will address these statutes in turn. I will also review
proposed legislation which I understand has been submitted to Congress
for its consideration (the proposed Alaska Natural Gas Pipeline Act).
A. The Natural Gas Act
Under Section 7(c) of the Natural Gas Act, the Commission issues
certificates of public convenience and necessity authorizing the
construction and operation of natural gas pipelines. The Commission
also establishes initial rates for new facilities.
Most natural gas pipeline facility construction is authorized under
the case-by-case certificate review process embodied in Subpart A of
Part 157 of the Commission's regulations. 18 C.F.R. Part 157 (2001).
The Commission reviews numerous aspects of a proposed project,
including the route, environmental impacts, engineering and design, gas
supply, market, cost, financing, construction, operation, and
maintenance, revenues, expenses, and income, and tariff and rate
matters.
During the last 20 years, the Commission has moved increasingly to
promote competition in the natural gas industry. The Commission has
encouraged pipelines subject to its jurisdiction to unbundle their
production, sales, and transportation functions, and to provide
transportation on an open-access basis. Almost all have done so. Under
the open-access policy, shippers are able to buy gas directly in
production areas and separately obtain transportation on interstate
pipelines on an equal footing with other shippers. Moreover, in
response to competition, the interstate pipeline transportation grid
has expanded significantly, offering shippers more flexibility in their
choice of supply areas, and creating new paths from supply areas to
additional markets.
When the Commission receives an application under Section 7(c), it
issues public notice of the application in the Federal Register, and
notifies potentially-impacted landowners of the proposed project.
Interested persons may file motions to intervene or protest. Generally,
Commission staff requests from the applicant any additional information
it needs to fully understand the application, considers issues raised
by other persons, and conducts a thorough environmental review. A
certificate order is then drafted, containing whatever terms and
conditions are deemed necessary for the public convenience and
necessity. The Commission can set an application for evidentiary
hearing before an administrative law judge, if there are material
issues of fact that cannot be resolved on the basis of the written
record, although such hearings regarding construction applications are
rare.
I am proud of the prompt manner in which the Commission in recent
years has acted on natural gas pipeline applications. For major
projects, we have been making every effort to act within 18 months of
the time that the application is complete, which, given the complexity
of these cases, is quick indeed. This requires a significant commitment
of time and resources, but we know that swift regulatory action is
necessary for properly functioning markets.
B. The Alaska Natural Gas Transportation Act
In response to the energy shortages of the 1970's, Congress passed
ANGTA, in an effort to establish streamlined procedures for the
consideration, approval, and construction of a natural gas pipeline to
bring Alaskan natural gas to the Lower 48 States (the Alaska Natural
Transportation System, or ANGTS).
ANGTA established a unique process for selecting an ANGTS and
expediting its construction and initial operation. Under this process,
the Commission was directed to recommend to the President a specific
transportation proposal. The President then would submit a decision to
Congress, and Congress would approve or disapprove that decision.
Thereafter, the Commission was to issue an NGA certificate for any
approved project. ANGTA also established other procedural mechanisms to
assist in the completion of an ANGTS, including requiring all federal
agencies to expeditiously grant necessary authorizations for the ANGTS,
establishing the Office of the Federal Inspector to oversee the timely,
efficient, and environmentally sound construction of the ANGTS and to
coordinate federal efforts related to the project, and strictly
limiting judicial review.
In 1977, in the President's Decision and Report to Congress on the
Alaskan Natural Gas Transportation System (President's Decision),
President Carter designated the route and selected the project sponsors
for construction of the ANGTS, running 4,787 miles from Prudhoe Bay,
south to near Fairbanks, and then southeast along the route of the
Alaska-Canadian highway to near Calgary, Alberta, where it would split
into two legs, one continuing to California in the West, and the other
to Illinois in the Midwest.
The President's designation of the ANGTS route and choice of
sponsors to construct and operate it were closely coordinated with the
government of Canada and followed adoption of an Agreement Between The
United States And Canada On Principles Applicable To A Northern Natural
Gas Pipeline (Agreement on Principles). Pursuant to the Agreement,
Canada enacted the Northern Pipeline Act, which is similar to ANGTA.
On December 16, 1977, the Commission issued a conditional
certificate under ANGTA and the NGA to designate project sponsors. (The
project sponsors have changed over the years and the certificate is
currently held by the Alaska Northwest Natural Gas Transportation
Company, a partnership between Foothills Pipelines, Inc. and
Transcanada Pipelines Limited). This conditional certificate, which
authorized the project sponsors to construct and operate the pipeline
system to transport gas from Alaska's North Slope to the Lower 48
States, was actually the initial step in the process of issuing a more
detailed final certificate. The conditional certificate was followed by
extensive procedures to establish further conditions for the project,
including the design specifications and initial system capacity of the
Alaskan segment of the ANGTS and an interim rate of return mechanism
applicable to the segments of the ANGTS located in the United States.
The ANGTS sponsors, in order to facilitate financing for what would
be the largest privately financed construction project in U.S. history,
proposed to build the project in two phases. Phase 1, or the
``Prebuild,'' completed in 1982, is an approximately 1,500-mile
segment, which presently delivers large volumes of Canadian gas from
Alberta to Stanfield, Oregon in the Western Leg, and to Ventura, Iowa
in the Eastern Leg.
At the time work on Phase I was being completed, the energy outlook
of the United States and Canada changed substantially. Natural gas
discoveries in Canada and in the Lower 48 States ballooned, and world
oil prices moderated. With this changed natural gas market, the ANGTS
sponsors announced in April 1982 that the Alaska portion of the project
(Phase II) would be substantially delayed. No final certificate for
Phase II was requested or issued before proceedings came to a halt in
1983.
On January 18, 2001, a report on ANGTA prepared by Commission staff
was submitted to Congress. 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
As I understand the proposed Alaska Natural Gas Pipeline Act, which
has been included in the last several versions of the National Energy
Bill, 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.
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.
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 clarifies that the Commission has the authority to
coordinate federal activities with respect to a proposal filed under
the NGA, and that the environmental record prepared by the Commission
will be the one Federal record. 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, and that
the role of the proposed federal coordinator is to supervise activities
other than the Commission's environmental review and issuance of a
certificate.
B. Issues with Respect to an ANGTA Application
As I explained earlier, the Commission granted to the ANGTS
sponsors a conditional certificate in 1977. Before the ANGTS could be
constructed, the Commission would have to issue a final certificate. A
renewed or revised ANGTS application could raise several issues. These
issues are discussed in detail in the staff report, but I will
summarize some of the key questions here.
1. Ability to Deal with a Revised ANGTS Proposal--The President's
Decision, which was issued pursuant to ANGTA and approved by Congress,
contains a number of conditions that on their face seem to affect
directly the Commission(s consideration of a renewed application to
complete the ANGTS. Among other things, the President's Decision, in
addition to designating the sponsors and route for the pipeline,
specifies many aspects of the design, provides for a variable rate of
return as an incentive to limit costs, and determines that the required
environmental impact statements relative to an Alaska natural gas
transportation system have been prepared and are in compliance with
NEPA. Completion of the certificate process more than twenty years
after issuance of the conditional certificate could raise some
questions about aspects of the President(s Decision that could appear
to restrict the applicants( and/or the Commission(s ability to revise
the project in light of changes in the market, technology and
environmental circumstances.
ANGTA permits the Commission or another federal agency to amend the
ANGTS (15 U.S.C. 719g(d)), but restricts agency discretionary revisions
only to those that would not alter ``the basic nature and general
route'' of the ANGTS. The staff report noted that these provisions
leave it unclear as to what extent the project sponsors or the
Commission or other federal agencies could propose or authorize changes
to the ANGTS as outlined in the President's Decision. I observe,
however, that the term (basic nature and general route( is sufficiently
broad to encompass a number of update-related revisions that the
sponsors, the Commission or another federal agency could take upon
reactivation of the project. This becomes more difficult, however, if
revisions were to reasonably vary from the (basic nature and general
route( of the original project. In such event, Congressional guidance
would assist prompt processing of a reactivated project.
2. Environmental Considerations--The original environmental impact
statement (EIS) for the ANGTS project was prepared more than 20 years
ago by the Department of Interior and supplemented by the Commission's
predecessor, the Federal Power Commission. In 1980, the Commission
prepared a second EIS to consider the environmental impacts of a gas
conditioning plant that was proposed to be built, as part of the ANGTS,
at Prudhoe Bay.
ANGTA provided that a decision by Congress approving the
President's Decision designating an ANGTS was deemed conclusive as to
the sufficiency of the underlying EIS and that the EIS was insulated
from judicial review. Given that the ANGTS environmental documentation
is now more than 20 years old, a supplemental EIS may need to be
prepared before the Commission can issue a final certificate for Phase
II. It would expedite Commission review of a reactivated project if
Congress would clarify whether the original EIS is legally sufficient
or if a supplemental EIS should be prepared and, if so, whether the
supplemental EIS is also protected from judicial review.
3. Role of Other Federal Agencies--As noted above, coordinating the
roles of the various Federal agencies that have responsibility over
various aspects of such a proposal is critical to efficient, timely
review of any Alaska natural gas pipeline proposal. During the original
ANGTS proceedings, this coordination role was performed by the Office
of the Federal Inspector. The Office of the Federal Inspector was
abolished by Congress in 1992, and those functions and authorities were
transferred to the Secretary of Energy. I defer to the Secretary with
respect to any budgetary or other authority he might need to fulfill
the coordinating and compliance functions if the original ANGTS
proposal is renewed by the project sponsors.
C. Alaska Gas Pipeline Update
As I mentioned previously, there are currently no certificate
applications for an Alaska natural gas pipeline on file with the
Commission. Our staff and I are closely following the public
pronouncements of potential applicants, and stand ready to immediately
begin processing any application that is filed. We are also making
every effort to prepare to work together with other agencies that may
have regulatory responsibilities concerning a natural gas pipeline
moving gas from Alaska and Canada to the lower 48 states. Last year, I
signed a memorandum of understanding with the Chair of the Regulatory
Commission of Alaska with respect to coordinating our two agencies
regulatory activities. My staff has worked with the Interagency Task
Force, headed by the Department of State and the Department of Energy,
pursuant to the President's National Energy Strategy, to prepare to
coordinate Federal activities with respect to an Alaska Natural Gas
Pipeline. Our environmental staff toured the pipeline route last year
and met with Federal and State agencies, Native Alaskan groups, and
other stakeholders. My staff has also had discussions with Canadian
agencies, particularly the National Energy Board, in order to lay the
groundwork for coordination between U.S. and Canadian regulators. We
are also monitoring technical developments, such as the testing of new,
more economical types of steel pipe that could be used in an Alaska
project.
The first steps in developing an Alaska natural gas pipeline
obviously lie with the project proponents. However, I assure you that
as soon as any application is filed with the Commission, we will
eagerly take up the challenge of processing it efficiently and
effectively.
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.
Mr. Hall. Pat, thank you very much.
And note the presence of Mr. Dingell, the ranking member,
who has heard your testimony and had it for observation
overnight.
I recognize Mr. Dingell for his time, opening statement, or
to begin the questioning of Mr. Wood, if you would like, Mr.
Dingell.
Mr. Dingell. I have no opening statement, Mr. Chairman,
other than the one which I would like to have inserted by
unanimous consent.
I do have a couple of questions for the Chairman, if you
please, Mr. Chairman.
And thank you for recognition.
First of all, Mr. Chairman, welcome to the committee.
Mr. Wood. Thank you, sir.
Mr. Dingell. In your statement you state that FERC
Commissioners and staff stand with President Bush and the
Congress in our commitment to ensure America's energy markets
function reliability at this crucial time and for many years to
come.
Have you had the opportunity to appear before the committee
since the Department of Energy released its final report on
August 14 entitled ``Blackout in the United States and
Canada,'' published May 31?
Mr. Wood. This is my first appearance since that time.
Mr. Dingell. Thank you, Mr. Chairman.
I understand you and the staff were intimately involved in
both the investigation and the final report to which I
referred, is that correct?
Mr. Wood. Yes, sir.
Mr. Dingell. Mr. Chairman, I note that on page 140 the
report contains 46 recommendations intended to preclude or to
prevent or minimize the event of future blackouts or at least
to diminish their scope, the very first of which reads as
follows:
``One. Make reliability standards mandatory and enforceable
with penalties for noncompliance.'' The recommendation then
states the U.S. Congress should enact reliability no less
stringent than the provisions now included in the pending
comprehensive energy bills H.R. 6 and H.R. 3004. Do you agree
with that recommendation.
Mr. Wood. I do agree with it. Yes, sir.
Mr. Dingell. Mr. Chairman, I note that recent actions in
the Senate indicates that a comprehensive energy bill continues
to struggle in that institution. In the light of relatively few
legislative days remaining to us, I think its prospects are
rather grim.
I would refer you now to a press article of January 7, 2004
which quoted you as saying you would support detaching the
reliability provisions from the comprehensive bill and passing
them separately. Do you still hold that view?
Mr. Wood. Yes, sir. I think we should. I would hope that
the other provisions could pass as well, including this
important on Alaska gas that are a part of the whole bill. But
the answer to that question was if the whole bill cannot pass,
then we definitely do need the electricity liability and the
other provisions that I mentioned in the answer to that
question.
Mr. Dingell. I thank you for that.
I would note that there is a question that concerns us all
at this time, and that is have the actions which have been
taken by this country since the last blackout which occurred
significantly moved to either prevent or minimize the level of
disruption that could occur, or to eliminate or minimize the
possibility of such a shut down of electric power service to
the United States occurring?
Mr. Wood. Yes, sir. I do think that we have made
significant progress. I would like to just take a second to
kind of lay out the areas.
The principal one is one that we are participating as a
support for is the NERC, the North American Electric
Reliability Council, is doing readiness reviews of the major
top 20 basically electric control areas of the country. That
accounts for about 80 percent of the population and in Canada
as well, North America.
Those readiness reviews are like oral examines for master's
candidate. They are 3 day reviews in each of the major area and
have done a significant job pointing out both deficiencies as
well as pointing out where certain areas are doing a good job.
Those are becoming, I think as of this week, public; those
report cards on each of the main areas. And certainly everybody
that operates an electric system is very interested to have a
good report card.
So I think the peer pressure certainly in the short term is
doing a good job to make sure that the issues that were pointed
out in the report are being addressed on a short term basis. I
think what certainly the mandatory rules will do is to ensure
that that really becomes a standard part of day-to-day
business, not just a one time visit to confirm.
Trimming the trees is another big issue. We just put out a
data request to every utility in the country that maintains
significant transmission voltage that----
Mr. Dingell. I hate to be rude.
Mr. Wood. That is fine.
Mr. Dingell. But I have limited time and I want to respect
our Chairman here and his kindness to me.
Can you tell us if everyone of the reliability councils has
the power to make its orders mandatory with regard to
reliability?
Mr. Wood. The power on their own, no. That is only if the
members contractually agree.
Mr. Dingell. That is one things which they desperately
need, is it not?
Mr. Wood. I think so, yes.
Mr. Dingell. And as a matter of fact, I do not think there
is any that has the authority with perhaps the exception of PJM
to assert that kind of power, is there?
Mr. Wood. We have for the RTOs, which would be PJM, New
York, New England and California and now Southwest Power Pool
made as part of a condition of being in the RTO, the regional
transmission organization, a requirement to comply with the
NERC standards. So through that region of the country where we
do have organized markets, we have been able to use the FERC
terrifying process to make those mandatory.
Mr. Dingell. Can you assure us that they are in fact
mandatory and that they will be complied with by all the
utilities within those areas?
Mr. Wood. The core issue is what is the ``it''? Comply with
the standards, the standards up to now because they have been
voluntary have been more guidelines and gray zone and
terrifying issues; they are not black and white.
Mr. Dingell. And that is my worry. One of the reasons that
we had the big failure in the Northeast quadrant of the country
last year was the fact that there was no authority in the
people that had to have it, namely the reliability councils, to
enforce their rules and orders. And, of course, once the
trouble started, it just ran wild.
Mr. Wood. That is true.
Mr. Dingell. And I think the gray areas or areas where
there is less than adequate assurance that the RTO or the other
agencies that have that responsibility can in fact enforce
their orders and see to it that we have a situation where the
utilities must comply. And I am particularly troubled, for
example, that one utility in a State adjacent to Michigan has
had a consistent history of troubles with regard to its
reliability and how its behavior affects the neighboring
utilities. And I am also troubled with the fact that the
hearings of this committee revealed last year that there really
is no authority there to assure whatever has to be done will in
fact be done.
So I am concerned not only about that problem, but I am
concerned also about the others where there may be gray areas
and where there is not a clear authority for them to enforce
their orders--and that everybody knows, including the utilities
and the consumers, that they have that authority. So I am
troubled about this.
Can you tell me that you are comfortable?
Mr. Wood. I cannot tell you that. But I think one point I
want to add to yours, and you have made case for me better than
I can, but is that the rules themselves. You know, you said
enforce the rules and orders; the rules themselves are not
crisp and enforceable today. So we have really used the bully
pulpit to bang on the experts on the industry that we rely on
to develop the standards to get those developed by the end of
this year. And they have actually set forth a process by which
the NERC, the voluntary council, will actually adopt crisp and
enforceable rules by February of 2005, which I wish it were
tomorrow. But clearly that is better than the schedule they
were anticipating before we started.
Mr. Dingell. Well, I commend you for this. But my response
is the old liturgical one, and that is let us pray.
Thank you, Mr. Chairman.
And thank you, Mr. Chairman.
Mr. Hall. Thank you, Mr. Chairman. Thank you, Mr. Dingell.
Old habits are hard to break.
Pat, thank you.
We are going to go back now to Mr. Walden and recognize him
first. Somebody go upstairs and get Mr. Walden.
I will then recognize Mr. Boucher for your questions.
Mr. Boucher. Well, thank you very much, Mr. Chairman.
I really only have one question for Chairman Wood, and that
relates to a matter that you addressed in your testimony. I
noted your statement that if we are successful in enacting H.R.
6, that any legal questions that would arise under current law
with regard to how you should handle an application to certify
the pipeline, should it be filed under either the Alaska
Natural Gas Transportation Act or in the alternative under the
National Gas Act would be resolved. And so the passage of H.R.
6 eliminates those legal questions.
So my question to you is this: Other than approving H.R. 6
which, as you know, is problematic at the moment, is there
anything else that we should consider doing in order to
facilitate the construction of this much needed pipeline?
Mr. Wood. Courts look to statements of congressional
intent. And I think, unfortunately, they look at the
congressional intent at the time the law was passed. So, unless
we can find some good transcripts from 1974 or 1976 that have
not come to light.
Again, I do not know that they are fatal on their face,
that the ambiguities that exist in the current law are fatal on
their face, Mr. Boucher, to an application. I do think they are
the kind of thing that a corporate exec that is looking to
spend $15 billion is going to think twice about, though. About
is he going to be stuck in a court, whether it is a district
court or state, Federal. Probably Federal. Several layers of
review before, you know, his company can go forward and invest
that $15 billion to build this huge project.
It is just one of those things that as a practical matter
from dealing with energy businessmen for the last 15 years, I
know how they think. And that is not an unfair
characterization.
The Commission certainly can move forward in the 18 months
and do this. I think after issuance of the certificate is when
you would start to have issues. Well, I would love to see those
legal issues resolved today.
I think if the Congress acted to resolve that part of it by
the time we finish the certificate, say if one were filed today
we would be through by next Christmas, that that would be
probably good timing on that half.
Now the financial issues that Senator Murkowski just talked
about and that Ms. Hall's asked some questions on, I think are
probably the type of things that those business folks need to
know before they even file a certificate.
The process with us, while I would hope it would be
streamlined and efficient, is still costly. And to do the
necessary environmental reviews onsite in Alaska is, as you
know, a different terrain to do that kind of review than just
about anywhere else in the U.S.
So I think as a practical manner the legal half and the
financial support half of the Alaska Natural Gas package
probably do need to go together from a business matter. I think
we could move forward and the legal issues do not kick in
probably, or at least get challenged, until we issue a
certificate which, again, would be about 18 months after filing
with us. So you have got some time, I think, on that half. But
as a practical matter I think they are woven together on the
financial half for the business side.
Mr. Boucher. So if I interpret your remarks, you are saying
that legal clarification from the Congress at this time would
be helpful. But that there would be little reason for us to
undertake passing a freestanding bill that simply provided, for
example, the legal clarification if it were not tied to the
loan guarantee and other things that we would have to do to
answer the financial questions.
Mr. Wood. Right.
Mr. Boucher. Is that a fair interpretation?
Mr. Wood. And that is, honestly, just I would say an
informed layman's assessment. I do think the next panelists
could probably give you a real solid answer on that. But I have
talked to them enough to know what I think it is.
Mr. Boucher. All right. Thank you very much.
Mr. Wood. Thank you.
Mr. Hall. Thank you, Mr. Boucher.
We have a vote, and it would be nice if we could take care
of this witness before we go to vote. So I will recognize Mr.
Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman. I just have one brief
one, but I appreciate, Mr. Chairman, your comments on H.R. 6.
There is a lot of other benefits in there, obviously the citing
provisions, the natural gas provisions that we are really
talking about here.
You discussed three different paths for pipeline approval;
the National Gas Act, ANGTA and the proposed language in H.R.
6. In your opinion as Chairman of the Federal Energy Regulatory
Commission which legislative path either enacted or proposed is
preferable in order to see the pipeline built?
Mr. Wood. The latter one. Just because it is up to date. I
mean, ANGTA clearly was granted a certificate----
Mr. Shimkus. The latter one being H.R. 6?
Mr. Wood. Yes, sir. The current legislation.
Mr. Shimkus. The current energy bill proposal? And as we
have talked about before, there is so much other huge benefits.
I understand that the Ranking Member's desire about
splitting provisions out, we are better to get all the
provisions at one time because of the benefits of coal
generation siting, expansion of the grid, renewable fuels.
Mr. Wood. I guess all the ones that would be split out
would probably make the whole bill all over again.
You know, again, I think the point of this hearing, and I
mentioned that in my opening statement, is that the gas
pipeline from Alaska is as important to I think the welfare of
our citizens as----
Mr. Shimkus. Which I think you pointed out is the most
provision in the bill.
Mr. Wood. What else can we do to make this country's energy
future significantly better than it is looking like it would be
right now.
Mr. Shimkus. Right.
Mr. Wood. It is this.
Mr. Shimkus. Yes. And I appreciate that.
Mr. Chairman, thank you. And I yield back.
Mr. Hall. The Chair recognizes Mr. Wynn.
Mr. Wynn. Thank you, Mr. Chairman. I do not have any
questions.
Mr. Hall. All right. Then we will wind up here.
Mr. Wood, I take it that you still support comprehensive
energy proposal that we sent to the Senate that they are
laboring over now?
Mr. Wood. Absolutely.
Mr. Hall. Before we start single shouting, which you are
not opposed to single shouting if it comes to that?
Mr. Wood. If it comes to that. But I think there is too
much in there that we need for the country.
Mr. Hall. All right.
We will recess until the votes are over on the floor, which
I estimate to be 30, 45 minutes.
Thank you, Pat.
Mr. Wood. Thank you, Mr. Chairman.
[Brief recess].
Mr. Hall. Well, it appears that we have the main witness
and two of the main members of the committee here. So I guess
we can get underway.
As you may know, you are veterans and knowledgeable, all of
this is transcribed and everybody gets a copy of it and
everybody looks at it before we write the bills. The way we
write legislation up here is to get people like you who know
more about it than we do to come tell us about it. And it is
going to appear that you are just talking to two of us right
now, but really you are talking to the Congress because they
all have copies of it and they will read it carefully, I am
sure.
So, in order to go ahead and get the transcript underway,
we might get underway. And when the third witness comes, we
will make him feel right at home there. Is that agreeable with
your, Strickland?
Mr. Strickland. Absolutely. Mr. Chairman. Thank you.
Mr. Hall. You are ranking right now.
Mr. Strickland. That is a first. Thank you, sir.
Mr. Hall. So we are happy to have Dennis McConaghy,
Executive Vice President, Gas Development TransCanada
Corporation. I have had the pleasure of meeting him and
visiting with him and his assistant or partner. And very
impressed by your knowledge.
And we have Mr. Carruthers, who is Vice President, UpStream
Development of Enbridge Pipelines, Inc.
And we just need to hear from you men and your staffs and
your background, and your opening statement. All the opening
statement will be put in the record.
But I recognize you, Mr. McConaghy, right now to just
summarize what you intend to tell us. And I am not limiting you
on time, but try to hold it as close as you can to 5 or 6
minutes.
STATEMENTS OF DENNIS MCCONAGHY, EXECUTIVE VICE PRESIDENT, GAS
DEVELOPMENT TRANSCANADA CORPORATION; JOHN CARRUTHERS, VICE
PRESIDENT, UPSTREAM DEVELOPMENT OF ENBRIDGE PIPELINES, INC.;
AND KEN J. KONRAD, SENIOR VICE PRESIDENT, ALASKA GAS BP ALASKA
Mr. McConaghy. Thank you.
TransCanada appreciates this opportunity very much to
participate in this hearing. And I would like to take just
these opening remarks to brief you on TransCanada's
longstanding efforts to bring this project to fruition. I would
also want to note that TransCanada's CEO Hal Quisley is
Chairman of the Interstate Natural Gas Association of America,
INGA, which represents virtually all interstate and
interprovincial natural gas pipelines in the United States,
Canada and Mexico.
The construction of the Alaska Natural Gas Pipeline is a
priority for INGA, and the Association has prepared written
testimony for today's hearing, I ask Mr. Chairman, that INGA's
written statement also be included in the record.
Mr. Hall. Without objection, it will be included.
[The statement follows:]
Prepared Statement of the Interstate Natural Gas Association of America
Mr. Chairman and Members of the Subcommittee: The Interstate
Natural Gas Association of America (INGAA) appreciates the opportunity
to submit a statement for the record regarding an Alaskan natural gas
pipeline. INGAA represents virtually all interstate and interprovencial
natural gas pipelines in the United States, Canada and Mexico. Our
association has advocated constructing an Alaskan natural gas pipeline
for over 25 years. INGAA hopes that the provisions in the comprehensive
energy bill (H.R. 6) regarding the Alaska project, coupled with the
projected market conditions for natural gas in North American, will
provide the impetus for rapidly developing a pipeline that connects the
U.S. market to the extensive natural gas reserves on Alaska's North
Slope.
NATURAL GAS SUPPLY SITUATION
It now is widely recognized that North America is experiencing a
fundamental shift in the supply and demand equation for natural gas.
For many years, the United States experienced an excess supply of
natural gas--the so-called ``gas bubble''--that kept prices relatively
low and encouraged an increase in demand for natural gas. Both the
industrial sector and the power generation sector increased their
demand for natural gas by significant levels. Over the last three
years, however, demand has caught up with supply, leading to sustained
higher natural gas prices. At the same time, gas production from many
of the traditional supply basins has begun declining. Areas such as
West Texas, Oklahoma, the Gulf of Mexico, Western Canada and the San
Juan Basin account for over 80 percent of current U.S. natural gas
supplies; but production from all of these regions is forecast to
decline over the next 15 years. It is anticipated that by 2020 these
traditional supply areas will supply about 60 percent of U.S. demand.
These supply declines make it increasingly important to develop new
supply basins in North America. This must be done sooner rather than
later if we as a Nation are to avoid the adverse economic and energy
security implications of a serious mismatch between natural gas demand
and available natural gas supply. The Rocky Mountain region, for
example, will be an instrumental part of the overall supply picture, as
will the deep Gulf of Mexico, Eastern Canada and imports of liquefied
natural gas. Another key supply area will be the Arctic frontier, which
includes both the Alaskan North Slope and Canada's MacKenzie Delta.
There are significant known natural gas reserves in the Arctic--the
Alaskan North Slope alone has estimated natural gas reserves of 35
trillion cubic feet--and the potential for an even larger resource
base. Twenty five years of oil production in the region have provided a
clear picture of the associated natural gas reserves; what has been
lacking is the infrastructure to move these significant resources to
markets in North America.
BUILDING AN ALASKAN PIPELINE
Constructing an Alaskan natural gas pipeline is not a new idea. The
United States and Canada made significant progress in the late 1970s in
approving a pipeline that would have connected the Alaskan North Slope
with markets in the continental U.S. Involvement by the Canadian
government was critical, because more than two-thirds of the proposed
pipeline was to be built in Canada.
Congress enacted the Alaska Natural Gas Transportation Act (ANGTA)
in 1977, which established a coordinated approval process for an
Alaskan natural gas pipeline. The Canadian Parliament enacted a
counterpart, the Northern Pipeline Act, in 1978. Significant segments
of the Canadian portion of the pipeline actually were authorized and
constructed during the 1980s, and currently deliver Western Canadian
production to U.S. markets. Declining natural gas prices in the 1980s,
however, made constructing the Alaskan segment uneconomic, and the
pipeline's sponsors mothballed the project and waited for market
conditions to change.
That market change now has occurred, and the need for an Alaskan
pipeline is greater than ever. Still, a combination of factors makes
the timely construction of an Alaskan pipeline uncertain. These factors
include the long lead time for authorization and construction, the
enormous capital commitment required by pipeline sponsors and the price
risk that must be assumed by those with an economic stake in the
pipeline and in producing the natural gas. If permitting started today,
it would still take a decade before a pipeline could begin delivering
natural gas to U.S. markets. This is one of the reasons why
Congressional action is needed now, setting some clear permitting
guidelines, reducing some of the economic risk associated with this
project, and getting construction activity underway as soon as
possible. Any further delay in beginning the construction of this
pipeline will cost American consumers billions of dollars annually in
higher natural gas prices.
JOBS FOR AMERICA
The members of this Subcommittee have heard from businesses across
the country that are adversely affected by high natural gas prices. The
fertilizer and chemical manufacturing industries have been hit
particularly hard. Federal Reserve Chairman Alan Greenspan has, in a
number of statements before Congress, expressed concern about future
natural gas supplies and the adverse economic effect of sustained
higher prices for this critical source of one quarter of the Nation's
primary energy input. Developing new natural gas supplies, and building
the infrastructure needed for transporting it to consuming markets, has
become a major economic and jobs issue, even if it does not command
much attention on the evening news.
New supplies of natural gas from Alaska would help balance supply
and demand and result in more reasonable natural gas prices for
consumers and industry. In addition, constructing a pipeline from
Alaska would create a huge number of jobs--some estimates are as high
as 400,000 jobs--in construction, steel and pipe manufacturing,
compressor manufacturing, and all of the affiliated equipment and
service needs for such an enormous undertaking. And this figure does
not include the thousands of jobs that would be saved by lowering
natural gas prices domestically. Simply put, the Alaskan natural gas
project translates into U.S. jobs.
THE ENERGY POLICY ACT OF 2003 (H.R. 6)
The conference report to H.R. 6, the Energy Policy Act of 2003,
includes a number of provisions dealing with the Alaskan natural gas
pipeline, including:
Title III, Subtitle D--Builds upon the 1977 ANGTA by creating a new
expedited permitting and judicial review process for any
proposed Alaska pipeline project. Section 386 also permits
federal loan guarantees of up to $18 billion for qualifying
projects, in order to reduce financing costs and help mitigate
some of the associated financial risk of the project.
Section 1355--Permits an accelerated depreciation schedule of 7
years, as opposed to the normal 15 years, for ``high volume
natural gas pipelines'' such as the one from Alaska.
Section 1356--Extends the enhanced oil recovery tax credit to natural
gas treatment facilities associated with a ``high volume
natural gas pipeline'' such as the Alaska project.
These provisions address a number of the financial risks that have
impeded this project over the last 25 years. INGAA endorses the
enactment of H.R. 6, as amended, in order to provide the catalyst for
reviewing, permitting and constructing an Alaskan natural gas pipeline
as soon as practicable.
The conference report to H.R. 6 does not include a production tax
credit, often referred to as a ``price floor'', for Alaska North Slope
gas, while the current version of S. 2095 includes this production tax
credit. This is a financial benefit that would accrue to producers, and
not necessarily to the owner and operator of the pipeline. Therefore,
INGAA has elected to remain neutral on this issue. Two of the three
North Slope producers have argued that the production tax credit is
needed to mitigate the risks associated with their commitment to long-
term capacity contracts on an Alaska natural gas pipeline. The proposed
tax credit would apply should market prices for natural gas fall below
$3.25. With prices forecast in the $5 range for the foreseeable future,
it is unlikely that the tax credit would ever apply.
AN INDEPENDENTLY OWNED PIPELINE SERVES THE PUBLIC INTEREST
The natural gas industry in North America has never been a
vertically integrated industry. In other words, the same companies
generally do not produce, transport and distribute natural gas to
consumers. This historic structure was taken one step further by the
natural gas industry restructuring that followed wellhead decontrol in
the 1980s. Prior to the restructuring, interstate pipelines had a
direct role in the supply function, because they purchased natural gas
from producers and resold the aggregated supply to natural gas
distributors and other large-volume customers. As a result of the
restructuring, interstate pipelines are now purely transporters of
natural gas. This restructuring has promoted greater competition,
transparency and efficiency in the natural gas industry to the benefit
of consumers and the Nation's economy.
In contrast, the oil industry generally has been, and remains,
vertically integrated. The major integrated oil companies produce,
refine, transport and retail oil products to consumers. In other words,
these companies have an economic stake in all segments of the oil
product supply chain.
The distinctions between these two industry models are relevant to
some of the threshold questions in connection with authorizing an
Alaska natural gas pipeline. The three North Slope producers are all
major integrated oil companies and the producers have stated, at
various times, their desire to control the pipeline that would bring
Alaskan gas to consuming markets in the lower-48 states. This would be
in sharp contrast to the industry model in the remainder of North
America, where once gas is gathered and processed, it is transported to
market utilizing interstate and interprovincial pipelines owned and
operated by third parties. This distinction now is highlighted by the
fact that several North American transmission pipeline companies have
expressed an interest in building, owning and operating the Alaskan
natural gas pipeline.
INGAA submits that this choice has significant public policy
implications, and is more than just a commercial decision. A pipeline
owner and operator that is solely in the business of transporting
natural gas has different economic motivations than does an owner and
operator that is primarily a producer. A pipeline company has the
incentive to construct and operate the facility to maximize the volumes
of natural gas that can be transported efficiently, regardless of the
source or ownership of supply. That is not necessarily the case for a
producer-owned pipeline. A producer's primary motivation is to operate
the pipeline to maximize the value of its natural gas production. Doing
so may not necessarily involve sizing or operating the pipeline, or
designing rate structures that treat others sources of supply in a non-
discriminatory manner. In other words, some of the very same concerns
that motivated the Federal Energy Regulatory Commission (FERC) to
mandate open access transportation and, ultimately, to compel pipeline
companies to abandon the wholesale merchant function are relevant in
considering the public policy choices on ownership of the Alaska
natural gas pipeline.
Producers may respond that these concerns are inconsequential,
because the Alaska natural gas pipeline will be subject to FERC
regulation regardless of its ownership. While it is contemplated that a
producer-owned pipeline would be regulated, this does not fully address
the concerns about the public policy implications associated with who
owns and operates the pipeline. For example, while FERC may authorize
the pipeline, it does not control directly the proposed size of the
pipeline, business decisions on the size and timing of pipeline
capacity expansions, or proposals for rates and tariffs. Under current
law, FERC cannot compel a pipeline to expand its facilities and it must
bear the legal burden should it choose to challenge a pipeline's rates
and tariffs should it believe that they are no longer just and
reasonable. Given these limitations, it is plain that separating
pipeline ownership from ownership and control of the natural gas
resource base will promote greater efficiency, transparency and
competition in the construction and operation of an Alaska natural gas
pipeline. This, in turn, will result in greater benefit to consumers
and the economy.
CONCLUSION
INGAA would like to thank the Subcommittee for scheduling a hearing
on this important element of America's energy policy. The Alaska
natural gas pipeline is a necessary addition to the Nation's critical
infrastructure. We hope the Congress will pass H.R. 6 this year, and in
doing so create the incentives for getting this project underway.
Mr. McConaghy. Thank you.
TransCanada is a leading North American energy company. It
owns one of the largest natural gas transportation systems in
the world and has pipeline and electric generation operations
and facilities extending across Canada and into the northern
United States.
By way of background, the Alaska Natural Gas Transportation
Act, ANGTA, of 1976 established a transportation system to
deliver Alaska natural gas, designated an entity to receive a
certificate to construct and initially operate that system, and
sought to expedite the construction by limited judicial and
regulatory review.
ANGTA also designated the route for the pipeline along the
Alaska highway, and both chambers of the U.S. Congress and the
State of Alaska have reaffirmed this selection by various
initiatives with respect to routing.
Also, in the late 1970's Canada and the United States
signed an Agreement on Principles, entering into a bilateral
treaty to govern relations between the two countries for the
transportation of Alaskan gas across Canada. And the Canadian
government enacted the Northern Pipeline Act to implement these
Canadian-U.S. agreements, and they remain in force today.
Entities which are wholly owned by TransCanada were issued
certificates to construct and operate the Alaska and Canadian
portions of the pipeline. TransCanada has steadfastly
maintained these certificates and intends to build the Canadian
facilities that connect the Alaska pipeline to U.S. markets.
The first phase of the Alaskan gas pipeline in Canada was
known as the ``prebuild,'' and that was constructed by a
TransCanada subsidiary in the late 1970's at a cost of over one
billion dollars.
Although changes in the North American natural gas supply
and demand balance postponed the completion of the pipeline
through Canada and into the Lower 48, expert consensus today is
of the view that the total natural gas supply from traditional
sources will be insufficient to meet projected growth in North
American gas demand. And as we have heard earlier this morning,
the consensus that this project is required as part of the
continental gas supply mix is, I think, well shared broadly.
TransCanada, on the basis of its own engineering studies
over this period, continues to be of the view that the highway
route is the most economic and the least risky. Furthermore,
TransCanada anticipates having available spare capacity in its
existing systems whose utilization would eliminate, or reduce
the need for additional pipeline infrastructure from Alberta to
the Lower 48 when the Alaska volumes begin to flow.
For example, with inexpensive capital debottlenecking,
there could be over 3 Bcf of capacity available to transport
Alaska gas across TransCanada's Alberta system.
TransCanada strongly believes that the project is necessary
and economic. However, the project does have unique risks and
they have to be addressed before stakeholders can invest the
billions of dollars.
Important progress has been made recently. TransCanada has
signed a memorandum of understanding with the State of Alaska
and has agreed that in order to encourage parties to reach the
necessary commercial and regulatory agreements, it will convey
the State right-of-way to any holder of a final FERC
certificate to construct an Alaska gas pipeline that
interconnects with its facilities that TransCanada has the
right and will to build in Canada.
Additionally, TransCanada has resolved issues related to
historic costs in the Canadian portion of the project and has
also obtained a reaffirmation from the Canadian government of
its commitment and preference for the U.S.-Canada treaty and
the Northern Pipeline Act.
So the question is still there, what needs to be done to
resolve the impasse to bring forward this project. We have the
view that four critical groups North Slope producers,
TransCanada and potentially other pipeline entities, the State
of Alaska and the U.S. Government have to come together and
develop an optimal mix of commercial and fiscal terms under the
framework of the existing treaty and the Northern Pipeline Act.
A key part of this process will be negotiations in the State of
Alaska under Stranded Gas Act which are going to unfold this
year. That process, hopefully, will define long term fiscal and
tax regimes. And we are of the view that the U.S. Government
will have to also play a critical role in ensuring ultimately
that no single group is required to bear an undue portion of
the risks that are necessary to bring this project forward.
TransCanada looks forward to working with stakeholders to
bring forward a viable project.
In conclusion, TransCanada remains as committed to this
project today as it has over the past 20 years and will
continue to move the project forward to complete the Canadian
segment utilizing its existing infrastructure and its existing
rights and is willing to participate as constructively as it is
asked to in the Alaska segment.
I thank you for this opportunity to make those opening
remarks.
[The prepared statement of Dennis McConaghy follows:]
Prepared Statement of Dennis McConaghy, Executive Vice President, Gas
Development, TransCanada Corporation
INTRODUCTION
Good morning, Chairman Hall and Members of the Subcommittee. My
name is Dennis McConaghy. I am the Executive Vice President for Gas
Development of TransCanada Corporation (TransCanada), the parent
company of TransCanada PipeLines Limited. TransCanada appreciates the
opportunity to participate in this proceeding on the status of the
Alaska natural gas pipeline, to brief you on TransCanada's longstanding
efforts to bring this project to fruition, and to discuss the current
initiatives underway to ensure that Alaska's enormous supplies of
natural gas are delivered on a timely basis to U.S. markets that
urgently need this critical supply.
TransCanada is a leading North American energy company. It owns one
of the largest natural gas transmission systems in the world--over
24,200 miles--and has operations and facilities extending across Canada
and into the northern United States. TransCanada transports
approximately two thirds (11 Bcf/d) of western Canada's natural gas
production, representing 16% of North American production, to markets
across North America. TransCanada also owns, controls or is
constructing more than 4,700 MW of electric generation in Canada and
the United States. Headquartered in Calgary, Alberta, Canada,
TransCanada's American holdings include interests in five American
pipelines and numerous electric operations in the United States.
TransCanada recently has agreed to purchase a major natural gas
pipeline in the Pacific northwest. TransCanada is an international
leader in the construction of natural gas pipelines under harsh
frontier conditions.
INTEREST IN THE ALASKA GAS PROJECT
TransCanada subsidiaries now hold the certificates to construct
both the Alaskan and Canadian portions of the Alaska Natural Gas
Transportation System. TransCanada has maintained and advanced the
project in the last two decades and recently has undertaken several
important steps to move the project forward in light of the urgent need
for additional gas supplies in the Lower 48 states.
The Alaska Natural Gas Transportation Act (ANGTA), enacted in 1976,
established mechanisms to select a transportation system to deliver
Alaskan natural gas and to designate an entity to receive a certificate
to construct and initially operate that system. In addition, ANGTA
included provisions to expedite the construction process, including
limited judicial and regulatory review processes. The route for the
pipeline along the Alaska Highway was designated under ANGTA and both
Chambers of the U.S. Congress and the State of Alaska have reaffirmed
this selection by including prohibitions against alternative routes in
recently passed energy legislation.
In the late 1970's, Canada and the United States signed an
Agreement on Principles, entering into a bilateral treaty to govern
relations between the two countries for the transportation of Alaskan
gas to market via the system selected under ANGTA. The Canadian
government enacted the Northern Pipeline Act (NPA) to implement the
Canada-U.S. agreements.
An entity which is now wholly-owned by TransCanada was issued,
pursuant to ANGTA, a certificate of public convenience and necessity to
construct and operate the Alaska portion of the pipeline. TransCanada
has maintained this certificate and, as discussed below, is prepared to
work with the critical players--the North Slope Producers, the U.S.
Government, the State of Alaska, Alaskan interests and consumers--to
assure that the benefits of this certificate and associated rights can
be harnessed to ensure the timely construction of the pipeline project.
TransCanada intends to build the Canadian facilities that connect
the Alaska pipeline to U.S. markets, combining new facilities with
existing facilities to create an economically attractive delivery
system for Alaskan gas. Following a competitive hearing process that
was held in the 1970's, the NPA issued the certificates of public
convenience and necessity to construct and operate the Canadian
portions of the pipeline to Foothills Pipe Lines Ltd. (``Foothills''),
now wholly-owned by TransCanada. The first phase of the Alaskan gas
pipeline in Canada, known as the ``prebuild,'' was constructed by
Foothills in the late 1970's at a cost of over one billion dollars, and
has been expanded five times since to meet the needs of U.S. markets.
The prebuild facilities now transport approximately 30% of Canadian
exports to American markets.
Although changes in the North American natural gas supply and
demand balance postponed the completion of the pipeline through Alaska
and Canada, over the past 25 years the governments of Canada and the
United States have preserved the pipeline treaty so that it remains in
force today. Additionally, Foothills has steadfastly maintained the
certificates issued to it by the Government of Canada to construct the
remaining Canadian portions of the pipeline. Most recently, in November
2003, Canadian Prime Minister Chretien reaffirmed the benefits of
proceeding under the framework contemplated under the bilateral treaty
between Canada and the U.S. and Canada's intention to meet its
commitments to facilitate the planning and construction of the Canadian
portions of the project under the NPA.
Most recently, TransCanada has continued its efforts to move the
project to fruition by signing a Memorandum of Understanding (MOU) with
the State of Alaska designed to advance the development of the project.
Under the MOU, TransCanada will file an application under Alaska's
Stranded Gas Development Act and complete its acquisition of necessary
rights-of-way from the State. TransCanada also has agreed that, in
order to encourage parties to reach the necessary commercial and
regulatory agreements, it will convey the State right-of-way to any
holder of a final FERC certificate to construct an Alaskan pipeline
that interconnects with facilities that TransCanada has the right to,
and will, build in Canada. TransCanada already holds the Federal right-
of-way within the State of Alaska.
DEMAND FOR ALASKA GAS
TransCanada is wholeheartedly committed to this project. Canadian
and U.S. experts have concluded that the total natural gas supply from
traditional sources in Canada and the U.S. will be insufficient to meet
projected growth in North American gas demand, particularly that of the
Lower 48. Consequently, natural gas from frontier basins in Alaska and
Canada's north are required within a decade, along with new liquefied
natural gas (LNG) supplies, to ensure North America has adequate
supplies of competitively priced natural gas.
Although there are several critical uncertainties that would affect
the forecast of North American natural gas demand, including long-term
growth rates of the U.S. and Canadian economies, the level of oil
prices, the relative price of natural gas to other fuels, the effect of
environmental policies such as the Kyoto Protocol, and the conventional
natural gas supply response, inadequate natural gas supply could cause
sustained high gas prices and negatively impact the North American
economy over the long term.
TransCanada expects that gas supply from traditional U.S. and
Canadian natural gas sources will decline by approximately 1 Bcf/d from
2002 through 2012, leaving a gap of approximately 13 Bcf/day to be
filled by new sources of supply. Without new gas resources, natural gas
prices could be expected to rise high enough to restrict gas demand and
economic development.
We believe that natural gas from the Mackenzie Delta in Canada's
north, Prudhoe Bay gas from Alaska and new sources of LNG are all
required early in the next decade if North America is to have
acceptable gas prices.
RISKS OF THE PROJECT
TransCanada strongly believes that the Alaska pipeline project is
both necessary and economic. However, the project has unique risks that
must be addressed through the appropriate allocation of risks among the
interested parties--the producers, the owners of the pipeline, the
State of Alaska, the Federal Government and consumers.
The Alaska pipeline will require the investment of billions of
dollars in new facilities and the expansion of existing facilities.
However, given the risks of construction and the risks of projecting
commodity prices ten years into the future and beyond, significant
challenges remain before the necessary commercial underpinnings for the
project can be put into place. Important questions, such as the
willingness of players to accept a portion of the completion and
overrun risk and the burdens of long-term shipping and gas purchase
contracts, remain unresolved today.
Important progress has been made in recent years in moving the
project forward. The producers have engaged in an extensive and
expensive study process to review the options and finances of a
pipeline project. The producers also have sought Federal legislation
that they state would enhance their willingness to proceed with the
project. TransCanada has resolved issues related to historic costs in
the Canadian portion of the project and has obtained a reaffirmation by
the Canadian Government of its commitment to the U.S-Canada treaty and
the Northern Pipeline Act. As well, TransCanada has played an important
role in facilitating the progress of the Mackenzie Valley pipeline
project. Equally important, in discussions with the State of Alaska and
others, most recently in the MOU executed with the State of Alaska,
TransCanada has indicated its willingness to facilitate the
construction of the Alaskan segment of the project, in addition to
TransCanada's facilities in Canada.
THE PATH FORWARD
Based on TransCanada's own in-depth engineering studies, the Alaska
Highway route designated under ANGTA continues to be the most economic
and least risky route through Alaska to transport Alaskan gas to
market. It avoids additional costs and delays by minimizing potential
technology, environmental, and regulatory problems that could seriously
delay the construction of the project in both Alaska and Canada.
TransCanada's Alberta gas pipeline infrastructure currently has
approximately 2 Bcf/d of spare capacity, and we forecast there could be
an additional 2 Bcf/d of spare pipeline capacity at the time Alaskan
gas is delivered to market. The utilization of this spare capacity
could eliminate the need for any additional new pipeline infrastructure
from Alberta to markets in the Lower 48 states. It would also allow for
the serving of diverse markets in the U.S. The Alaska project is
expected to initially transport 4.5 Bcf/d. Integration of the project
into TransCanada's existing pipeline infrastructure in Alberta, which
has a capacity of approximately 13 Bcf/d, will reduce the capital costs
and cost overrun risks to complete the project from the Alaskan North
Slope, reduce regulatory risks and minimize environmental and other
societal impacts.
However, the owners of Alaska gas and the developers of the
pipeline that will deliver that gas to U.S. consumers will not invest
the hundreds of millions of dollars needed for the initial phases of
the project, which will not produce cash flow for nearly a decade,
unless they have an opportunity to earn a reasonable level of return on
their investments. Shippers and investors need to be able to manage the
risks inherent in constructing a project of this magnitude in frontier
areas, but the private financial markets are unable to provide the
tools necessary to adequately manage the unique risks of this project.
What is needed to solve this impasse, in the face of North
America's critical demand for additional natural gas?
Ultimately, four critical groups--the North Slope Producers,
TransCanada, the State of Alaska and the U.S Government, must come
together and develop an optimal mix of commercial and fiscal terms,
under the framework of the existing U.S/Canada pipeline treaty and the
Northern Pipeline Act. The final structure must result in the long-term
commitment of North Slope gas supplies to commercially viable shippers,
reasonable certainty with respect to both tariffs for shippers and
returns to investors in the pipeline, acceptable conditions for the
sale of gas by the producers, opportunities for in-state deliveries of
natural gas, and conditions for the expansion of the pipeline under
terms that encourage the development of new natural gas supplies in
Alaska.
A key part of this process will be negotiations with the State of
Alaska under the Stranded Gas Development Act. This process will help
define the long-term fiscal and tax regime required to attract the
producers to long-term commitments, whether for the sale of natural gas
or as shippers, as well as some of the terms and conditions for the
pipeline itself. The Federal Government will have a critical role to
play in assuring that no single group is required to bear, in full,
risks that are necessary to benefit the entire Nation. Of course,
TransCanada will continue to work with the Producers and others on the
necessary commercial terms and structures for the project.
CONCLUSION
Conventional sources of natural gas are projected to be
insufficient to meet expected growth in natural gas demand in North
America over the next decade. However, frontier gas sources already
discovered in northern Canada and Alaska can be delivered to markets in
the Lower 48 on competitive terms in this timeframe to meet forecasted
demand. Specifically, Alaskan gas can be in-service by 2012 by moving
along the Alaska Highway and across Canada under the existing Canada/
U.S. treaty and the Northern Pipeline Act, then integrating with the
existing North American pipeline grid in Alberta. Using the Foothills
system under the Northern Pipeline Act in Canada will expedite the
Alaska project, avoid a new round of negotiations between the U.S. and
Canada, and provide maximum benefits to both countries.
TransCanada remains as committed to the project today as it has
been over the past 20 years. Furthermore, TransCanada has taken the
unprecedented step of indicating its willingness to transfer critical
rights to the successful developer of the Alaska segment of the project
as part of a project that is true to, and consistent with, the U.S./
Canada pipeline treaty and TransCanada's rights within Canada.
TransCanada hopes that its willingness to take this important step will
encourage others to complete the process of developing the commercial,
regulatory and statutory structure necessary to ensure the timely
delivery of critical Alaskan gas supplies to North American markets.
TransCanada believes that an appropriate allocation of risks can be
developed that will ensure that no industry segment is asked to
shoulder an unbearable economic burden and that consumers will, because
of the price benefits of the introduction of new suppliers, pay lower
rates than they otherwise would face.
TransCanada looks forward to continuing to work with the Producers,
the State of Alaska, and the U.S. and Canadian governments to enable a
viable project that adequately addresses the significant frontier
construction and financial risks in Alaska in a manner that capitalizes
on the efficiencies of utilizing current Canadian infrastructure.
TransCanada's ability to expedite regulatory processes in Canada under
the NPA and its expertise as one of the world's leading pipeline
companies provide a valuable component to the overall project.
Thank you for this opportunity to testify on the status of the
Alaska natural gas pipeline. I would be happy to respond to your
questions.
Mr. Hall. Thank you.
Mr. Carruthers?
STATEMENT OF JOHN CARRUTHERS
Mr. Carruthers. Thank you, Mr. Chairman and members of the
subcommittee for this opportunity to offer Enbridge's views on
the recent developments.
Enbridge Inc. is a leading North American energy delivery
company in both Canada and the U.S. with roots stemming back
150 years. We own Canada's largest gas distribution company and
the world's longest petroleum pipeline extending from western
Canadian through to the U.S. midwest. This crude system
delivers over 1 million barrels per day to U.S. refiners
serving roughly 10 percent of the United States imported crude
supply. We own, or are major partners in over 10,000 miles of
natural gas pipelines in the U.S. and Canada, and own 50
percent of the Alliance Pipeline.
As noted, last week Enbridge submitted an application to
Alaska for approvals under the Alaska Stranded Gas Development
Act signaling our intention to take a lead role to take a lead
role in the creation of a consortium to drive this project to a
completion. Enbridge is uniquely positioned to lead this
effort. We have unequalled experience in pipelining north of
the 60th as we built and operate the underground Norman Wells
crude oil pipeline and the Inuvik natural gas system.
We are experienced in the building and maintaining
underground pipelines in continuous and discontinuous
permafrost, and through tribal communities.
Over the past decade, we have been involved with planning,
permitting and construction of roughly 3,000 miles of new gas
and liquids pipelines. Stakeholder consultation, construction
cost management and comprehensive multi-jurisdictional
environmental assessments are nothing new to us.
We are a financially healthy company with a sound
reputation in the industry and among stakeholders, and we have
a market perspective as we are the owner of the largest gas
distribution system in Canada serving more than 1.7 million
customers.
In other words, the proposal we put forth is built a
carefully considered approach based on decades of experience
and a full appreciation of the challenges ahead. We share the
view of many others that a number of supply sources will be
combined to meet rising demand, including incremental supplies
from nonconventional production, the deep gulf, Rockies and new
LNG plants.
Further, we believe that MacKenzie Valley Pipeline will be
completed ahead of the Alaska gas pipeline, although we expect
a significant portion of the MacKenzie gas will serve the
energy needs of Alberta's production. And I think that's very
important that MacKenzie continue to proceed from a Canadian
support perspective.
Enbridge believes that the Alaska Natural Gas Project is a
critical step beyond these measures, and that the time is now
to drive the Alaska gas project to success.
Enbridge itself is proposing a more phased or measured
approach to building the Alaska gas pipeline that we believe
can have significant advantages, including faster initial gas
delivery with a gain of 1 year, better opportunities for North
American steel manufactures, less risky more predictable costs
and greater expansion opportunity.
Enbridge proposes to take a lead role in implementing this
measured approach through the alignment o stakeholder interests
and a consortium of owners. We have proposed a pipeline from
Prudhoe Bay south to a point near Fairbanks and then along the
Alaska highway to Gordondale, Alberta where it would
interconnect with existing pipeline infrastructure such as
Alliance, TransCanada and Duke Energy Pipeline Systems now
serving and expandable to deliver gas into the Lower 48.
Our phased approach would begin with construction with a
buried 36 inch diameter pipeline providing 2.6 Bcf per day of
initial capacity. The pipeline would then be expandable with
the addition of more compressor stations and pipeline segments
as dictated by both exploration and continental market demand
to create an ultimate design capacity in excess of 5 Bcf per
day.
We propose that the pipeline be an open access pipeline
operated by an independent operator. This measured approach is
subject to firm shipping commitments and a final plan developed
by the consortium and we have estimated this phased concept to
cost $7.5 billion for the initial segment with an ultimate cost
for the more than 5 Bcf per day estimated at 13.8 billion.
Upon kickoff the project can be in service in about 9
years.
The project includes some 1100 miles of new pipeline in
Canada, and while certain approvals for the Canadian segment
received some 25 years ago pursuant to the Northern Pipeline
Act, the Act does not provide exclusive rights to build a
pipeline. Enbridge would file applications under the National
Energy Board and Canadian Environmental Assessment Act under a
well developed Federal process with modern efficient
environmental reviews and stakeholder consultation.
Our view is that a new application for the Canadian segment
under the NEB and CEAA protocol would be the most efficient
regulatory process with the least risk.
Several measures are key to ensuring momentum for this
important project. First, critical to the enabling legislation
including the loan guarantee should be enacted before Congress
adjourns to reduce regulatory and financial risks.
Please note that our interest in this project is market
driven and does not require price support or exclusivity. And
in answer to a previous question, all our discussion with
Canadian Federal and provincial governments indicate strong
support for the development of Alaska natural gas, except for
the production tax credit, and we anticipate they will ensure
expeditious project development.
Second, Alaska needs to address the multitude of issues
related to the fiscal impact on producers and taxes imposed on
the project.
And finally, alignment of a consortium of owners and
stakeholders including gas markets and their State regulators
is necessary to proceed with procuring long term shipping
commitments.
In short, Enbridge proposes a consortium and measured
approach design that will provide significant advantages to
shippers, consumers in the State of Alaska. The measured
approach offers a more flexibility solution matching capacity
to exploration's success and market demand. This results in
less project risk, access to gas by consumers of up to one
earlier, greater expansion capability and more competitive
opportunities for U.S. and Canadian steel manufacturers.
Thank you for the opportunity to address you today. I am
pleased to answer any questions that you may have on issues
related to our proposal.
[The prepared statement of John Carruthers follows:]
Prepared Statement of John Carruthers, Enbridge Inc.
Thank you Mr. Chairman, Ranking Member Boucher and Members of the
Subcommittee and for this opportunity to present our views on the
status of the Alaskan natural gas pipeline that will soon serve the
energy needs of North Americans for decades to come.
Introduction: I have worked in the industry for over 20 years and
during most of the last 5 years have focused my professional attention
on North America and northern gas and energy development. Enbridge Inc.
is a natural gas and petroleum transportation and distribution company
based in Calgary, Alberta, Canada with U.S. headquarters in Houston,
Texas. We have been in the energy business for over 150 years through
our ownership of Canada's largest local gas distribution company based
in Toronto. We operate the world's longest liquid petroleum pipeline
transporting over 2 million barrels per day of western Canadian crude
oil production with the majority of that supply feeding the Great Lakes
refinery region. We deliver most of the crude oil refined in the states
of some Committee members and, in all, deliver roughly 10% of the
United States' imported crude supply. We own or are involved with close
to 12,000 miles of natural gas gathering and transmission pipelines,
including our 50% ownership in the Alliance Pipeline.
Enbridge Role in Alaska Natural Gas Pipeline: On April 30, 2004
Enbridge Inc. submitted an application to the Alaska Department of
Revenue for approvals under the Alaska Stranded Gas Development Act.
This application signaled Enbridge's intention to take a lead role in
the creation of a consortium that will pursue the opportunity to plan,
permit, build and operate the Alaska natural gas pipeline. Enbridge
believes the time is now appropriate to further develop this project
and has invested significant expertise and resources to framing a
proposal to drive this pipeline to completion.
Enbridge is uniquely positioned to lead this effort. In addition to
our extensive background operating large diameter transmission systems,
we have unequalled experience in pipelining north of the 60th parallel
through our ownership of the underground Norman Wells crude oil
pipeline and the Inuvik natural gas systems. We have been involved with
planning, permitting and environmental assessments of roughly 3,000
miles of newly constructed large diameter gas and liquid pipelines
built over the last decade, gaining significant perspectives and
expertise on the regulatory environments in the U.S. and Canada,
including projects requiring major international, provincial and state
border crossings. These projects have solidified our experience in
stakeholder consultation and approaches required to minimize the
affects of a large project on the environment and the community.
Enbridge has a solid reputation with stakeholders and has a net worth
of $4.1 billion (Canadian) with another $1.3 billion (U.S.) added
through our sponsorship of the U.S.-based Enbridge Energy Partners,
L.P.
Enbridge Experience in Northern Pipelining: The proposed pipeline
route starts in continuous permafrost and then gradually transitions
into sporadic pockets of discontinuous permafrost, found first in low-
lying areas and eventually becoming more prevalent in southern sections
of the pipeline. The discharge gas from the compressor stations located
in permafrost regions will be cooled to mitigate potential impacts on
pipe and soil. Based on our extensive northern experience, we emphasize
that the challenges of constructing an underground pipeline in
permafrost and discontinuous permafrost should not be underestimated.
To further update our knowledge gained during our construction of
the Norman Wells liquid pipeline in the mid-80's and the Inuvik Gas
Project five years ago, Enbridge has participated in a study and field
trials in Alaska to examine the state-of-practice trenching in
permafrost terrain. The objective of this study and subsequent field
trials was to identify parameters that limit and control trenching
productivity in permafrost terrain and arctic conditions. The field
trials were conducted in Prudhoe Bay and Fairbanks, Alaska using two
chain-type trenchers. BP America Inc. has coordinated both the studies
and the field trials. Enbridge headed the analysis of the field trial
data and correlation of the study findings. While there were other
parties participating in the trencher studies, only BP and Enbridge
were common to both the study and the field trials involving the
trenchers. This data gained in these studies will be of significant
value to the development of the pipeline system. The ability to predict
trenching progress will enhance project cost estimating accuracy.
Incorporating this information early in the design process will result
in reduced project cost risk and a reduction in the potential for
rework.
Now is the Time to Initiate the Alaska Natural Gas Pipeline: Mr.
Chairman and members, many of you have heard testimony over many years
on the means of meeting America's energy demand for this century. The
Energy Information Administration has been before this body and will no
doubt continue to reinforce the environmentally friendly role natural
gas will play in meeting demand expected to rise to over 30 trillion
cubic feet per year by 2012. Each of you represents consumers who have
been faced with energy bills that have stretched the average American's
budget. We all have an interest in participating in the success of this
and other projects that will meet this demand, assure reliable supply
and stable prices.
To be clear, Enbridge believes that there are a number of required
solutions to meet this demand. We are, in fact, involved in northern
Texas in several transportation projects that will deliver production
from non-conventional supplies of gas shales and tight gas sands.
Enbridge is closely monitoring developments and new Liquefied Natural
Gas (LNG) plants that we expect will soon play a significant role in
replacing waning supplies from conventional domestic U.S. production.
And we are actively seeking business opportunities to build the
additional pipeline infrastructure needed once supplies from the
Rockies are further developed. Each of these efforts, along with
development in the deep Gulf of Mexico are important incremental steps
and have been the subject of prior testimony before this Committee.
We also expect the Mackenzie Valley natural gas pipeline project
will proceed ahead of an Alaskan project, although a significant
portion of that incremental supply will be used to meet the energy
needs of Alberta's oil sand production projects.
Assuring incremental supply from each of these projects presents
its own challenges, but nevertheless, it will not be sufficient to
assure North America's energy independence and supply predictability
needed for the future.
Enbridge believes that the Alaskan natural gas project is the next
step beyond Mackenzie Delta, LNG and non-conventional natural gas
supplies and the time is ripe to drive the Alaskan gas project to
success over the next decade.
A Measured Approach: Enbridge is proposing a phased or ``measured
approach'' to building the Alaska Gas Pipeline which we believe has
significant advantages including faster completion of construction and
initial gas delivery; more opportunities for North American steel
manufacturers, pipe plants and contractors; more predicable costs, and
lower transportation tolls and shipping commitment risks.
Over the past several years, Enbridge has engaged in several
efforts to better understand the market drivers for the Alaska natural
gas project. We have invested considerable resources to identify what
we believe is a project that is responsive to continental North
American natural gas demand. We believe that our measured approach will
provide the best benefits to producers, explorers, the state of Alaska,
the people of Alaska, North American steel manufacturers, consumers and
stakeholders located in proximity to the proposed route.
Enbridge proposes to take a lead role in forming a consortium of
owners. The Project will require producer and market support and a
strong alignment of key stakeholders to manage the risk that a project
of this size and scope will present.
We propose the ``southern route'' starting in Prudhoe Bay, through
Alaska and the Yukon to Gordondale, Alberta. More specifically, the
Alaska Segment would follow the existing Trans Alaskan Pipeline System
right-of-way from Prudhoe Bay to Fairbanks, Alaska. From this point,
the proposed natural gas pipeline would generally follow the Alaska
Highway to the Canadian border. The Canadian Segment of the pipeline
would continue to follow the highway to Fort Nelson, British Columbia
and then on to Gordondale, Alberta where it would interconnect with
existing pipeline infrastructure, such as Alliance, TransCanada, and
Duke Energy pipeline systems.
As well, subject to regulatory, technical and economic conditions,
Enbridge would facilitate access at appropriate locations along the
pipeline to accommodate local gas distribution development.
Enbridge proposes that the consortium of owners would develop the
Canadian segment of the pipeline concurrently with the Alaskan portion
of the project.
Enbridge proposes that the Project, including the Alaska Segment be
developed in phases. The proposed initial development would consist of
a buried 36-inch diameter natural gas pipeline system and related
facilities. The initial capacity of the proposed project will be 2.6
billion cubic feet per day and would be expandable as dictated by
exploration and continental market demand. The buried pipeline would
operate at approximately 2,500 psi with compressor stations located at
appropriate intervals along the line. Expansion could be accomplished
through construction of additional compressor stations and incremental
segments of a second pipeline (referred to as ``looping''), if
required, to create an ultimate design capacity in excess of 5 Bcf/day.
The pipeline would provide take-away capacity for natural gas reserves
located both within and outside of the Alaska North Slope region. Final
details of line size, operational pressure, and planned buildup will be
developed through extensive dialogue with producers, consortium owners,
explorers and shippers and detailed design work.
A key advantage of specifying smaller diameter pipe materials is
that U.S. and North American pipe mills will have a better ability to
manufacture pipe of sufficient specifications. Availability of pipe
from both local and offshore suppliers will sharpen competition and
provide greater opportunity for the U.S. and North American industry,
and improve the Project schedule that will deliver Alaskan gas to
consumers quicker.
A 48-inch diameter or larger pipeline would, in our view, take
about one year longer to deliver gas to market and reduce the
involvement of North American suppliers and contractors. While
feasible, (Enbridge operates both liquid and natural gas pipelines of
this diameter), our view is the phased-in approach better aligns the
large new supply of gas with the market demand.
The initial phase will provide take-away capacity of 2.6 Bcf/day
and is estimated to cost $3.3 billion for the Alaska Segment and $4.2
billion for the Canadian segment. Enbridge has estimated the eventual
cost of this conceptual design (i.e. with capacity expanded to exceed 5
Bcf/day) for the entire project to be $13.8 billion in 2004 dollars.
These costs are sensitive to the price of steel to make the pipe that
has been recently driven higher by tight worldwide supply. Costs could
be different once shipping commitments are made and detailed design and
routing work is complete. However, the measured approach is more
flexible, enabling capacity to be closely matched to exploration
success and market requirements.
A long-term commitment will be required to align interests and
commercialize the pipeline. Enbridge has a history of developing and
embracing unique commercial arrangements that benefit both shippers and
developers. Enbridge will proceed to develop the commercial phase of
the project as expeditiously as possible. An in-service pipeline in
nine years from project kick-off is a reasonable expectation.
The Project includes some 1,100 miles of new pipeline in Canada.
While other pipeline companies received certain approvals for the
Canadian segment some 25 years ago pursuant to the Northern Pipeline
Act, that Act does not provide exclusive rights to build a pipeline.
For the Canadian segment, Enbridge would file application with the
National Energy Board (NEB) and Canadian Environmental Assessment
Agency (CEAA) under a well-developed federal process as well as other
regulatory bodies with jurisdiction. Following the NEB's and CEAA's
comprehensive project review procedures, Enbridge's proposal will
ensure that the Project is subject to modern and efficient
environmental assessment and regulatory processes. Moreover a precursor
to any application for the Canadian segment will be consultation with
First Nations and other aboriginal communities and stakeholders. Our
view is a new application under the NEB and CEAA protocol would be the
most efficient regulatory process with the least risk. Addressing
Canada's environmental and regulatory process efficiently will provide
the foundation for developing the project in a timely manner while
mitigating unnecessary risk.
Enbridge expects that capacity on the both the Alaskan and Canadian
segments of the pipeline will be marketed and subscribed on an open-
access, non-discriminatory basis. The proposed pipeline will therefore
be available to transport all Alaskan gas supplies that meet standard
posted tariff conditions and quality requirements. As an operator of
thousands of miles of common-carrier transmission pipeline, we believe
that a consortium of owners with an independent operator will best
serve the interests of all producers and explorers in the region and
North American consumers.
Factors for Success: Several issues are key to ensuring the
momentum for this important major project continues.
To stay commercially viable, natural gas prices must remain above
historical price levels. While that may not seem to be a major concern
in light of recent pricing, the influx of non-conventional and LNG
supply and the portion of MacKenzie Delta gas delivered to the Lower
48, together with possible demand destruction may serve to offset the
recent tight supplies and higher prices we have seen in the last few
years.
Secondly, Enbridge believes that the current provisions in the
Energy Bill (H.R. 6) regarding Alaska gas are a necessary precursor to
this project. The federal loan guarantees and accelerated depreciation
serve to reduce financial risk. The provisions on regulatory review
significantly reduce the risks of extensive delays or judicial reviews
faced by so many projects in the lower 48. We urge you to continue the
hard work invested in the Energy Bill and assure that at least these
provisions are enacted before Congress adjourns.
Thirdly, the state of Alaska must actively participate to address
the multitude of issues related to fiscal impacts on producers as well
as state provisions for income, property, sales and inventory taxes.
These are very significant issues that must be addressed to mitigate
the impact of these material costs on the economics of the Project.
Next, Enbridge is prepared to lead a collaborative approach with
producers, Alaska, market participants and qualified investors such as
Native Corporations and others to form a consortium that could take on
a project of this size. Enbridge is prepared to take a significant
equity interest in this consortium.
While not a matter before the Energy and Commerce Committee,
Enbridge believes that settlement of aboriginal land claims in some
regions in Canada would expedite an Alaska Highway Pipeline Project and
would more clearly clarify consultation and participation processes for
aboriginal communities. However, we believe that the current National
Energy Board and other regulatory processes in place in Canada are
sufficient, without the need for new legislation.
And finally, a decision on Enbridge's measured approach by a
consortium is necessary to proceed with procuring long-term commitments
from shippers for pipeline capacity.
Once these issues are behind us, the project could then start and
be completed within about nine years.
Summary: In short, Enbridge's proposed consortium and ``measured
approach'' design will provide significant advantages to shippers,
consumers and the State of Alaska. Increased competition by pipeline
suppliers will reduce the cost of the pipe and provide jobs for U.S.
and North American plants. The measured approach offers a more flexible
solution, matching capacity to exploration success and market demand.
This results in reduced transportation tolls, less project risk, access
to gas by consumers up to a year earlier and significantly longer
construction job opportunities.
Thank you for the opportunity to address you today and I hope I
have helped in your understanding of new developments on the Alaska gas
pipeline Project. I am pleased to answer any questions you may have on
issues related to this Project.
Mr. Hall. Mr. Carruthers, thank you very much.
We now hear from Ken Konrad, Senior Vice President, Alaska
Gas BP Alaska.
You can take the time you need. We would like for you to
stay as close to 5 or 6 minutes as you can, and then we will
open it with questions, okay? Recognize you at this time. Thank
you for being here.
STATEMENT OF KEN J. KONRAD
Mr. Konrad. Sorry I was a little late getting here. I was
catching a slice of pizza.
Anyway, thanks for the opportunity to be here.
I would like to begin by saying the North American gas
market is extremely important to BP. We are currently the
largest natural gas producer and holder of reserves in North
America, and we are investing heavily in mature basins trying
to offset decline.
We are also investing $15 billion in the deeper water Gulf
of Mexico creating new supplies of domestic oil and gas to
serve American consumers. And we are also actively pursuing
numerous plants to increase LNG supplies to the U.S. And, of
course, we have significant interests in stranded gas in Alaska
and also in Canada.
We believe Alaska gas has the potential to play a major
role in supplying significant volumes of gas to the North
American market in the decades ahead. Government and industry
experts agree that the North American supply situation is
increasingly tenuous. Traditional supply basins will not meet
projected demand in the coming years and additional supplies
are very clearly needed. It is further agreed, absent policies
that support and encourage new supplies from a variety of
diverse sources, the gas market may be forced to balance in
undesirable ways. This may include higher natural gas prices
resulting in further demand destruction and/or fuel
substitution into heavier fuels such as coal or oil.
Alaska is blessed with enormous natural gas resources and
35 trillion cubic feet has already found. I might add that that
has been found while industry has been looking for oil, not
gas. So it is sort of by accident. Government studies estimate
100 tcf or more may be added to that figure. However the gas is
remote and very expensive to transport to U.S. markets 3500
miles away.
Since the discovery of Prudhoe Bay, industry and
governments have searched for a commercially viable way to move
this stranded gas to market. BP has participated in nearly all
of those studies. However, to date, none of these efforts has
identified a commercially viable project. In the meantime, the
gas has been conserved and put to good use. All gas produced
from fields on the North Slope is re-injected into reservoirs
to aid recovery. Over the years billions and billions of
dollars have been invested to increase gas-handling capability
and to manufacture enhanced oil recovery solvents to increase
oil production. Through these investments over the years, an
additional three billion barrels of domestic reserves have been
realized.
In 2001 and through early 2002, Alaska's North Slope
Producers BP, ConocoPhillips and ExxonMobil conducted a
feasibility study for an Alaska gas pipeline, investing one
million man-hours of work and $125 million, to study in detail
many aspects of the project. The project was estimated to cost
on the order of $20 billion and would be the largest private
sector investment ever. And I might add, that we looked at all
aspects of the project, not just a pipe from here to there, but
included the gas treatment plant, pipes in Alberta, evacuation
systems natural gas liquid processing facilities; all the
infrastructure that is going to be needed to develop this
resource.
It is the enormous scale of this project that magnifies the
risks and inhibits the attraction of investment capital. The
risks are several, but they include cost overruns, regulatory
and fiscal risks, market risk, commercial risk, to name a few.
Any one of these alone could severely damage an Alaska project,
and need to be in some way mitigated in order to have
confidence to move forward to the next phase.
But it is also the enormous scale of the project that
generates significant interest and benefits to North American
consumers and governments. For example, 4 bcf a day or more of
supply into North American markets for decades to come.
Hundreds of thousands of direct and indirect jobs across North
America.
A secure supply of domestic energy and the associated
balance-of-trade benefits and $90 billion of direct U.S.
Federal tax revenues over the life of the project.
The feasibility study that I referenced earlier concluded
that the project was certainly technically feasible but not
currently economic given that the project risks outweighed the
prospective rewards, preventing the project from attracting
investment capital. BP has identified progress across four key
areas as necessary in order to advance the project to the next
phase of activity:
No. 1: Cost reductions to help improve project returns; No.
2: Passage of U.S. legislation; No. 3: Developing a fiscal
contract with the State of Alaska; and Number Four:
Establishing a clear and predictable regulatory process in
Canada.
And I will take a few moments to explain a little bit more
each one of those. First cost reductions.
Lower costs means higher returns, higher probability of the
project moving ahead. BP has made good progress maturing new
technologies and improved designs that we believe hold promise
in reducing project costs. We certainly intend to validate
these potential savings as we enter the next phase of
engineering.
Second, passage of U.S. Federal legislation including key
regulatory and fiscal measures.
I would like to thank this committee for adopting the
Alaska gas pipeline regulatory provisions contained in H.R. 6,
and in particular the provisions that were passed by this
committee that we think are superior to any of the other
provisions that have been previously considered in the Senate
or actually that came out of conference. So I would thank this
committee for that.
These regulatory provisions, coupled with the fiscal
provisions considered in the Senate, if passed, would
significantly increase the probability of a project advancing
to the next stage of engineering and permitting. And that phase
itself would require about nearly a billion dollars to conduct
further engineering and permitting activities.
Third, a fiscal contract with the State of Alaska that
provides clear and durable fiscal framework. Investors need to
know with certainty what the terms and conditions are before
investing billions of dollars, not after.
In the spring of 2003, I'm pleased to say the State of
Alaska passed legislation enabling the negotiation of fiscal
terms for a gas pipeline project. BP, along with ConocoPhillips
and ExxonMobil, are in active negotiations with the State of
Alaska to develop a clear and durable contract that enhances
the economics of the project. Both the State and the producers
are working hard and are hopeful a contract can be developed in
the near term.
Fourth, establishing a clear and predictable Greenfield
regulatory process in Canada that meets the needs of a modern
day project and broadly matches the time lines identified in
the proposed U.S. legislation. Federal Working Group in Canada
is currently working on this process and we believe good
progress is being made, nonetheless their focus right now is
predominately Mackenzie Valley project, and they are certainly
looking to the U.S. to pass legislation as a signal of U.S.
interest in the project.
Although progress has been made across all four of these
fronts, we cannot yet declare a victory on any of the necessary
government frameworks. Nonetheless, we remain very hopeful that
success can be achieved in the near term.
We are often asked how long it will take to deliver gas to
consumers once the necessary government frameworks are in
place. And I always begin with the caveat: This is a very, very
large, very, very, very large and difficult project, and it is
impossible to predict perfectly when everything will occur. The
next major phase of this project alone will require a $1
billion commitment for engineering and permitting and in itself
will take several years. Assuming that phase is successful and
final cost estimates support proceeding to construction, gas
could be flowing in 9 to 10 years.
In summary, we believe that natural gas from Alaska's North
Slope can play a key role in meeting the future needs of North
American consumers, but only if the project risk/reward balance
supports the attraction of investment capital. Public policy in
the U.S., Canada, and Alaska will have a significant impact on
that risk/reward balance, and we will be evaluating the project
and our next steps in light of government decisions.
We remain intently focused on identifying a commercially
viable Alaska gas pipeline project. It is one of the most
significant gas development opportunities in our portfolio. And
I think to echo what Senator Murkowski said earlier, it is a
project with enormous intrinsic merit. It has got win/win/wins
all over it.
We welcome the opportunity to provide policymakers with
information and perspectives regarding the project.
Mr. Chairman, thank you. I would be happy to answer any
questions.
[The prepared statement of Ken J. Konrad follows:]
Prepared Statement of Ken J. Konrad, Senior Vice President for Alaska
Gas, BP Alaska
Mr. Chairman and Members of the Subcommittee, I am Ken Konrad, Sr.
Vice President for BP Alaska and am responsible for BP's development
and commercialization activities for Alaska North Slope gas.
Thank you for the opportunity to provide the Subcommittee with BP's
perspective on the Alaska gas pipeline project.
I would like to begin by saying that the North American natural gas
market is extremely important to BP. Here are a few reasons why:
We are currently the largest natural gas producer and reserves holder
in North America.
We are investing $15 billion in the Gulf of Mexico to supply domestic
oil and gas to U.S. consumers.
We are actively pursuing plans to increase LNG supplies to the U.S.
We have significant interests in ``stranded gas'' in Alaska and also
Canada.
We believe Alaskan gas has the potential to play a major role in
supplying significant volumes of gas to the North American market in
the decades ahead.
NORTH AMERICAN SUPPLY SITUATION
Government and industry experts all agree that the North American
supply situation is increasingly tenuous. Traditional supply basins
will not meet projected demand in the coming years and additional
supplies are clearly needed.
It is further agreed, absent policies that support and encourage
new supplies from a variety of diverse sources, the gas market may be
forced to balance in undesirable ways. This could include higher
natural gas prices resulting in further demand destruction and/or fuel
substitution resulting in greater reliance on heavier fuels such as
coal or oil.
Northern Alaska is blessed with enormous natural gas resources and
35 trillion cubic feet of gas already discovered (while looking for
oil). Government studies estimate 100 TCF or more may be ultimately
recoverable, however the gas is remote and expensive to transport to
major U.S. markets--3500 miles away.
HISTORIC EFFORTS TO COMMERCIALIZE ALASKA GAS
Since the discovery of Prudhoe Bay in 1968, industry and government
together have searched for a commercially viable way to move this
stranded gas resource to market. However, to date, none of these
efforts has identified a commercially viable project.
In the meantime, the gas has been conserved and put to good use.
Gas produced from fields on the North Slope is re-injected into
reservoirs to aid oil recovery. Billions of dollars have been invested
over the years to increase gas-handling capability and to manufacture
enhanced oil recovery solvents that increase oil production. Through
these investments, an additional three billion barrels of domestic oil
reserves have been realized.
ALASKA GAS PIPELINE PROJECT OVERVIEW
During 2001 and early 2002, Alaska's North Slope Producers (BP,
ConocoPhillips and ExxonMobil) conducted a feasibility study for an
Alaska gas pipeline, investing one million man-hours and over $125
million, to carefully study many aspects of the project.
In total, the project was estimated to cost on the order of $20
billion and would be the largest private sector investment ever.
Project risks and benefits:
It is the enormous scale of this project that magnifies the risks
and inhibits the attraction of investment capital. These risks include
cost overruns, regulatory and fiscal risks, market risk and commercial
risk, to name a few. Any one of these alone could severely damage an
Alaska gas project, and each needs to be mitigated in order for BP to
have sufficient confidence to move forward to the next phase of
activity.
It is also the enormous scale of the project that generates
significant benefits to North American consumers and governments. Some
highlights include:
4+ bcfd of supply for North American consumers for decades to come
Hundreds of thousands of direct and indirect jobs over project life
A secure supply of domestic energy and the associated balance-of-
trade benefits
$90 billion of direct U.S. federal tax revenues assuming the U.S.
EIA price forecast
NECESSARY STEPS TO ADVANCE TO NEXT PHASE
The feasibility study that I referenced earlier concluded that the
project was technically feasible but not currently economic. Project
risks outweighed prospective rewards, preventing the project from
attracting investment capital. BP has identified progress across four
key areas as necessary in order to advance the project to the next
phase of activity.
1. Cost reductions to help improve project returns
2. Passage of U.S. federal legislation.
3. Developing a fiscal contract with the State of Alaska
4. Establishing a clear and predictable regulatory process in Canada
Let me briefly explain each:
First, cost reductions are needed to help improve project returns. BP
has made good progress maturing new technologies and improved
designs that we believe hold promise in reducing project costs.
We intend to validate these potential savings as we enter the
next phase of engineering.
Second, passage of U.S. federal legislation including key regulatory
and fiscal measures. I would like to thank this committee for
adopting the Alaska gas pipeline regulatory provisions
contained in HR6. Those provisions, in our opinion, provide the
greatest regulatory clarity of any of the various versions
considered over the past several years. These regulatory
provisions, coupled with the fiscal provisions considered in
the Senate, if passed, would significantly increase the
probability of a project advancing to the next stage of
engineering and permitting--which would mean the project
sponsors spending nearly a billion dollars to conduct
preliminary engineering and permitting activities.
Third, a fiscal contract with the State of Alaska that provides a
clear and durable fiscal framework is needed. Investors need to
know with certainty what the terms and conditions are before
investing billions of dollars, not after. In the spring of
2003, the state passed legislation enabling negotiation of
fiscal terms for a gas pipeline project. BP, along with
ConocoPhillips and ExxonMobil, are in active negotiations with
the State of Alaska to develop a clear and durable contract
that enhances project viability. Both the state and the
producers are working diligently through this process and are
hopeful a contract can be developed in a timely manner.
Fourth, establishing a clear and predictable Greenfield regulatory
process in Canada that meets the needs of a modern day project
and broadly matches the timelines identified in the proposed
U.S. legislation is also needed. A Federal Working Group in
Canada, composed of key federal agencies, is currently working
on such a process, although a key priority in Canada remains
progressing the Mackenzie Delta pipeline. While the Canadian
Government is actively considering a regulatory framework to
help the Alaska gas project advance, they are clearly looking
towards passage of U.S. legislation to confirm U.S. interest in
the project.
Although progress has been made across all four fronts, we cannot
yet declare success on any of the necessary government frameworks.
Nonetheless, we remain hopeful success can be achieved in the near
term.
HOW LONG WILL IT TAKE?
Mr. Chairman, I am often asked how long it will take to deliver gas
to consumers once the necessary government frameworks are in place. My
response always begins with the following caveat. This is a very, very
large and difficult project, and no one has the perfect crystal ball.
The next major phase of this project alone will require a nearly $1
billion commitment for detailed engineering and permitting and will
itself take several years. Assuming this phase is successful and final
cost estimates support proceeding to construction, gas could be flowing
9-10 years after entering the next phase.
In summary, we believe that natural gas from Alaska's North Slope
can play a key role in meeting the future needs of North American
consumers, but only if the project risk/reward balance supports the
attraction of investment capital. Public policy in the U.S., Canada,
and Alaska will have a significant impact on the risk/reward balance,
and we will be evaluating the project and our next steps in light of
government decisions. We remain intently focused on identifying a
commercially viable Alaska gas pipeline project--it is one of the most
significant gas development opportunities in our global portfolio. We
welcome the opportunity to provide policymakers with information and
perspectives regarding the project.
Mr. Chairman, thank you again for the opportunity to appear. That
completes my testimony. I'd be happy to answer any questions.
Mr. Hall. Well, thank you.
We thank you three for being willing to come and testify.
Not everyone that we talk to evidenced a real great desire to
do that, and we thank you and thank you for the time you spent
with us preparatory to this.
It seems to me that TransCanada owns the right-of-way,
Enbridge has about half of the Alliance Pipeline to Chicago and
BP has what? Twenty-eight percent of the gas on the North Slope
with ExxonMobile and ConocoPhillips having the other. But your
big problem how to share the risk on making it all happen. Is
that the major question that you have?
Mr. Konrad. Well, I think two elements. One is raising the
returns of the project.
Mr. Hall. Is what now?
Mr. Konrad. Well, risk and reward. If a project has high
perspective returns, you can tolerate risk.
Mr. Hall. Oh, yes.
Mr. Konrad. And if it has high risk, you need higher
returns.
Mr. Hall. You think BP would tolerate all the risk then and
take a----
Mr. Konrad. No, I do not think so. This is a challenging
project and it is going to take, I believe and as I tried to
say in my testimony, a partnership of the U.S. Government,
Canadian government the Alaskan government and the three major
producers and potentially pipeline companies joining as well
provided they are prepared to add value and take some risk. So
it is going to take everyone rolling in the same direction.
Mr. Hall. Yes, I was facetious with you. I did not think
you were going to lay it right on the table there. But I do not
know, it seems like if we ever figure out how; it is such a
worthwhile project that can just absolutely save this country
and ave us energy wise that means all those signs around
nuclear plants ``no nukes can say no wars'' if we could solve
what you all are here giving us testimony.
And you all heard the testimony today of Chairman Wood and
the Senator. So Mr. Konrad in your testimony you said that BP,
ConocoPhillips and ExxonMobile--by the way, you are the ones
that can or break this, are you not? You feel that position?
Mr. Konrad. Most of the risk inevitably is going to fall on
the shippers of the gas or the producers. That is just the
nature of the industry.
Mr. Hall. Yes. In your testimony you say BP, ConocoPhillips
and ExxonMobile are in active negotiation with the State of
Alaska, ``to develop a clear and durable contract that enhances
project viability.'' And I guess that means a pipeline?
Mr. Konrad. Exactly.
Mr. Hall. And is that in direct competition with
TransCanada or Enbridge?
Mr. Konrad. I do not know that it is in direct competition.
What we are trying to do with the State of Alaska is to--the
nature of the fiscal regime in Alaska is that the producers pay
the taxes whether severance tax, royalty, income tax, or even
the taxes on the pipeline. Any taxes paid by the pipeline are
passed through to the shippers. So the producers are taking
that risk and we are looking to get into a binding durable
agreement with the State of Alaska. And we have actually asked
Alaska that any terms that we agree regarding the pipeline
itself, that those be transferrable to any party. So we have
encouraged a wide opened playing field.
Mr. Hall. Yes. Your appearance here helps us get the
attention of the United States, of the Congress and of this
committee. Are there any seemingly insurmountable hurdles that
you have with the Canadian government?
Mr. Konrad. No, I do not believe so. I think they are
looking to----
Mr. Hall. They want it, they support it?
Mr. Konrad. They have consumers just like the U.S. does.
They have people that want jobs just like the U.S. does. They
enjoy the notion of energy security.
I think they do have a priority to see MacKenzie gas
flowing first, and we are supportive of that. But if that falls
into place, I think the Canadian government will do what is
needed, absolute.
Mr. Hall. And Mr.McConaghy, you and gave us a good
preliminary look at this earlier. The producers have spent a
lot of money on a feasibility study concerning the project. And
I think you mentioned it your testimony. That study said that
the project's currently uneconomic, but your testimony
indicates that the project is economic. Do you want to address
that Mr. McConaghy. Yes. I think the issue is how, as you
mentioned a few minutes go, is the inherent risks of this
project going to be allocated amongst the parties that have to
assume that risk. And that is going to, as Mr. Konrad noted,
principally going to fall to the shipper of the gas, and that
is most likely to be currently the producers of the North
Slope, the three firms that you cited.
The final landing of what pipeline terms, what the State
fiscal issues and whatever is done by the U.S. Congress in
terms of risk mitigation, all of those elements will come
together and have to still come together to determine what is
the right landing on risk mitigation that will actually take a
project which we believe is today a project that is economic,
can move forward provided each of the private sector
participants feel that the amount of risk that they are being
asked to bear is responsible or them to do so.
And I would go on to say that another risk that is inherent
in this project is the risk of the regulatory process itself
and any other interventions that parties make which all goes to
trying to take advantage of those existing elements both of
infrastructure and of existing statute that minimize the
prospect that this project has major hurdles either in the
hearing room or in other venues if all the appropriate
stakeholders can't be accommodated.
Mr. Hall. I thank you. I am about 41 seconds over my time.
So I recognize Mr. Strickland for questions.
Mr. Strickland. Thank you, Mr. Chairman.
And I want to thank those of you who have testified.
I was sitting here listening thinking of a hearing we had
not many weeks ago, and Mr. Greenspan was with us talking about
the current situation with natural gas supplies and pricing in
this country. And he, quite frankly, told us he saw no short
term answers.
And as you talk, I think at least two of you have indicated
that you think there may be a possibility if this were to move
forward of the completion and having supplies available in this
country in around 9 years. Is that assuming that we are going
to start tomorrow or when would the actual work have to begin
in order to have supplies available within 9 years in your
judgment?
Mr. Konrad. In our judgment it would be 9 to 10 years from
the completion of the government frameworks that we have talked
about, the U.S. legislation, signed executed contract with the
State of Alaska where we are making good process and the
regulatory process in Canada, which I think can be done fairly
expeditiously once they see a signal from the U.S. Government.
When the gun goes off there, in our view, it would be 8 to
10 years if everything clicked pretty well.
Mr. Strickland. Do the others of you concur with that?
Mr. Carruthers. That would be consistent with our view, and
we would see that you could have a loopline system available 1
year earlier than a larger single system.
Mr. Strickland. Mr. Carruthers, I was intrigued by what you
said regarding the measured approached. You indicated faster
completion of construction, a faster initial gas delivery, more
opportunities for American steel manufacturers; I am especially
interested hearing your rationale there, pipe plants and
contractors, more predictable costs, lower transportation costs
and so on.
Can you specifically say why you believe your approach
would make more opportunities for American steel producers
likely?
Mr. Carruthers. Yes. And we are really driven looking at
that process in terms of a consistent theme in terms of risk
reduction. And we would see that--and so if I can get back to
it, it terms of there's a huge known resource of 35 tcf, which
would support over a 30 year period about 3 Bcf of pipeline
commitments. So we were thinking that it may be better to take
a more measured approach to match that volume, because we were
not sure who would step up the additional capacity. But in that
when you look at 36 system, there is more capacity in North
America for mills to manufacture that, particularly because of
the wall thickness. So at a 52 inch over 1 inch wall thickness
it is very little, if any, capacity in North America to
manufacture that, where at a 36 inch system that is available
in North America so they could compete for that.
Mr. Strickland. So my understanding is that the piping for
the oil pipeline can primarily from Japan, is that correct?
Mr. Carruthers. Historically people would have looked at
sources over the world in terms of North America, Germany and
Japan in particular for sourcing their steel. Depending on the
size, they could all be competitive for that.
Mr. Strickland. Excuse me for interrupting, but so would
all three of you concur that with one 52 inch pipeline it would
be unlikely that American steel companies would be able to
compete because they do not have the capacity for that kind of
production? Am I hearing your opinion correctly?
Mr. Carruthers. That would be our opinion that without
significant investment, which we did not think was likely, that
is correct.
Mr. Strickland. Do the others----
Mr. McConaghy. I think we would be of the view that there
is still a reasonable case that a 48 inch pipeline which helps
improve the overall economies of scale is still more likely the
appropriate pipe sizing, particularly for future expansion
opportunities. And that is within the capacity of North
American--some North American steel manufacturing facilities.
Mr. Strickland. So the Alaska Oil Pipeline is what? Forty-
eight?
Mr. Konrad. The taps line is 48 inch, but it is thinner
wall thickness, yes.
Mr. Strickland. And so what you are talking about is a
thicker----
Mr. Konrad. The designs that all of us are contemplating is
modern day gas pipeline design which is higher pressure, which
means more wall thickness. As Dennis alluded to, the pipelines
are kind of the ultimate economies of scale type of
construction. You can build it this big and it costs so much,
and you can add a few inches and your unit costs or the cost
per mcf to transport it goes down quite dramatically. So like
John indicated, and we have looked at that design in quite a
bit of depth. It is smaller diameter and it is probably because
of that, slightly lower risk. But the tariffs, if you will, or
the unit cost to transport the gas tends to be higher. And that
is why we do not--the whole challenge of this project is
getting the tariff.
The market is there, the gas is there. The whole project is
doing it, getting it from A to the consumer at the lowest
tariff. And we think that a large diameter line does that most
effectively.
Mr. Strickland. Mr. Chairman, can I just make a concluding
comment, and I will be very brief?
Mr. Shimkus [presiding]. You may.
Mr. Strickland. The problems of getting the Congress to
agree on anything I think involves self interest on the part of
those of us who are a part of the Congress. And it seems to me
that as someone who is concerned about and from a steel
producing region that to have the opportunity for American
steel companies to be a vital participant in the production of
the materials for this pipeline could go a long way toward
really causing an excitement amount many of us who are
concerned.
I understand that is an esoteric, some might even say
narrow or self interested point of view, but it is one that I
think to me and I think to many others could be very important.
Thank you, Mr. Chairman.
Mr. Shimkus. The Chair now recognizes my colleague from
Maine.
Mr. Allen. Thank you, Mr. Chairman. And thank you for
holding this hearing.
I have just a couple of questions for all three of you.
First of all, the Senate just took up the energy bill and
turned it down for a second time. The legislation is ont likely
to move again this year. Do you have positions breaking out--
well, I would argue out the electricity reliability provisions
or the natural gas pipeline provisions as separate legislation?
Would that be helpful to you?
Mr. Konrad. Well, we believe the country needs a
comprehensive energy policy, and that would certainly be our
preference. If Congress decides that it feels it is more
appropriate to pass it in a piecemeal fashion, I think you will
see BP supporting the Alaska gas provisions in whatever form
that they come. But I think the Nation does need an energy
policy.
Mr. McConaghy. Certainly TransCanada has had the position
and we have tried to be fairly careful as a Canadian company
not opining on how the U.S. Congress should pass legislation.
But I think certainly we have never had any opposition to the
moving forward of the Alaska provisions. We have seen in
respect of them, they would all be constructive additions to
moving the project forward.
Mr. Carruthers. Similarly we would see the Alaska
provisions as very important to the U.S. energy.
Mr. Allen. Okay. Let me just ask you, in the early 1980's
energy prices were quite high and Congress, you know,
considered this pipeline. However, the FERC Chairman Wood just
testified that natural gas discoveries in Canada and in the
Lower 48 States ballooned and world oil prices moderated. You
have asked for a congressional guaranteed minimum price for gas
from Alaska that was included in the Senate energy bill but
excluded from the conference report. You know, I realize that
trying to predict fuel oil prices and natural gas prices is a
risky business. But, you know, how would you describe the risks
involved in lower prices today and as compared to--let me say
this another one.
Can you evaluate the risks and the likelihood of prices,
natural gas prices in the next 5 to 10 years being higher than
they are today or lower than they are today? Can you talk about
the risks of their being lower or their likelihood or not of
their being higher?
Mr. McConaghy. I would just offer this comment. I think
that unless this project finds a way of moving forward and also
if LNG certifications do not move forward----
Mr. Allen. Right.
Mr. McConaghy. [continuing] the only way the North American
gas supply to demand balance will balance will be through
higher prices. And there is going to be of that in the short
run until some of this additional infrastructure is development
because, frankly the amount of supply addition that is going to
be possible from both Canada and the United States is
conventional supply regions is going to be difficult to do much
better than hold its own. So with growing demand, and natural
gas is the fuel choice at the margin for incremental
electricity production, what we are really talking about is
improving the ultimate price level at some point either likely
the tail end of this decade or for the next, but that is really
the realities of how long it is going to take us to get these
kinds of project mobilized. And that is just really I think the
plain facts of the matter.
Mr. Allen. Anybody else have a point?
Mr. Carruthers. Just consistent with Dennis' views, but
also suggest that prices do not need to increase further than
they are today to make the project viable. It is just a risk of
it was not that long ago there was lower prices that would not
support a project. In all probability we would see that prices
do support a project, but it is a huge investment.
Mr. Allen. So even a slight risk of lower prices is a
problem is what you are saying I think?
Mr. Carruthers. That would be my assessment in terms of the
market. Ultimately it is really a resource owner's issue in
terms of pricing.
Mr. Allen. Right.
Mr. Konrad, anything?
Mr. Konrad. Well, I would just state the obvious that to
the extent there is more supply in the North American markets
that prices should moderate. And we would certainly expect that
if policies are in place to encourage tight gas production, to
encourage LNG terminals that gas can be supplied to North
America at prices below what they are today.
Mr. Allen. Okay.
Mr. Konrad. I might also point out I have heard the
vocabulary of price floor a couple of times. I believe members
of this committee are clear that the production tax credit
being considered is a 52 cent credit. It is not a floor. It
never exceeds 52 cents. If the price drops a dollar, it is 52
cents; if it drops $2 it is 52 cents. It actually is identical
in its mechanism to what we all have become quite familiar
with, the Section 29 or even the marginal well credit. So it is
the same mechanism.
Mr. Allen. Okay. Thank you.
The clock up there is acting very strange.
Mr. Shimkus. You do not have 53 minutes. You do not have 53
minutes, no.
Mr. Allen. I was hoping. Thank you.
Mr. Shimkus. A couple of quick points. And I know my friend
from Ohio is here, too, is just for the record we know what the
end use of some of the natural gas is in this country. We know
electricity generation is kind of a new end use, relatively
new. We know home heating.
Someone mentioned some of the other major uses of natural
gas, who you sell it to and what it is used for, or do I need
to do that?
Mr. Konrad. Well, the whole petrochemical complex,
fertilizer, polyethylene or the whole host of industries that
gets into plastics and onward that are dependent on natural gas
feed stock.
Mr. Shimkus. So the reason why I mention this is because
when we talk about our concerns in industry and manufacturing,
there are a lot of competing forces in this country, variables,
that allow us to be competitive or allow us not to be
competitive. You guys are in a very competitive industry.
Energy is one of those.
As I mentioned in my opening statement, you know, my
farmers have a tripling of cost for fertilizers because of the
tripling of costs of natural gas.
In the steel industry a major component for just the
running of the steel plant is natural gas, and that is a cost
of doing business. And if that cost triples, then that is
another variable that makes it very difficult to compete. But I
think with my colleague from Maine's question on there is a lot
of risk with this project. And we have listed, you know, the
possibility of 8 to 10 years that maybe the lower 49 may see
benefits.
Will there be because of the impatience that we will have
as Americans and consumers, we will see fuel shifting in ways
that maybe my friends in Maine may not like. Those of us in the
coal regions in this country are going to be kind of excited.
That planned natural gas generator facilities that was
mentioned earlier, while no longer be planned, are still there
but the electricity generation plant of choice now is going
back to coal.
So even for my friends who are environmental concern, there
will be fuel shifting over time and that may lower--there is
always going to be a high demand for natural gas in the out
years, I believe, but it may not be as high if we go back to
nuclear-based low generation and coal generation. And that is a
risk that you all have to consider in this out year projection
of trying to recovery your costs. Is that not true?
Mr. Carruthers. I think it is especially true, but one
thing I would be more concerned about is the fact of the impact
on the North American economy of not seeing a long term secure
reliable source of energy. So I think that overall demand
impact of the economy would be a big concern.
Mr. Shimkus. And that would be if we do not fuel shift?
Mr. Carruthers. Even with fuel shifting I am just thinking
you need to see a long term----
Mr. Shimkus. Right. And that is part of the debate of a
national energy policy is that you have broad approach on
addressing a lot of concerns. If we move to a hydrogen economy
right now, the commodity product of choice is natural gas. We
may go into ethanol, we may go into coal as far as being able
to product hydrogen, but the commodity fuel of choice today to
move to a hydrogen economy is natural gas. And if we do not
expand our supply, that really puts that at risk.
Mr. McConaghy. My only comment would be is that I think a
certain amount of fundamental change in terms of where certain
kinds of commodities are going to be actually produced is
perhaps irreversible. And some of that phenomena has been seen
in fertilizer, in petrochemical industries. Notwithstanding
that, I think it is still apparent by most energy experts who
look ahead, and I think actually also from the perspective of
what is in the best interest of the U.S. economy, to still see
great value in facilitating the importation of LNG and also
moving forward with this project. Because those are really the
two major supply sources that have yet to really make a major
contribution. And when you do that, you do not necessarily
restore those industries, but you do in terms of having
significant production positions in North America, but you do
what I think fundamentally you can do that is within the scope
of the economic. And it will generate benefits for all
interests in the U.S. economy.
Mr. Shimkus. Right.
Let me just end up. There is concern especially that a
project of this magnitude might pose vertical integration
issues and less of a competitive aspect nature across the
country. But with the proposed in essence consortium of
players, does that not dispelled that concern?
Mr. Carruthers. It would be our view that it does. I think
if we are talking about the project in particular, a very keen
important part of the project. So I do not think you would want
to eliminate that.
Mr. Shimkus. If the Federal Government enacts the Alaska
Natural Gas Pipeline provisions would anyone be so bold as to
predict that they would commit to the pipeline?
Mr. Carruthers. That is one step. That is a very major
step.
Mr. Shimkus. Right. And then the other stuff is the market
forces, developing the consortium and projecting return?
Mr. Carruthers. Fiscal certainty with the State of Alaska.
Mr. McConaghy. If we are talking bout the provisions that
were contained in the conference report, certainly if those
move forward as I have said before I think those are
constructive steps and they may even be necessary steps. The
real task is still for the commercial parties to try and find
the right mix of risk sharing as well as the State of Alaska
and perhaps there will be still more work for this Congress to
do in adjusting that risk reward balance.
Mr. Shimkus. Right.
Mr. Carruthers. One further comment that I do not think has
been addressed. I would still see there is significant room for
the market to participate. We have often talked about, Ken
mentioned that the producers may underwrite the long term ship
commitments. But really the biggest beneficiary are consumers
and they should have an interest in ensuring the pipeline goes
ahead from a long term perspective. Obviously it needs
regulatory support. So I would say that is another very key
component to allocating risk out and helping the project move
ahead.
Mr. Shimkus. Right. I know we had a hearing last week on
deep well drilling and part of the debate was on just, again,
referring to the industrial sector, the cost in the United
States for natural gas versus Russia, which is an essence one-
fifth. Actually greater, one-tenth of the cost, which the
consumer should. But the consumers, other than a natural gas
bill, are not the sole payers of the commodity. It is passed on
to the fertilizer, it is passed on to the finished good and the
like.
We have been joined by my colleague from Michigan, and I
would like to recognize him for a round of questions.
Mr. Rogers. Thank you, Mr. Chairman.
Thank you panel. I know you have been here a while.
I just want to change gears briefly. I am from Michigan and
we certainly have been hit in the manufacturing sector pretty
hard, and when we look at why that is occurring we know that
taxation, litigation, and regulation are direct uncompetitive
disadvantages for Michigan manufactures as it applies to the
rest of the world, as is our energy costs right now, especially
natural gas. Can you talk about the provisions of H.R. 6 and
what that would mean for manufacturing jobs in America on a
cost basis? I don't mean it would solve all the problems today,
but just as it relates to our high cost verses our
uncompetitiveness with our neighbor countries, especially the
ones we are competing with on the very jobs that are moving and
shifting.
Mr. Konrad. Well, to the extent H.R. 6, we have talked
about very clearly, some key government frameworks, the energy
bill is one of them. Should that allow a project to advance:
(1) additional supplies into the market should help mitigate
price volatility. And second, for Michigan, the scale of this
project, it is difficult to describe it. Every number on this
project has a lot of zeros after it, but things like pick-up
trucks. We were talking about steel earlier. There is not just
steel for the pipe, there is steel for compressor stations,
there is still for--an enormous amount of steel, enormous
amount of construction equipment. The list kind of goes on and
on, and so I would think that for a manufacturing State like
Michigan trenchers, backhoes, pick-up trucks; all that would be
quite stimulative, I would expect.
Mr. Rogers. And that is in direct relation to what the bill
would provide for us for building and supplying natural gas, or
at least providing incentives.
Mr. Konrad. Yes.
Mr. Rogers. That does not count the fact that it would also
reduce the natural gas costs. We have I believe it is two
plants that will not go on line because natural gas is too
expensive to burn for energy, for electricity.
Mr. Konrad. The market needs more gas. Alaska is a great
source of that, but we should not limit ourselves to Alaska. It
is going to need to be LNG. It is going to need to be deep
water. It is going to need to be mature basins' type gas. And
any policies that are put in place to encourage supply will
help mitigate high prices, absolutely. And it will help
manufactures.
Mr. McConaghy. I mean, I would just add that I think those
provisions are absolutely constructive provisions in terms of
putting in place those things that will add to supply which, in
turn, is useful to the kind of interest that you have just
described in addition to the construction impact that Ken has
just noted. So clearly those provisions are absolutely
constructive. They may not translate into immediate price
mitigation because these are long term, high capital
infrastructure projects and they really are going to be putting
in place today a legacy for the next decade, at least in terms
of Alaska.
Mr. Rogers. But if we want to look at competitive
advantages down the road, waiting is not going to solve our
problem on H.R. 6. I mean you are saying it will not impact
prices today, but waiting until next year or 2 years from now
is not going to help us out?
Mr. McConaghy. I totally concur with that. Moving forward
would be a constructive thing to do.
Mr. Rogers. What happens if we do not do anything? What
happens to the price of natural gas in places like Michigan, a
peninsula State?
Mr. Konrad. Prices go up, as I said in my testimony, you
get further demand destruction as industry perhaps has to move
off shore or substitution into heavier seals such as oil or
coal or other heavier fuels, which have policy implications in
itself.
Mr. Rogers. So if I am a manufacturer who is dependent on
natural gas either directly in a manufacturing process or
indirectly if we do not do anything we are putting a direct
cost on every job in that shop? It is coming, right? I mean the
prices are going up, we are not going to eat that price, right?
Mr. McConaghy. All other things being equal, margins will
be squeezed. That is right.
Mr. Rogers. I mean, some of you have facilities, you
understand the cost of doing business. I mean, we know that we
are not going to pay Chinese wages and they are not going to
pay wages. And we are going to have to do everything that we
can do to be competitive in the United States, and energy is a
big part of that. Now, if you're going to make that decision,
do I stay here in an uncertain market where I am not sure what
my energy costs will be or do I build a plant in Russia where I
know I am going to be able to get it ten times cheaper, I will
get close to the energy source? That is a very real possibility
for decisions that these companies are going to make, is it
not?
Mr. Carruthers. Yes.
Mr. Rogers. And some of you may even had those discussions
with companies who are looking closer to their energy sources,
have you not?
Mr. Carruthers. Well certainly it is a major consideration
in determining what your long term business viability is. And
in case of Alaska, it is a very well known resource in the
United States. It just seems a crime not to pursue that
opportunity.
Mr. McConaghy. Congressman, our company is not focused on
international infrastructure today.
Mr. Rogers. Yes.
Mr. McConaghy. So we are not really looking to supply
services for entities that are trying to bring gas to
production facilities in other locals in the world.
I think the only point I would make is that bringing
forward more natural gas into North America from Alaska that is
to the Lower 48 and through LNG is absolutely in the best
interests of the continent. We firmly believe that.
What industries are going to be able to take natural gas or
take its derivative in terms of electrical power and prosper
with that in terms of the next decade? You know, there is a
whole set of economic decisions that are going to play
themselves out.
I think what we are contending is that it is in the best
interest of the economy to bring these supply sources into the
economy and how they ultimately translate into what kinds of
industries should be located in North America. That's a whole
more complicated question. I think what we are suggesting is
that the advent of these new gas supplies is absolutely in the
national interest but it is a different question as to in the
long run what industries are going to be able to use what
degree of energy inputs in whatever form.
Mr. Rogers. And my point only was that some of these
companies will base their decisions on the cost of energy
including natural gas, if they stay or if they leave. It is
absolutely critical for a----
Mr. McConaghy. Absolutely.
Mr. Rogers. [continuing] State like Michigan that we get
this off.
Thank you very much, Mr. Chairman.
Mr. Shimkus. Thank you.
I thank the panel for your patience in putting up with us.
And this hearing is adjourned.
[Whereupon, at 12:47 p.m. the hearing was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of The American Chemistry Council
The American Chemistry Council represents the nation's largest
industrial users of natural gas. Last year, the U.S. chemical
industry's natural gas bill increased by $6.5 billion. Higher costs
mean U.S. producers are losing market share to foreign manufacturers.
It means domestic producers have less money to invest in their
businesses. And it means U.S. companies are being forced to close
production and eliminate jobs. U.S. chemical manufacturing has lost
more than 90,000 jobs since 2000 according to the Bureau of Labor
Statistics.
We commend the Subcommittee for holding this hearing to see what
can be done to speed up construction of the Alaskan gas pipe line, but
as important as building an Alaskan pipeline is, it is a long-term
solution, and industries like ours need immediate action as well.
Three years of extreme volatility and high prices in natural gas
prices are taking a terrible toll on the chemical industry--a critical
infrastructure industry vital to the country's national and economic
security. Affordably-priced natural gas helped make chemicals the
nation's largest export industry. In the late 1990's the industry
posted the largest commercial trade surpluses in the nation's history--
$19.7 billion. Those exports have sustained hundreds of thousands of
good-paying jobs.
The U.S. has become a net importer ($9.6 billion last year) of
chemical products--and much of this stunning decline can be traced to
natural gas prices. Five years ago, chemical products poured from the
U.S. Gulf Coast to Asia. Today, we are being beaten by Asian importers
in our own backyards.
Stephen Brown of the Federal Reserve Bank in Dallas recently told
the Louisiana Public Service Commission, ``You're looking at the
gradual destruction of employment in certain petrochemical firms. Given
the prices of natural gas and oil, the petrochemical industry here
could be gone in 10 to 20 years.''
In March, James Ray, vice president and general manager for the
Texas division of the Eastman Chemical Company told The New York Times,
``Gas price spike continue to idle capacity basic chemical
manufacturing in the United States, and the long-term outlook remains
bleak
The Washington Post recently ran an article on the front page of
its business section. The headline said, ``Chemical Industry in Crisis:
Natural Gas Prices are Up, Factories are Closing, And Jobs are
Vanishing.'' Mississippi Chemical Corporation became one of the latest
companies to verify that headline when, on March 26, it announced it
will lay off 72 workers and close the bulk of its fertilizer and
plastics manufacturing plants in Donalsonville, La. by the end of May.
The company said extreme fluctuations in natural gas prices contributed
to the decision.
``We have the highest natural gas prices in the industrialized
world,'' R. William Jewell, vice president for energy at Dow Chemical,
told the Post. In the past two years, Dow has closed four major
chemical factories in North America and replaced them with production
from Germany, the Netherlands, Kuwait, Malaysia and Argentina.
``These jobs didn't leave the US because of labor costs,'' Jewell
told the Post. ``They left the US because of uncompetitive energy
costs.''
On April 25, the Chicago Tribune ran a story titled, ``Energy Costs
an Offshore Factor.'' The lead sentence said, ``Escalating energy
costs--especially for natural gas--are causing US companies to close
plants and move overseas. ``When Germany is a more competitive platform
for production than Louisiana,'' said Greg Lebedev, President and CEO
of the American Chemistry Council, ``something is seriously out of
whack. We are effectively being uninvited to maintain our plants
here.''
On April 21 Federal Reserve Chairman Alan Greenspan told the Joint
Economic Committee of Congress, ``We are losing a lot of business,
especially in chemical-related areas, because we can't compete at these
(natural gas) prices.''
In the past five years, the US chemical industry has lost $50
billion in business to foreign competition. High and volatile natural
gas prices is a major reason why.
Last fall, the National Petroleum Council (NPC) issued a definitive
report on natural gas markets. The NPC report projects that natural gas
consumption by the chemical industry will decline by 25 percent in the
next five years. Some of that will result from efficiencies, some will
result from fuel switching, but most of that decline will come as a
result of demand destruction--natural gas consuming factories shutting
their doors and moving away.
The NPC report is the most important wake-up call ever issued on
natural gas. It is nothing less than an indictment of business as usual
energy policies--policies that are fundamentally contradictory. The NPC
stated it most succinctly:
``Government policy encourages the use of natural gas but does not
address the corresponding need for additional natural gas supplies. A
status quo approach to these conflicting policies will result in
undesirable impacts to consumers and the economy, if not addressed.
``The solution is a balanced portfolio that includes increased
energy efficiency and conservation; alternate energy sources for
industrial consumers and power generators, including renewables; gas
resources from previously inaccessible areas of the United States;
liquefied natural gas (LNG) imports; and gas from the Arctic.''
The report goes on to say how government policies contribute to
price volatility. ``Today, many regulations and policies affecting
natural gas are in conflict. Public policies are promoting the use of
natural gas as an efficient and environmentally attractive fuel. These
policies have led to restrictions on fuels other than natural gas for
the siting of power generation and industrial facilities, restrictions
on fuel switching, and fuel choice limitations.
``Other laws and regulations have been enacted that limit access to
gas-prone areas--areas where gas can be explored for and produced in an
efficient and environmentally friendly manner--and there are outright
bans to drilling in certain regions. There are laws and regulations
that unnecessarily hinder pipeline and infrastructure siting or
interfere with the functionality of the market in ways that lead to
inefficiencies. Overall, these conflicting policies have contributed to
today's tight supply/demand balance, with higher and volatile gas
prices. The beneficial effects of additional gas use can be achieved
more efficiently and at a lower cost with policies that eliminate the
current conflicts.''
The report says that business as usual will lead to a monumental
tax on American consumers and businesses. Our current ways will impose
$1 trillion in new costs on the economy, NPC concludes.
We have carefully reviewed the reports finding and recommendations
and find ourselves agreeing with nearly everything it says.
The nation must get serious about using gas more efficiently and
conserving energy. Some experts have estimated that reducing
the amount of natural gas used to generate power by 5 percent
would reduce natural gas consumption by 1.5 trillion cubic feet
a year--enough natural gas to heat 18 million homes.
The nation must maintain a diverse fuel base and create more
opportunities for consumers to switch fuels when market
conditions warrant. Today, we have the technology to supply
clean-burning gas--made from coal and other hydrocarbon
sources--to utilities and industrial customers.
The nation must invest in energy infrastructure.
And the nation must increase natural gas supplies.
Building the Alaska pipeline is clearly part of the solution to the
natural gas crisis. But it is one part of the solution. Congress must
enact a balanced portfolio of policies--aimed at curbing demand,
diversifying fuel use, increasing supply, and building infrastructure--
that enable consumers to buy adequate supplies at globally competitive
prices. Failure to do so will accelerate the ongoing exodus of
manufacturing capacity--and jobs--now taking place in the US.
______
Interstate Natural Gas Association of America
Washington, D.C.
May 28, 2004
The Honorable Joe Barton
Chairman
Committee on Energy and Commerce
2125 Rayburn HOB
Washington, DC 20515
The Honorable Ralph M. Hall
Chairman
Subcommittee on Energy and Air Quality
2125 Rayburn HOB
Washington, DC 20515
Dear Chairman Barton and Chairman Hall: On May 5h, 2004, the
Subcommittee on Energy and Air Quality held a hearing on the Alaska
Natural Gas Pipeline. Dennis McConaghy of TransCanada Corporation was
one of the invited witnesses, and at the hearing, he requested that a
written statement from the Interstate Natural Gas Association of
America (INGAA) be entered into the record. As both the Chairman of
INGAA and the President and CEO of TransCanada, I am writing to correct
some comments which were part of the INGAA written statement.
Subsequent to the hearing, a number of members of the INGAA Board
of Directors have expressed their concerns about, and objections to,
comments made in the statement regarding vertical integration. While
the INGAA comments were specifically directed at the potential
ownership of the Alaska pipeline, the statement could be interpreted as
a more broad-based argument against any vertical integration in the
natural gas industry. This was not the intent of the statement, and
that is not the position of INGAA on the matter of vertical
integration, In addition, while the INGAA statement expressed a
preference of independent ownership of the Alaska pipeline, this should
not be interpreted as an argument advocating a government policy that
restricts the ownership of the pipeline. As several INGAA Board members
have stated, any party willing to adhere to the regulations regarding
natural gas pipelines should have an opportunity to construct, own and
operate the Alaska pipeline project.
We regret any misunderstanding the written statement may have
caused, and thank you for the opportunity to correct the record. INGAA
also intends to correct the record on these matters in future hearings
before the Congress. Please let me know if you have any questions.
Respectfully,
Harold N. Kvisle
Chairman
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