Issues concerning the transportation of Alaska natural gas

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Issues concerning the transportation of Alaska natural gas
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United States -- Congress. -- Senate. -- Committee on Interior and Insular Affairs
United States -- Congress. -- Senate. -- Committee on Commerce
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Table of Contents
    Front Cover
        Page i
        Page ii
    Memorandum
        Page iii
        Page iv
    Assessment of natural gas supplies
        Page 1
        Page 2
    Demand for Alaskan natural gas
        Page 3
        Page 4
    Status of regulatory approvals
        Page 5
        Page 6
        Page 7
    Financing
        Page 8
    Legislation
        Page 9
        Page 10
    Back Cover
        Page 11
        Page 12
Full Text
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COMMITTEE ON INTERIOR ANI) INSULAR AFFAIRS
HENRY M. JACKSON, Washington, Chairman
FLANK C(II'rCII. Idaho PAUL J. PANNIN, Arizona
11:1: NMEiTC.AI.F, Mintana CIAIFFORD P. IIANSE.N, Wyo ning
J. BENNEJTT Ji)IINsi'o.N, I.,iii-iaiia MARK 0. HIATFIELI), Oregon
JAMI:S .\l;i)lIRl:ZhK. South liak Ita JAMES A. McI.URE, Idaho
FLOYD K. IIASKLL.., Colorado DEWEY F. BARTLETT, Oklahoma
J.1 i'IN (;LENN, Ohio
1 LII AI; I STONEI. : ',rrila
I.A.I: BL'MI'ERS. Arkansas


GIEENVL1.i- G. RnsIDE, Special Counsel and Staff Director
)DANI:L A. DREYr'rs, D('put, Stall Director for Lcgislation
WILLIAM J. VAN NEsS, Chief Counsel
D. Micii.Hk. II.\Rny, Deputy Chief Counfel
Ir.\RItSON LO.:scH, Minority Counsel



('OM.MITTEE- ON COMMERCE


WA. RREN G. MAGNL-USON, Washington, Chairman
JO IN 0. PA STORE. Rhildo Isl rind JAMESI B. PEARS.(N, Kansas
VANCE IHARTIKE. Indiana IR]I.:I;RT P. GRIFFIN, Michigan
I'II LII' A. HAI.RT, Michlp-.in IIOWA RHI) H. BAKER, JR., Tennessee
1lOWARI W. C.ANN-)N. Nevada TED STI.VENS, Alaska
IIISS.ELL. B. LI)NG, Louisiana J. GLENN BEALL.. JR., Maryland
FRANK E. MI)SS. Utah LOWELL P. WICKER, T.I., Connecticut
ERNEST F. HOLLINGS, South Carolina JAMES L. BUCKLEY, New York
DANIEL. K IN()OUYIE'. Hawaii
JOHN V. TUNNEY, California
AIDLA I E. STEVENSON, Illinois
WE:NDELL JI. FORD), Kentucky
JOHN A. DURKIN, New Hampshire
NI c(:HA-L PE:RTS(HIUK, ChiCf Counsel
S. LYNN UTCLIFFE, General (Coun.sel
M\L(OLM NM.*B. STIRRTrT, Mlinority Counsel


(U)


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MEMORANDUM OF THE CHAIRMEN


In February 1976. the Senate Comnmittee on Interior and Insular
Affairs and the Senate Committee on Commerce will conduct joint
oversight hearings on Arctic natural gas r,,-.rves and alternative trans-
portation systems for delivery of this gas to markets in the lower 4S
states. The Conmmittees will examine the institutional, re,-ource aLd
other factors which may constrain or significantly influence the co.4t,
timing and mode of delivery of this natural gas into existing distribu-
tion systems.
To facilitate our respective Committee's consideration of this matter
and to develop a factual background on the major policy decisions
respecting Alaska gas, interested persons are invited to respond to all
or any of the attached questions by February 11, 1976.
Materials submitted will be included in the hearing record on this
matter.
HENRY M. JACKSON,
Chairman, Committee on. Interior and Insular Affairs.
WARREN G. MAGNUSON,
Chairman, Committee on Commerce.


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I, ASSESSMENT OF NATURAL GAS SUPPLIES


A. NATURAL GAS SUPPLIES
(1) What are the current estimates of proven reserve- in:
(a) the Sadlerochit formation of the Prudhoe Bay field,
(b) other formations in the Prudhoe Bay field,
(c) re-erves elsewhere in Arctic or interior Alaska, or on the
Arctic OCS, and
(d) the Mackenzie Delta and adjacent Canadian onshore and
offshore areas.

(2) What additional reserves can reasonably be expected to be dis-
covered and produced from each of these areas by 1985?

(3) What is the range of uncertainty and/or dispute in each of the
estimates in questions 1 and 2 above:
(a) resulting from geological or engineering uncertainty,
(b) depending on leasing or re.-ource development policies, or
(c) resulting from uncertainty about other factors (economic
incentives, industry response, logistical problems, etc.)?

(4) What are the potential natural gas resources in each of the areas
identified in question (1) and the likelihood of their producibility
in volumes which could influence the viability or relative merits of
alternative systems for delivery of Prudhoe Bay natural gas?


(5) Consider specifically what leasing or development policy re-
ga'ding the Alaska outer continental shelf, Naval Petroleum Re.-rve
No. 4, the Arctic Wildlife Range, state lands and lands controlled by
Alaska Native corporations might be necessary to make viable various
alternative transportation systems? Consider also the possibility of
major discoveries in Lower Cook Inlet. the Gulf of Alaska, or other
areas of Alaska, and their implications for the viability or merits of
alternative transport systems?

B. DELIVERABILITY AND COST
(1) What levels of natural gas production could each of th, areas
considered in subpart A above reasonably be expected to support in
each year 1980 through 1985, if transportation were available, given
due allowance for the time necessary for field development ?
(1)





2

(:2) XWhlt is tCe itaae of icertaiinty or dispute over each of these
s-t it :tes? C't nsitder part iciihirlv t lie relationship ,between crude oil
ic very and 1nat0:ral '..as production from the Pilrudhoe Bay field.

(3) The Vain Poollen study for the State of Alaska implies that
tlie 1t-t,.tial triadeoff ble1ttweeL ,ais a1 1( oil production from tlhe
Saidle!',t.|i itt formation will ]iot I)L ki'ow' until
(a) tests Ihave been made of tihe ability to inject water into tlie
reservoir and a. > oilre of water lias been assured, and
(b) I hlie opelial ion of the aquiilier underlying the reservoir hlas
I'en olIsierved during oil production.
Is tills infeeviuce correct? If not. can thle ol)ptimum rate of gas produc-
tion presently be calculated? If so. what is it? If the inference is cor-
r'c.,t, when are the earliest and latest, dates that enough information
Ii1iirht be available to make a prudent decision on the rate of gas pro-
duct i)ii and the vsyt lemi to t transport such natural gas

(4) (;i) What is tlie stat utiory mandate and policy of thlie oil and gas
'i.ervition atlltliority in Alaska with respect to optimizing the. joint
prodution of oil and gas?
(b) To what extent is there a requirement or authority for the
agen,. or the State to consider economic or development factors
(as opposed to physical conservation alone) in regulating field
pr*odhict ion levels ?

(5) (a) Could the rates of production at Prudhoe Bay now con-
templ)lateil by tie applicants in Docket CPI-T5-96 before the Federal
IPowl ('oiiilmili.-sion be appreciably reduced bv actions of the State of
Alaska?
(b) Wheli will the Alaskan conservation agency decide on the
allowable rate of natural gas and oil production?
(e) Can its initial decision 1)e later modified?
(d) Is there a conflict between the FPC's ,certificating au-
thorflity anl (l tie State's conservation authority? If so, which au-
t lIority would pi'vail?

(6) What is thle anticipated cost. (not nece-sarily equal to price) of
Plrudhoe Bay natiilal gas at tlie wellliead ? Please supply the assump-
tions and detailed lbackl-up for sucli estimates. Specifically:
(a) Are these calculations Incremental costs, assuming that all
joint costs of lease acquiisition and field development are borne by
oil prodl'uctiom. or do they assume an allocation of such joint costs
to gas production ; and
(b) Does tlie cost estimate include tlhe value of oil production
forgone, if any ?







II. DEMAND FOR ALASKAN NATURAL GAS
A. ANTICIPATED SHORTAGES
In the absence of the Alaskan gas, what are the anticipated natural
gas shortages in the lower 48 states by region in the 1980-85 period?

(1) Which pipelines are expected to be in deepest curtailment of
priority users in that period? What is the range of uncertainty asso-
ciated with these estimates?

(2) What is the anticipated intrastate demand for natural gas in
Alaska during the 1980-85 period?
(a) How much of the Prudhoe Bay gas is planned to be con-
sumed in Alaska ?
(b) To what extent do these projections of Alaskan consump-
tion assume natural gas use for boiler fuel and other uses for
which oil or coal could be substituted?
(c) How much do these estimates vary with different assurip-
tions concerning natural gas and oil prices?

(3) Which pipelines or distributors have options to purchase
Alaskan natural gas at this time?

(a) Would the same piplines and distributors obtain Alaskan
natural gas regardless of whether the Arctic Gas or the El Paso
project are approved?
(b) Whliat are the terms and conditions of these options to
purchase ?
(c) If Prudhoe Bay gas were to be sold to the pipeline systems
in greatest need on the basis of the best current projections pur-
suant to the FPC's current curtailment policy, which pipelines
would receive the gas and what quantity would be sold to each?
(d) On what terms would non-transportation system owners
have access to the Alaskan gas transportation system?

(4) The State of Ala.ska has not yet committed its royalty share of
the Prudhoe Bay gas to sale or options. Will the State's decision re-
garding disposition of its royalty gas (a), between interstate and
intrastate purchasers, or (b) among interstate purchasers, sigmifi-
cantly influence the viability or the FPC's evaluation of alternative
transportation systems?

B. PRICE
(1) Is the demand for Alaskan natural gas sensitive to natural gas
prices and to the price of alternative fuels in the lower 48 states?






(2) Whlen do the producers and I)lpurchasers intend to enter into firm
long-term contracts for the sale of the Prudhoe Bay natural gas?
(a) WhIat is the reason for the. delay to date?
(b) What price will the producers receive in the absence of FPC
price controls?
(c) What will be tlhe duration of the sales price ?
(dI) What are the other likely major terms of such contracts?

(3) For the two transportation systems proposed by tihe applicants
and the inodific-;tions recommended by the FPC environmental staff,
what are tlhe anticipated:
(a) capital costs (in 1075 dollars) ;
(b) the initial total transportation tariff per Mef delivered to
points on the West Coast, in the Midwest and in the East; and
(c) the total transportation tariff per Mcf delivered to such
destinations 1* years after initial delivery?

(4) Are current estimates, realistic in light of the large cost overruns
that recently have characterized major construction projects like the
TransAlakssa oil pipeline, tile Washington Metro or nuclear generating
plants? To what extent do the current cost. estimates take into account
tlhe likelihood of materials shortages, failure to perform by certain
contractors, defects or late delivery of equipment, -labor disputes, un-
usually severe weather, regulatory delays, etc.? If the experience of the
Alasklan oil pipeline and all these factors are taken into consideration,
what is the magnitude of total system costs (in both current dollars
and 1975 constant dollars) that conceivably could be expected?

(5) To what extent does transportation at each system's design
capacity depend upon additional discoveries of new reserves? What
is the range of anticipated total capital and operating costs per Mcf at
various levels of throughput?

6. (a) What is tlie size of the market for Alasklan gas in the lower
48 states if its average lower 48 city gate price (in constant 1975 dol-
lars) is $2.00 per M-cf? %%2.50 per Mcf? 1h0 per Mcf? S4.00 per Mlcf?
$5.00 per Mcf? What. is the asiiiled oil price in these estimates?
(b) At each average price wlhat portion of the total gas over the
course of a year would be consimedl byv priority users, (residential and
coIImerial) and at what price; and what portion would have to be
,old for boiler fuel or as interrutptible supply, and at what price?

(7) Wliat would be the impact on demand for Alaskan gas if its
prce at thc a ee S)State were tially higherr t]han the equivalent
avera 'ge price of oil ? At what price p er Mcf would pipelines no longer
le willing to purchlase Alaskan gas? What is the probability and under
what. circumstances, taking into account production costs, all tariffs







and taxes, that the price of Alaskan gas would exceed the amount pur-
chasers are willing to pay for an equivalent volume of base load
supply?

Please provide the estimates requested in questions (6) and (7) on
the alternative assumptions that Alaska natural gas is required to be
priced (1) incrementally or (2) on a "rolled in" basis.

C. COST OF DELAY
(1) What revisions must be made in project costs for each year of
delay (up to five years) in the commencement of construction?

(2) What is the best estimate of the total cost to consumers for each
year of delay beyond 1980 in terms of the price of alternative fuels or
impact on the economy of a gas shortage?

III. STATUS OF REGULATORY APPROVALS
A. AGENCIES INVOLVED
List all of the Federal and state agencies which must issue permits
or approvals as a prerequisite to the construction or operation of an
Alaskan gas transmission system.
(1) State the estimated timetable for the applicants to obtain such
approvals in the absence of expediting legislation.

(2) Is it possible or reasonable for the FPC to grant a certificate
for any gas transportation system before the deliverability issues iden-
tified in subpart I, B are resolved?

(3) State any approvals required after the FPC issues a certificate
of public convenience and necessity. Can the necessity of any such
approvals delay or even prohibit construction of the system?

(4) Identify the possibilities for slippage and delay in the time-
table for the FPC and other agency approvals?

B. FEDERAL-STATE RELATIONS
(1) Are Federal and state approval processes coordinated?

(2) Is there a potential for conflict between state land-use, coastal
zone management, construction, conservation, safety and other regu-
latory or taxation activities and Federal requirements and permits?






(,) What is. the mechanism. or what mechanism should be estab-
lishe(d. for encouraging early state input and resolving differences be-
t '%\i F001 FhrIl1 and state policies?

C. JURDICTAL REVIEW
(1) Which Federal or state agency decisions regarding the trans-
portation of Alaskan gras are the likely subjects of judicial review?
Wli.it ]- a iilsonlable esti iate of the time required to complete such
j d icial review of agency decisions? Could construction commence
while such judicial review was underway?

(2) Tn the absence of any legislation, what is the expected date
on wI ichl collstruct ion could commence? Be completed?

D. ALTERNATIVES
Please provide estimates of the costs, environmental impacts, con-
strii't ion lead times and other relevant facts concerning:

(1) An alternative pipeline route from the North Slope to Fair-
banks and then paralleling the Alcan Highway;

(2) Conversion of natural gas to methanol and shipment by the
traiis-Alas.ka oil pipeline or tanker or submarine; and

(3) Other possible alternatives.

E. SAFETY
What are the design and operation techniques to assure safe and
coontinuous operation of Alaskan natural gas transportation systems?

1. What is the relationship between the Federal Power Commission
,and the Department of Transportation with respect to safety stand-
ards during gas pipeline construction and operation?


2. What are the probable and worst case estimates of injury and
damage of natural gas pipeline accidents?

3. Which] State and/or Federal agencies have jurisdiction over LNG
terminal siting with respect to safety, distance from population cen-
ters. and ship traffic control?






4. What plans or procedures have the responsible agencies or the
applicant devised to prevent or deal with LNG tanker collisions or
other LNG handling accidents? What is the best available technology
to minimize the risk of an LNG accident and to deal with serious
LNG accidents?

5. What are the probable and worst case estimates of injury and
damage that could result from an LNG tanker or terminal accident?
What are the owners' liabilities for such an accident? Are existing
liability laws adequate to provide compensation for all damages result-
ing from a probable and worst case accident?

F. CANADIAN PROCEDURE
(1) What is the status of Canadian proceedings regarding the Arctic
Gas and Maple Leaf projects? What is the anticipated schedule for
final approvals by the National Energy Board and the Cabinet? What
approvals are required by Provincial Governments? Are there other
opportunities for delay of a Canadian decision, such as settlement of
Canadian native claims? What is the best estimate of when the Cana-
dian Government will reveal whether a trans-Canada route to trans-
port Alaskan gas is acceptable to Canada?

(2) To what extent does the Canadian decision in fact await or de-
pend upon a decision by the United States?

(3) What diplomatic channels or other mechanisms are available to
assure coordination of the U.S. and Canadian approval processes?
How would differences be resolved if incompatible trans-Canada
routes are approved in the U.S. and Canada?

G. TREATY STATUS
(1) What is the anticipated initialling date for the U.S.-Canadian
pipeline treaty ?

(2) What are the terms of the draft treaty?

(3) Would the treaty limit or restrain the taxation or regulatory
authority of state or Provincial governments?

(4) What other issues remain to be resolved in a specific protocol
dealing with an Alaska-Canada transmission system?






IV. FINANCING
A. PRIVATE CAPABILITY
(1) Do private capital markets have the capability to provide tlhe
ncces.arv finds for thle construct ion of an Alaskan gas transportation
s.v-teznl? ('lan the equity capital for tis project lbe attracted solely on
tlhe basis of regulated revenues froml natural gas consumers? What is
the anticipated interest rate at which needed long-termi debt capital
can be raised?

(2) Assume the project enlcoluntered suib.tantial cost overruns. Could
it still be financed privately? What are the outer limits of the amount
of capital that could be privately raised ?

B. SUBSIDIES
(1) To what extent are either of the applicants intending to seek
Federal subsidies, loan guarantees or other forms of financial assist-
ance to offset cots or provide cost overrun protection?

(2) Can either project be constructed and operated without any' such
Federal assistance?

(3) If Federal assistance to protect against cost overruns is required,
what incentives ,an be incorporated to give the successful applicant
incentives to minlimize costs?

(4) If a project requiring LXG transportation is certified:
(a) How many vessels would ble needed?
(b) Where would such vesels l)e constructed?
(c) What is the amount of subsidies or loan guarantees likely
to 6)1 r]eque'-t ed?

C. TARIFFS
(1) Is it anticipated that Al.askan gas will be sold pursuant to an
all-events full cost of service tariff whereby rates are automatically
adju-ted to reflect any costs incurred and are paid by purchasers
whether natural gas is delivered or not ?

(2) What is the. anticipated risk that gas deliveries will be inter-
rup)ted over the life of a project ?

(3) Is the private financing of the. Alaskan gas transportation sys-
tem omit inlrent i1po1 state ad(i Federal approval of such an all-events
tariff?






(4) Are there precedents for an all-events tariff in other situations?

(5) What is the likelihood that state public utility commissions
would approve natural gas pur'l(a-es conditioned upon such tariffs?

(6) Can purchasers obtain insurance from private markets to insu-
late them against financial difficulties if gas deliveries are interrupted?

(7) If the risk of interruption is significant, would it be prudent to
limit the percentage of Alaskan gas entering any pipeline or distribu-
tion company ?

V. LEGISLATION
(1) What legislation, if any, is required to facilitate the construc-
tion of an Alaskan natural gas transportation system?

(2) What subjects should such legislation address? Consider and
comment on such matters as:
(a) an expedited schedule for FPC action;
(b) a narrowing of judicial review in time and scope;
(c) establishment of a Congressional review process;
(d) congressional selection of one or more routes by directing
all involved federal agencies to expeditiously grant all required
permits and licenses;
(e) establishment of wellhead price ceilings and tariffs for
Alaskan gas;
(f) establishment of a consolidated administrative process for
the siting of LNG facilities;
(g) basis for and extent of an LNG vessel owner's liability for
damages in the event of accident;
(h) provision for financial assistance to assure project con-
struction;
(i) providing for allocation of Alaskan gas to pipeline sys-
tems in greatest need;
(j) resolution of environmental issues associated with the
transportation of Alaskan gas; and
(k) other matters.










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