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Witness Testimony
Mr. Ken Konrad
Alaska Natural Gas Pipeline Status Report
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. Related Documents |
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