Remarks by Mark Maddox
Principal Deputy Assistant Secretary for Fossil Energy
to the
Interstate Pipeline Regulatory Committee
Annual Meeting
Chicago, Illinois
October 12, 2005

Thank you and good afternoon. It’s a pleasure to be here this afternoon to discuss the Department of Energy’s role in planning and building the Alaska Natural Gas Pipeline -- as Acting Federal Coordinator and as administrator of the pipeline project’s Loan Guarantee program.

Perhaps, in defining the Department of Energy’s role, and laying out the actions we have taken and expect to take, it would be helpful to go back to the Alaska Natural Gas Pipeline Act of 2004, the legislation that created the federal coordinator and loan guarantee roles.
I’ll summarize, leaving out the dull stuff.

Section 106 of the Act describes the office of the federal coordinator as an independent office in the executive branch responsible for coordinating the expeditious discharge of all activities by Federal agencies with respect to an Alaska natural gas transportation project, and ensuring the compliance of Federal agencies with the provisions of the act.

The legislation goes on to say that the Federal Coordinator and the State of Alaska will enter into an agreement to monitor the construction of the pipeline similar to that in effect during construction of the Trans-Alaska Pipeline.

The Section concludes by stating the federal government will have primary surveillance and monitoring responsibility in areas where the pipeline crosses Federal or private land; and the Alaskan government will have primary surveillance and monitoring responsibility where the pipeline crosses State land.

There’s a lot of responsibility packed into those few sentences.

The legislation is equally clear on loan guarantees. In its essentials, it states that the Secretary may enter into agreements to issue federal guarantee instruments with respect to loans and other debt obligations for a qualified infrastructure project with one or more holders of a certificate of public convenience and necessity. The Secretary may also enter into such agreements with one or more owners of the Canadian portion of a qualified infrastructure project.

The legislation stipulates that the Secretary’s authority to issue Federal guarantee instruments is subject to a deadline of 2 years after the date on which the final certificate of public convenience and necessity -- including any Canadian certificates -- is issued for the project.

Now we get to the money. The act states that:

• The amount of loans and other debt obligations guaranteed for a qualified project shall not exceed 80 percent of the total capital costs of the project, including interest during construction;
• The principal amount of loans and other debt obligations guaranteed shall not exceed, in the aggregate, $18,000,000,000;
• The Secretary may issue Federal guarantee instruments that take into account repayment profiles and grace periods justified by project cash flows and project-specific considerations. The term of any loan guaranteed shall not exceed 30 years; and
• The Secretary may issue regulations to carry out his loan guarantee responsibilities.

That’s not bad for legislation. You can almost understand it after only a couple of readings.

Alaskan natural gas is a priority in our National Energy Policy.  Enactment of the pipeline act more than a year before the recent energy policy act demonstrates that Congress and the President consider the Alaska Natural Gas Pipeline project to be of great importance.
The North Slope of Alaska has a large discovered gas resource of 35 TCF and the National Petroleum Council estimates the undiscovered and currently stranded gas resource to be 213 TCF. 

In addition, the natural gas currently produced at Prudhoe Bay during oil production operations is reinjected and used to increase oil recovery. As oil production declines, that gas will become available for sale. 

The need to produce every cubic foot of domestic natural gas was apparent long before September’s devastating hurricanes shut in Gulf of Mexico natural gas production and dramatically demonstrated the fine balance between current supply and demand by sending already high natural prices soaring even higher. Domestic production is not keeping pace with demand, as the tripling of imports of LNG since 2002 demonstrates. We could use the Alaska pipeline’s estimated annual throughput of 1.6 to 2 Tcf of gas right now but we’re going to have to wait a decade while we plan and build the pipeline before we turn the valve and begin transporting gas.

The comprehensive national energy policy for energy security announced in mid-2001 pointed specifically to the promise of North Slope natural gas exploration and production and its potential to contribute to meeting the increasing demand of a growing economy. North Slope gas is already factored into our supply forecasts for 10 and 20 years out, when natural gas demand could grow by a third, reaching 31 Tcf a year. 

The Pipeline Act, and the work we are now doing, will make the pipeline a reality and contribute Alaska natural gas to the increased  supply we need from every available source.

We need increased production from federal lands where possible; increased production of deep gas reserves, both on and offshore; increased production of unconventional gas reserves – and the delivery of Alaska’s gas reserves through the proposed pipeline.

And someday in the not too distant future, with the pipeline in place and the appropriate technology developed, we may be able to begin to reap the reward of tens of thousands of TCF of gas trapped in the methane hydrates embedded in the Alaskan permafrost.

This panel’s members can ably address the producer‘s angle on the pipeline project, the builder/operator’s angle, and the federal regulator’s angle. I’ll talk about what we at the Department of Energy have been doing to carry out our responsibilities as federal coordinator and for the loan guarantee program.

Since passage of the Pipeline Act, we have developed a business plan, which evaluates the responsibilities, actions, and resources needed to implement both the temporary responsibilities of the Federal Coordinator and the permanent programmatic needs for the $18 billion Loan Guarantee Program. 

In addition, we issued a Delegation Order to the Assistant Secretary for Fossil Energy to create the Alaska Pipeline Office and established an Interagency Federal Group to spur cooperation and we’ve held the first meetings to discuss roles and responsibilities.
We testified in June to the Alaska Legislature, along with representatives from the Department of the Interior and FERC, at the request of Senator Stevens.

We developed and sent to Congress a $900,000 FY’05 Budget Reprogramming Request. The request was approved in June.

We also developed and published a Notice of Inquiry in the Federal Register in May seeking public comment on the $18 billion loan guarantee program and on specific issues about how the program should be administered. The comment period closed in July. DOE received comments from twelve responders representing fourteen entities, including Alaska North Slope natural gas producers, pipeline companies, a financial and management consulting firm, investment bankers and governmental entities from the State of Alaska.

Based on the comments received, we concluded that the majority of responders are against the issuance of regulations because they could prove both unnecessary and restrictive.

The comments pointed out that regulations could endanger project sponsor creativity aimed at reducing project costs, particularly with regard to financial structuring. There was a suggestion that, after a period of consultation with interested parties, the DOE engage in direct negotiations with viable sponsors to work out the best way to structure the loan guarantee.

With that work completed, we drafted an Interagency Memorandum of Understanding and solicited comments from the Department of the Interior and FERC.  The finalized MOU is being circulated to the broad Interagency Group for concurrence and signatures. We are also continuing discussions with the Government of Canada, as well as with prospective project proponents.

The outcome of the Canadian Government’s deliberations over which of two alternative regulatory frameworks to employ for the Alaska Gas Pipeline is of intense interest to all parties.  I’ll just take this opportunity to state that the U.S. government is neutral with regard to the internal Canadian decision on which regulatory regime to use. We do not wish to influence the timing of the ultimate decision but we do advocate an open and competitive process that should result in the lowest possible tariffs and, ultimately, in the lowest prices for U.S. consumers.

We are also following with close interest the progress of the Canadian McKenzie Gas Project. If the various parties to the negotiations can agree on the project, the U.S. obviously would welcome the additional gas supply from our long-time energy trading partner Canada that a pipeline from the McKenzie Delta would deliver to the lower 48.

As to the situation regarding the Alaska gas pipeline today, we are waiting to see the project proposal the Alaska legislature will approve. Once the number of credible project sponsors has been narrowed down to one, we can then decide, based on the facts, whether regulations will be needed.

While we await a decision from the State of Alaska, we are working to prepare the Department for the task ahead. We are currently looking into obtaining the services of a financial advisor as well as a law firm with large project financing experience.

When the time comes, that is, when a commercial project emerges, we must be prepared with staff and an Interagency Memorandum of Understanding in place to execute temporary Federal Coordinator responsibilities. We all hope that will happen soon.

When a complete application is filed, we must be ready with final regulations for detailed negotiations regarding the Loan Guarantee program. We estimate that will occur next year and in the first half of 2007.

When Final Certificates are issued, we must be prepared to issue the limited recourse Loan Guarantee. If all goes well, that will happen in 2008.

The final step will be completion of the Loan Guarantee Project -- when the loan becomes non-recourse – estimated to happen in 2013.

Needless to say, all the interested parties to a project of this size, cost and complexity must get it right, from the beginning. With so much at stake, it is not surprising that negotiations between the State of Alaska and project proponents are not yet concluded. 

The state is considering three applications under the Stranded Gas Development Act: a pipeline built by the owners of the gas; an independent pipeline built by a company that has no ownership position in North Slope gas; or a non-profit corporation that proposes to send gas to market via tanker.

A contract under the act would be for 25 to 35 years and provide the applicant the assurance of a stable fiscal regime during the period they need to recover their investment.
In return, the State of Alaska expects a final agreement to meet Governor Murkowski’s six principles: a fair share of revenues to the state; gas for in-state use; pipeline availability for others; an economically expandable pipeline; equity ownership for the state; and jobs for Alaskans.

No wonder it’s taking so long.

Governor Murkowski recently gave negotiations a jumpstart when he provided the three major North Slope producers with contract terms for developing the pipeline. The proposal proposes that the State of Alaska invest $4 billion in the pipeline project and acquire 20 percent ownership. The governor has said he wants to have a contract ready to present to the state legislature for approval before its regular session starts in January. 

In our dual role as federal coordinator and administrator of the loan guarantee program, the Department of Energy’s interest is identical with that of Alaska and of the eventual industry partners in the project: We want the pipeline to go forward as efficiently, as cost-effectively and as rapidly as possible.

Energy Secretary Bodman himself is taking a strong interest in the pipeline project. He is following the progress of this preliminary phase of the pipeline project closely. 

Today’s discussion can only help advance us toward our common goals. I look forward to your questions and to further discussion of this vital project.