KAREN HUNT: What I'd like to do is start this discussion in the same way that we've started all of them which is we know who our guests are, but I would like for them to have some idea of who you are. So I'd like to go around and just have you give us your name and if you have a business or professional association with some firm or business, would you tell us that as well so that we can then begin. So may I start with Tom, please?

DR. TOM NIGHSWANDER: I'm Tom Nighswander and I'm one of the vice presidents of Commonwealth North. But in my real life I'm a physician over at the native hospital and I'm very interested citizen of the state.

BRIAN DAVIES: Brian Davies. Twelve years ago I worked for BP, but I no longer do and I no longer speak for them.

MS HUNT: Now, Brian, did you say speak to or for?

MR. DAVIES: For. I do occasionally speak to.

MS HUNT: And you, sir?

JERRY STRANG: I'm Jerry Strang and I'm retired. I came up with Chevron in '68 and spent 20 years in real estate.

LIZ FASCOS: I'm Liz Fascos, I'm an attorney, I'm with the state of Alaska.

BOB DURST: I'm Bob Durst, I'm an architect that came to Alaska in '74 and I was very interested in the topic.

JOANNE PANDAVIES: I'm JoAnne Pandavies, I don't have a business affiliation and I'm a short-term resident which is why I'm here.

BECKY PARKER: Well, I'm Becky Parker and I've been here since 1973. I joined ARCO for 20 years and I'm now working with the commissioner of Health & Social Services.

EVERETT ANDERSON: Everett Anderson, I work within the Department of Commerce, business development specialist.

GRANT HUNTER: Grant Hunter, I'm a lawyer, I do consulting work with Alaska International Adoptions.

JACK RODRICK: I'm Jack Rodrick, interested citizen.

JEFF STACER: And I'm Jeff Stacer, interested citizen.

MEAD TREADWELL: I'm Mead Treadwell and in past lives I've had the privilege of hiring both Harry Noah and Mike Menge. To be honest they did exceedingly well. But I'm a member of the Board of Commonwealth North and served in the Hickel administration

MS HUNT: Good. Thank you. Welcome to all of you. Here's what I would like to do. You know if you wrote out one of these questions and I would like you to have the opportunity now to ask that question directly. I don't need to read what you wrote, if you had a question that was forwarded to us, could you start by your asking or rephrasing that question now. So anybody here who asked any of these questions? Mead?

MR. TREADWELL: I guess the question that I have first off is given your world of Mike, what justifies saying okay, the only guys who can get this gas to market are the guys who own it, who won't sell it to anybody else because they will hurt by doing that. Where do we hedge our bet if they don't perform, how do we hedge our bet if they don't perform?

MIKE MENGE: A glib answer is I don't care what other people do as long as we get our piece, I don't care about the rest of it. subsidy issue, I think, your second part of the question is very valid. And it really gets to the heart of this issue and it's very good. Wellhead value, everything is the wellhead value. Now a pipeline company or any third party who wants to build a pipeline is going to build it based on the contractual commitments made for throughput. They will be regulated entities and they will get what it cost to build the pipeline plus a 12 to 14 percent guaranteed rate of return. So the pipeline companies will make their 14 percent no matter what. And if they have a pipeline that costs this much or they have a pipeline that costs this much, they're still going to get their piece of the top. So they have very limited motivation to cut and build the most efficient, cheapest system around. The only people that are motivated to get 11 cents worth of value out of every 10 cents spent are the people that control the gas, the ones that hold the leases, the state of the Alaska and those three companies. Those companies and the state are incredibly motivated to get a system that's very dependable and very inexpensive. The smallest, cheapest tariff possible. I will also add that the balance sheet of those three companies in the state are such that they can get the cheapest money, loan terms, on the planet. So they can get the cheapest money, they are highly motivated to get a system that costs absolutely less than anyone else can build and it maximizes the wellhead. The other companies, good companies, Trans Canada and other companies, wonderful companies, will try to minimize the cost because they want to keep the tariff for their customers. But when push comes to shove their money's on the table, if they have an opportunity to advance the schedule by a month and it only costs X number of millions, they're going to do that because they're self-motivated. And at the end of the day doesn't matter to them because they're going to get their 14 percent no matter whether they spent 20 billion for that pipeline or they spent 100 billion for it. So it all goes back to motivation. Those three companies and the state of Alaska control the gas and are the only ones that are motivated 24 hours a day to get the cheapest, most reliable system possible.

MS HUNT: Follow up questions to that, anything that the commissioner said that you'd like him to explain further?

UNIDENTIFIED VOICE: We focus on the wellhead, you say exclusively that. And I understand we really have to bound this negotiation, this project, to define its scope. It was the most economic thing, if economics was the only thing driving, would be to go to the north. Taking it through Alaska is a concession to provide that river through the heart of Alaska. Absent a plan of how all this structure fits together, like a spur line down to Anchorage, we're making a decision to optimize what we know. How much of a role does the state play in trying to anticipate well, we will have exploration in Cook Inlet that will cut off the need for the spur line down here, does Inlet gas reserves play into the equation at all or is that just kind of defined and assumed off of the scope of work?

COMMISSIONER MENGE: A line to Anchorage would be a very good thing to have. They are now able to compete with their counterparts in their own companies for exploration dollars. We're seeing a boom in exploration here in the Inlet. The toughest decision we're going to have to make is when that pipeline starts whether we're going to put a spur line in or not and whether we're going to have the capacity to that spur line. And we're going to do in state studies because we haven't defined the market down here. And then the pipeline system will service any demand that's out there.

UNIDENTIFIED VOICE: But the actual debate today is just the pipeline without that economic because we just don't have the data for that.

COMMISSIONER MENGE: No, but we have to generate the data for the open season.

MS HUNT: Now I'm going to stop for just one moment, Harry, because a term was just used and it's definitely a term of art. And unless you've been around the oil and gas you don't necessarily know what it means or the significance of it. And so, Commissioner, you just used the term open season. That's a very important part of the concept and the functioning of a gas pipeline. So would you take a moment and explain to us what that is and the significance of it?

COMMISSIONER MENGE: Open season is a federally regulated activity that the company will say we want to build a pipeline and we think we can build it for that proposal to the holders of the gas. The gas people, the ones that own the gas, control the gas, to say yes, that is a reasonable tariff we want to market our product. So we will take firm capacity on your pipeline, we will make a contractual commitment to you for X number of years, between 20 and 30 years. And it is actual commitment that the pipeline company goes to the bank, gets the loans and actually builds the pipeline. The open system is federally regulated -- I should back up a little bit. The pipeline company says we're going to do this and FERC then becomes the referee and tells them how they will do it, terms and conditions, 110 years. FERC will either compel them to increase the size of the pipe or they will apportion out. So they run the rule, but essentially the open season where you say I will take capacity on your pipeline and I will back that up with a contract, a take or pay contract for 20 years.

MS HUNT: In other words as a part of the application process the pipeline builder goes to FERC and says this is my plan and here's how big I think it's going to be, it's either going to be this size of pipe with this many pumps and this size of compressors. And then FERC will determine tariff, but that requires that there be the capacity purchased before anything else is done. Is that what open season means?

COMMISSIONER MENGE: Open season is a physical commitment and says we will participate in your pipeline.

MS HUNT: Commissioner, the only time that another one will come along is if somehow the pipeline that was originally built is changed in capacity, either the pipeline is made bigger or the pumps are made bigger or the compressing units are made bigger?

COMMISSIONER MENGE: That is generally correct, Judge. The difference here is that unique in the United States, FERC, because of the federal enabling developed four and half million cubic foot per day. And there such authority in the country that they will in this pipeline to mandate expansion.

GOVERNOR HICKEL: That's a very important distinction.

COMMISSIONER MENGE: I'm sorry, if I led you to that impression. You're right. Anyone who has gas and has the financial capacity to participate will not allow them to be frozen out.

MS HUNT: Okay. Any other questions about open season?

UNIDENTIFIED VOICE: for any other reason than that taking that out and say assigning it in an open season process?

HARRY NOAH: Can I answer that one?

COMMISSIONER MENGE: No. He asked me.

MS HUNT: And then you may answer.

COMMISSIONER MENGE: If you take capacity on the pipeline it's a contractual commitment. You can take capacity to Fairbanks.

UNIDENTIFIED VOICE: So you're proposing to ride this bus and never ever, ever, ever, ever, ever think of riding anybody else's bus, is that right?

COMMISSIONER MENGE: One you make a commitment to build, as I said, the foundation, the reason is the companies or the builders build a pipeline is based on that declared capacity. And yes, once you commit to it you're committed to it for 20 years.

UNIDENTIFIED VOICE: But isn't there another side that you commit to it and the companies commit or whoever builds the pipeline commits to building the pipeline.

COMMISSIONER MENGE: And I will also.....

UNIDENTIFIED VOICE: So the situation that you were referring to where it doesn't happen, they've broken their contract so you're free to break it?

COMMISSIONER MENGE: I can also say that with direct capacity to Anadarko or somebody else or Shell and then you can rent that portion of the pipe. Normally you would put your gas through. So you have all the options in the world with your gas, but you are going to pay for your throughput capacity.

MS HUNT: And, Mr. Noah, you wanted to..

MR. NOAH: Yeah, this is actually one of those points that as Michael will acknowledge, there was a great deal of, at least on my part, a lot of concern. Right?

COMMISSIONER MENGE: Yes, Harry, you were always very concerned about that.

MR. NOAH: Basically what happens in this deal as I've said before, this is a bullet line to Alberta. Once you commit to take the gas in kind then you have to sell it. And if you're going to sell if you have to rent capacity in the pipeline. And so it's not like five years later you get to go do something else, you really are committed. So the liquids and everything are going to go to Alberta. And yes, there may be a little bit of a takeoff in Fairbanks, but it's so small comparatively that it doesn't even show up I think. And sure, there may be a spur line, but who's going to sell them the gas. Once the state has bought capacity, it buys capacity from the North Slope to Alberta or Chicago, wherever the pipeline ends up.

COMMISSIONER MENGE: Or Fairbanks.

MR. NOAH: Well, or Fairbanks. But, the problem as Michael well knows is that there's a chicken or the egg problem here, is that if you're going to develop a petrochemical industry here you don't have an industry here now, you don't have an industry until you have gas. And so what happens is that -- let's say this project goes along on schedule just as it is right now. And you say, okay, you know, we're ready to start looking at this in terms of a petrochemical industry. You don't get to look at it anymore because you've bought your space on the line, you have to fill it. And if you get the gas to Fairbanks it's unlikely you're going to fill it with gas from elsewhere, maybe, maybe, maybe.

If you get to Glennallen it's unlikely you're going to fill it with much gas from there. So you have to keep going because your finances -- you've got a mortgage and you've got to pay your mortgage. And so you had lost your flexibility. And this is something that was debated, but it was essentially -- for the reasons that Michael has said, it was dismissed because it was considered more important to get the fundamental income to the state. And, I guess, this is where I disagree and this is where I've tried to urge this thing is not -- it does not have to be done right now. The deal does not have to be done this summer or next fall or a year from now because the companies aren't on that kind of a fast track. They are not at a point where they're making a real decision on construction or even on completing a feasibility study at this point. And they will argue to high hell right now that we can't start unless we have that. And there really is nothing stopping them, it's just simply a business decision. And from the state's standpoint, this is an issue that really needs to be understood and discussed. And if we as a state say no, we don't want a petrochemical industry, fine. And if you really think that after all these years that Cook Inlet there's going to be so much gas in Cook Inlet that we're going to have another LNG plant here, fine, you know, I'll be curious to see if that happens, but we are missing an opportunity that is significant. Amongst the other things that we're doing we're missing a significant opportunity.

MS HUNT: Okay. let me clarify a couple of things. You've used that expression twice now, Mr.Noah, and I'd like to make sure that I understand what you're saying. You say this project is a bullet line to Alberta. Number one, what does that mean? And secondly, when we're talking about a petrochemical industry, what are we talking about?

MR. NOAH: Well, it's partly what you have on the Kenai right now, you have an LNG facility. You have a fertilizer plant, which probably won't be economic and I don't want to, you know, say that that would be possible.

That's probably not going to work. But there are other potential type things, propane and the use of the butane and the ethane and that type of thing. And you have liquids that come down the line, it's not all methane. You have other constituents in the line that have the ability to produce products. And so I hope I answered that question. The bullet line concept is what Mead just said, it's a freight train. I mean, once you put it in that line it's coming out in Alberta or Chicago because you have to pay. You're paying firm transport from the North Slope to Alberta or Chicago. So every time you bleed something out, that you have to make sure you get the same price that you would have in Alberta or Chicago when you take it out of the line, you see, because you've already paid for the transport. You can't have if gas is $5 in Alberta, for example, an mcf or a million btu in Alberta and you want to sell some to Anchorage, that's fine. You're going to sell it for $5 and you're really going to sell it for $5 because you've already bought the transport. And then you're going to spend another dollar or dollar whatever to bring it from Fairbanks or from Glennallen to here to transport it. So now you've got 6.50 gas. You have to understand what this means to the rest of the state and the economics of it. Did I answer the bullet line concept?

MS HUNT: Well, let's see. Are there questions? Tom?

DR. NIGHSWANDER: A follow up question I thought for the spur line, for example, you could actually reduce the size of the pipe, for example, the pipeline, but you couldn't buy just the transport from the Slope to Fairbanks because you'd have to buy it all the way down to Alberta?

MR. NOAH: Well, you can you can buy firm transport to and from the North Slope to Fairbanks, okay. So the pipe's going to be that big.

DR. NIGHSWANDER: That's right.

MR. NOAH: And then it's going to shrink down to that much and that type of thing.

DR. NIGHSWANDER: Yeah.

MR. NOAH: Well, you can do that, okay, but you will find that when this open season occurs you aren't going to have a petrochemical industry. So.....

DR. NIGHSWANDER: You don't know what you need.

MR. NOAH: Right. So you can't take all that supply. And you can argue that the people are going to find other gas reserves elsewhere and that's a valid argument, maybe they will. But is that going to happen? I mean, you are really at this point in time making some fundamental decisions of what's going to happen in the state. And it is not in the producers best interest to mess around with selling gas in state.

MS HUNT: If Alaska wants to take part of its gas in kind to be used inside the state of Alaska to meet our own energy needs, when do we have to make the decision as to how much gas going where?

MR. NOAH: Michael's open season.

COMMISSIONER MENGE: expansion open season.

MR. NOAH: Twenty years later.

COMMISSIONER MENGE: Or 10 years later, or five years later.

MS HUNT: Okay. So the initial decision has to be made at the open season time?

MR. NOAH: Right.

MS HUNT: And that's right at the beginning as a part of the permitting process?

COMMISSIONER MENGE: A little further down than just start of the permitting process, but it's before it's complete.

MR. NOAH: Can I interject something to clarify?

MS HUNT: Yeah, and then I think Commissioner Menge wanted to respond. Go ahead.

MR. NOAH: Commissioner Menge is talking about we're a billion dollars away from some of these decisions and that's part of what we're talking about. Just the amount of steel that's required, the difference between a 48 inch pipe and a 52 inch pipe which I don't think has ever been built before. There's hysics and a lot of physical constraints on this as well. We don't know, that's why we're going to spend a billion dollars figuring out what's the price of steel doing, what's this going to do with the technology of bending pipe that we've never bent that thick before, that wide.

These are huge uncertainties and I think that goes to the heart of the deal. What is in the best interest of the state. We don't know what we want to be when we grow up so we have not identified a use for this gas yet. And it would be terribly controversial to talk about a petrochemical industry in Fairbanks, it's hard enough to open up a gold mine. I think what some of these questions are going to be, we have to be a little bit comfortable with ambiguity until we spend a billion dollars, you know, to get enough information to make an intelligent decision. The question is on your point at what time is it a point of no return, what time do we commit?

MS HUNT: It's when we buy capacity we've committed, right?

MR. NOAH: Right.

COMMISSIONER MENGE: the point I want to do is maximize the benefit to this state and if differential prices between Alberta and other places. So the benefit is it's a sprinkler head. There's connections from Alberta all the way to the Pacific coast, throughout the heart of America and all the way to the east coast. And it services essentially is a switch where you can move your gas from one. There are terms and conditions and rules and things that you have to follow and costs, the option of moving your product to essentially to anywhere in the United States.

Americans and Canadians and the U.S. share a common North American market. Generally speaking the prices are approximately the same across the north because they're all feeding off of the same pressure grid.

MS HUNT: I have a question because I need to reconcile something that I understood from Dr. van Mues and what you were just saying. When we had an opportunity to talk with him he repeatedly kept saying if this project has to go to Chicago, I love the way he said that word, it is a bad, bad project for Alaska.

(END OF PROCEEDINGS)