Legislature(2013 - 2014)BUTROVICH 205
02/13/2014 08:00 AM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB138 | |
| Alaska North Slope Royalty Study | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 138 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX
8:08:06 AM
CHAIR GIESSEL announced SB 138 to be up for consideration and
that Black & Veatch would finish presenting its North Slope
Royalty Study starting on slide 43.
^Alaska North Slope Royalty Study
DEEPA PODUVAL, Principal, Black & Veatch, Management Consulting
Division, said after reviewing the fiscal framework and
comparing it to other successful LNG projects they concluded
that Alaska's government take is high. She said there is room
for reducing that take or providing some incentive to the
project and they looked at some traditional ways of doing that
by reducing royalty or production tax, but concluded the neither
one moved the needle as much as they had expected. A lot of that
has to do with the big capital expense at the front end of the
project.
8:09:10 AM
So, she started looking at equity participation as a potential
alternative for the state, especially if it reduced leakage to
the federal government. She said there are significant risks
associated with this project whether or not the state is an
equity participant, prices being a significant risk factor, and
it's hard to say what they will be 40 years out. Capital costs
and scheduling have been demonstrated as being significant risks
for large LNG projects currently under way worldwide and this
project is no different. The cost for financing this project for
all the parties involved, as well as the cost escalations over
time, all add to its risk profile.
8:10:44 AM
She looked at the impacts of these risk factors from both the
producers' perspective and the state's perspective, Ms. Poduval
said, and the biggest factors impacting net present value (NPV)
either to the state or the producers were prices and costs.
Depending on how prices move, the state's NPV could be 50
percent less or 80 percent more and the producers are exposed
equivalently to these factors.
8:12:04 AM
These risks could be managed by concentrating project control
through an integrated structure, meaning single-ownership
through the entire value chain. Market risk could be mitigated
by securing Pre-FID commitments through sales contracts (which
are typical) and by having the buyers participate in the project
with 5 percent or less (typically). Risk for this large project
could also be managed with state participation.
8:15:46 AM
The tangible benefits for the state with equity participation
are:
-To the extent that the State transfers value to the
Producers through a modification of fiscal terms as an
incentive for the AKLNG project, obtaining an equity
interest in the project in exchange for that transfer
of value is more beneficial to the State than a simple
reduction in fiscal take
-Greater alignment of economic interests between the
State and Producers
-State ownership lowers the upfront capital cost to
Producers creating potential economic uplift
-Allows for TCPL equity participation and operation of
the pipeline and GTP
-Equity in all phases could facilitate greater
transparency in the AKLNG Project
-Allows State to influence access for third parties in
the most critical potential bottlenecks of the
project, the pipeline and marine terminal
-Equity investment in the supply chain, while allowing
SOA a seat at the table, does not necessarily provide
for a vote in the decision making process
-Joint Venture Agreement structuring is critical
These are very attractive reasons for the state to have an
equity position, she said, but it is very involved with the
devil being in the details.
8:18:30 AM
JASON DE STIGTER, Senior Consultant, Black & Veatch, Management
Consulting Division, described three alternatives for state
equity participation as a way to make the project more viable
for all.
1. State taking a position in the project that matches
its RIK and what its tax as gas would be
2. State owning 100 percent of the pipe and passing
the tariff through to producers
3. State matching 12.5 percent ownership with its
corresponding 12.5 percent royalty share
He graphed the implications of those three cases for the
state/federal/producers stakeholders on slide 49. He looked for
cases in which the state's participation and the producers'
participation stayed about the same or in which the state stayed
the same and was able to induce the producers with a larger
share of the project. Of the six cases he ran, only two cases -
the 35 percent state gas share and the state owning the pipeline
with 100 percent debt - show the state maintaining its value and
the producers increasing their share.
8:22:30 AM
The Royalty Study came up with a reference case (15-35 percent
range) for state participation but it could have significant
deviations, so he looked for a more accurate range for the
equity alternative and came up with 22 percent [slide 51]. While
there are significant benefits with an equity alternative, there
still are some risks and one was the capital costs going higher
in the midstream component. There is also upstream risk in that
the state doesn't have control over the volumes that will enter
the project. And there is market risk downstream.
8:25:31 AM
MS. PODUVAL said there are risks to the Alaska project
regardless of whether the state is an equity participant or not.
Equity participation can benefit all the parties, but it needs
to be designed right to protect the state's interests, to
achieve transparency and access objectives, and to truly have a
seat at the table.
8:26:48 AM
The Study found that equity participation along the value chain
equalizing the share of gas with equity would be an attractive
way for the state to incentivize the project, to get some value
for the incentive it is providing to the producers, and to
achieve the chief objective of opening up the North Slope for
future explorers.
MS. PODUVAL said the decision for the state to involve
TransCanada as a way of optimizing that equity participation was
a separate decision and she looked at how that could impact the
state and found:
1. It shifts initial project capital burden to
TransCanada by transferring the state's equity share
in the GTP and pipeline to TransCanada with what looks
like a very favorable debt/equity ratio for
transportation services. The state also has the option
of buying back 40 percent of the equity stake in the
GTP and pipeline at the FEED stage.
2. It secures favorable debt/equity ratio for
transportation services.
3. It makes expansions more likely given the structure
contemplated in the HOA.
8:28:13 AM
MS. PODUVAL stated that this analysis is ongoing and some of
their high level assumptions were:
-State participating at a 20 and 25 percent level,
-State owned all of it and did not transfer a portion to
TransCanada,
-TransCanada held on to the GTP and pipeline and the state does
not exercise its 40 percent buy back option,
-state transfers a portion of the GTP and pipeline to
TransCanada and exercises a portion of its 40 percent buy back.
8:30:14 AM
MR. DE STIGTER said slide 58 showed the state's investment under
several different scenarios. The LNG plant is approximately half
the cost of the whole project and exercising the option to have
TransCanada own the GTP and pipeline saves the state half of the
necessary capital. Slide 59 looked at the cash calls (blue
sections on slide 58). His analysis also incorporated an
opportunity cost for the funds the state would have to use for
the cash calls and, therefore, funds it could not use in other
endeavors.
MIKE PAWLOWSKI, Deputy Commissioner, Department of Revenue
(DOR), clarified that this analysis was limited to the
TransCanada case and did not include other sources of revenue
coming to the state from the project.
MR. DE STIGTER said it was correct that the cash flows such as
property tax and state corporate income tax on the upstream were
not in this analysis. Slides 60-67 graphed NPV and different
cash flow scenarios.
8:36:23 AM
SENATOR MCGUIRE joined the committee.
8:37:18 AM
Slide 68 analyzed what sort of additional benefit the state
would receive from expansion of the project and slide 69
outlined the key assumptions for that analysis:
-1 LNG train expansion after five years of operation (the
original project has 3 LNG trains)
-a corresponding expansion of the GTP (modular)
-adding compression to the pipe
MR. DE STIGTER said there are significant cost efficiencies with
an expansion of a pipe project, because it already has a
diameter; all that's needed is to add compression and that would
cost $10 billion (compared to $45 billion for the original
project), which would result in a 30 percent additional cash
flow for the state (slide 70). Slide 71 showed the specific cash
flow forecasts. Slide 72 bar charts represented the sums of each
of the years in slide 71.
Slide 73 looked at things from a 10 percent discounted cash flow
perspective and that resulted in a $2 billion increase for the
state (20 percent over the original project). So, he said, there
are significant advantages with an expansion, along with
significant increase in volumes.
8:40:57 AM
MR. PAWLOWSKI said the majority of what the committee heard was
foundational to the work the state did and not necessarily
conclusions. The risk identification by Black and Veatch
informed how they worked on the HOA, in particular, and some of
the work the TransCanada MOU.
8:41:54 AM
CHAIR GIESSEL opened committee questions.
SENATOR FRENCH asked how he got the same return for wildly
different cash outlays on slide 62. He got part of the answer
from Commissioner Rodell earlier who explained that this graph
envisions not just making an investment in each scenario, but
taking the other cash and investing it somewhere else and
combining the returns - as if the state "had a bottomless well
of money with which to work" - but really the state would be
running out of cash in 2020-21. So, he asked to see that chart
performed as if the state didn't have the other money to invest.
MR. PAWLOWSKI said he would work on it.
8:43:45 AM
SENATOR BISHOP asked what 20-25 percent participation in the
project would do to the state's credit rating.
MR. PAWLOWSKI answered that was a key part of the analysis that
the department's debt manager would testify on in the Senate
Finance Committee, but he added that what drove some of the
analysis was the debt capacity of the state in terms of the cash
calls.
8:45:08 AM
SENATOR MICCICHE said his biggest interest was in understanding
the risk associated with the project and he hadn't heard them
talk about efficiencies lost on costs, resources, scheduling,
and permitting by splitting the gas-to-liquids and pipeline from
the liquefaction plant and asked how efficiencies could be
improved.
MS. PODUVAL answered that a 5-6 year construction period was
built into the project schedule and 4-5 years is more typical
for a project of this size. But that is one way to allow for
unanticipated delays. Also, participants like ExxonMobil, BP and
ConocoPhillips bring a lot of expertise in efficiencies with
them and their project management plan would work through those
issues.
SENATOR MICCICHE clarified that what is unusual is having the
gas-to-liquids pipeline being separated from the liquefaction
facility.
MR. PAWLOWSKI said he would be happy to work with the committee
to talk about the importance of having an integrated project and
integrated project management. A delay in one piece will affect
the others.
8:48:29 AM
SENATOR MICCICHE said he wanted to see the net present values on
slide 49 overlaid against a risk profile (price and capital
costs) for each selection.
MR. DE STIGTER responded that slide 51 looked at that in
relation to the 15 and 35 percent cases, and whenever one has
lower Capex with assumed prices, specifically if you look at the
base prices, as the Capex increases the necessary participation
in an equity alternative position is less than if one were to
stay in a status quo position. The reason for that is as the
costs of the midstream component increase under the status quo
methodology the net back price at the North Slope is decreased.
That's why it decreases the value of returns from an upstream
perspective; whereas in an equity alternative world some of that
risk is shielded because the state would be directly selling the
gas (RIK) and therefore not needing to have those higher costs
incurred on the upstream (because there is no direct royalty-in-
value or production tax). Therefore the state's risk is more
aligned with the price side.
SENATOR MICCICHE said his interest was in demonstrating the
value of the TransCanada partnership.
8:51:31 AM
SENATOR FRENCH went back to the escalation factor on slide 45 to
make that same point; it seemed to indicate making more money as
price, Opex, and Capex went up and losing money when they went
down, but she was saying it was the opposite and he asked why
that was.
MS. PODUVAL answered here they were seeing the combined effect
of cost and price escalation recognizing that the markets
generally move together for those factors. The analysis shows
that the increase in price is more beneficial than the
detrimental effect of the increase in costs to this project.
SENATOR FRENCH asked if by price she meant oil or LNG price and
by cost, the cost of the steel and other material elements.
MS. PODUVAL answered yes.
8:53:19 AM
SENATOR MICCICHE said it would be interesting to see expansion
gas coming from an OCS project plotted on slide 73, as opposed
to state ownership.
MS. PODUVAL answered that they had done those analyses and would
get those to him.
[SB 138 was held in committee.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| SRES Black&Veatch Presentation Revised 201402010.pdf |
SRES 2/13/2014 8:00:00 AM |