Legislature(2013 - 2014)HOUSE FINANCE 519
03/19/2014 08:30 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB287 | |
| Overview of the Guidance Documents (heads of Agreement and Memorandum of Understanding) | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 287 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE BILL NO. 287
"An Act approving and ratifying the sale of royalty
oil by the State of Alaska to Tesoro Corporation and
Tesoro Refining and Marketing Company LLC; and
providing for an effective date."
8:33:52 AM
Co-Chair Austerman provided an introduction to HB 287.
JOE BALASH, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES,
provided an introduction of the bill. He stated that
Alaska, as owner of oil and gas resources in the state, was
entitled to a royalty share. The amount or percent of the
share depended upon the specific lease term in question.
Generally, the state's royalty share at Prudhoe Bay and on
the Alaska North Slope (ANS) was 12.5 percent and higher.
He informed the committee that the state would be able to
take its royalty in-value (RIV) or in-kind (RIK) selling
the hydrocarbon produced to somebody else. He reported that
the Department of Natural Resources (DNR) negotiated a
contract with Tesoro for one year. HB 287 would allow the
state to enter into a contract lasting longer than a year
with legislative approval. He relayed that Tesoro expressed
its need for additional deliveries in recent discussions
with DNR, hence, HB 287. He recounted that the volume of
oil discussed was relatively small; between 5 thousand to
15 thousand barrels of oil per day.
8:37:43 AM
Commissioner Balash asserted that part of the reason for
the limitation on volume was due to the previous
negotiations with Flint Hills for 18 thousand to 24
thousand barrels of oil per day. The amount of royalty that
the state had available to sell was limited by production
on the North Slope. The state did not want to oversell its
oil. Relative to the contract sales seen with Flint Hills
there was a marine differential of $2.15 in the formula to
ensure the state collected the full value for its royalty.
Commissioner Balash continued that in the contract between
the state and Tesoro the differential was $1.95, a $0.20
difference from its contract with Flint Hills. He explained
that other special commitments were included in the
agreement with Flint Hills relating to the price of
gasoline in the interior relative to Anchorage pricing. The
state was charging Tesoro a slightly higher price without
the same or similar provisions. He noted that Tesoro
employed approximately 200 Alaskans. The Tesoro plant was
the oldest, largest, and most sophisticated in Alaska. He
cited that it began operations in the late 1960s and
manufactured low-sulfur diesel, jet fuel, gasoline, heating
fuel, and asphalt. Tesoro expressed interest in additional
barrels of ANS royalty. He pointed out that the state was
not ready to commit to a long-term contract.
8:40:46 AM
Co-Chair Austerman asked about the terms of the contract.
Commissioner Balash replied that the contract extended
through January 31, 2016.
Co-Chair Austerman asked whether the timeline was normal.
Commissioner Balash replied that HB 287 extended the
contract by an additional year. He elaborated that sales
contracts with refineries were typically one year in
length.
Co-Chair Austerman asked about the term length of the Flint
Hills contract. Commissioner Balash responded that the term
of the Flint Hills contract was five years. The length of
the prior agreement was ten years.
8:41:38 AM
Vice-Chair Neuman noted the ability for the Tesoro refinery
to produce jet fuel. He wondered if that would affect jet
fuel supplies at Anchorage's international airport and at
Fairbanks' airport.
Commissioner Balash replied that jet fuel was currently one
of Tesoro's products and confirmed that the jet fuel supply
in Alaska benefited its people. He stated that Ted Stevens
International Airport in Anchorage was one of the largest
air cargo hubs in the continent and had a large demand for
jet fuel. He believed that all of the refineries currently
operating served Anchorage's market. However, he signified
that market fundamentals created a challenge for refineries
in Alaska because ANS pricing was higher than feed stock
available to refineries on the west coast and the Pacific
Rim.
Vice-Chair Neuman noted the need for additional holding
tanks for fuel in the Mat-Su region and referenced Port
Mackenzie. He directed his attention to Alaska's railroad
and mentioned the loss of revenue from no longer
transporting jet fuel from Fairbanks to Anchorage. He asked
about the possibility of producing enough jet fuel and
transporting it to Fairbanks to keep its airport full and
the railroad busy.
Commissioner Balash replied that Petro Star, the remaining
refinery in Interior Alaska, would continue operating for
another year. However, it did not produce enough product,
such as jet fuel, gasoline, and home heating oil, to meet
all of the needs of the Interior. He detailed that Flint
Hills would become a receiving terminal for tanker cars of
product coming from Anchorage to the Fairbanks area. He
elaborated that the volume of product carried to North Pole
would be much smaller than what was carried to Anchorage.
He furthered that although there would be additional
business for the railroad, it would not equate to the
amount of today's rail traffic out of the Fairbanks region.
8:45:16 AM
Vice-Chair Neuman commented that it was important the state
supported the railroad and airports because of the crucial
role they played in Alaska's commerce.
Representative Gara asked about RIK and whether 25 percent
of the value went into the Permanent Fund. Commissioner
Balash confirmed that RIK was considered royalty revenue.
Representative Gara asked for clarity regarding the formula
used to determine how much money the state received. He
understood the ANS spot price but inquired if it varied
from day-to-day. Commissioner Balash responded positively.
Representative Gara asked if a tariff was subtracted from
the total. Commissioner Balash answered yes.
Representative Gara asked how the tariff was subtracted.
Commissioner Balash referred to slide 5 of the
presentation: "Royalty In-Kind Sale to Tesoro Refining and
Marketing LLC"(copy on file). He explained that the RIK
differential of $1.95, which accounted for marine costs to
transport crude oil from Valdez to different markets on the
West Coast, was subtracted from the ANS spot price. The
tariff allowance was then subtracted for pipeline tariffs
to move the oil from the North Slope to Valdez. Adjustments
were also included for Quality Bank purposes and for line
losses. The $1.95 figure was negotiable. The actual
deductions made by the lessee under the terms of the
royalty settlement agreement was a number that was
currently higher than $1.95. The commissioner reported that
a smaller figure would bring additional revenue.
8:48:35 AM
Representative Gara asked for clarification about the $1.95
marine differential and inquired why the state has to pay
for it. Commissioner Balash responded that the state was
entitled to its royalty share under the terms of its
leases. The lessee was entitled to a reasonable cost of
transportation to move the oil from the field to market.
The $1.95 accounted for marine transport which included the
tanker cost and market location differential. The lessee
was also entitled to a Quality Bank adjustment which
accounted for the differences in crude quality. He
furthered that varying qualities of oil go into the Trans-
Alaska Pipeline System (TAPS) where they blend together. A
quality bank adjustment was a mechanism to ensure that the
producers that brought a higher quality crude oil received
a higher price for their product.
8:50:33 AM
Representative Gara asked why the state would have to pay a
portion of the tariff for oil traveling to Washington when
it took delivery of its oil in Nikiski. He referenced the
$1.95 figure.
Commissioner Balash explained that if the amount was left
in-value and the state relied on the lessees to take the
oil to market, the state would have a netback at the
Prudhoe Bay or North Slope fields at pump station one. As
long as the state was able to get the netback price or
better, then the state improved qualitative aspects of its
economy; increasing employment, adding to property tax
values, etc. He stated that the $1.95 was representative of
a cost less than what the state would otherwise pay to the
lessees for transporting its oil to market.
Commissioner Balash stressed that RIK applied to the sale
of oil. The transfer of title to the oil took place at the
field. He commented that the state was not responsible for
obtaining or maintaining capacity in any of the
infrastructure. The responsibility fell on the purchaser,
such as Tesoro, as outlined in all of the state's existing
RIK contracts.
Co-Chair Austerman commented that the bill would be heard
again and that there would be time to ask follow-up
questions later.
8:53:07 AM
Representative Guttenberg asked Commissioner Balash for a
copy of "Exhibit A" to the best interest findings.
Commissioner Balash affirmed he would provide copies to the
committee.
Representative Wilson asked if there was a royalty contract
with Tesoro for Cook Inlet production. If so, she wanted to
know if there was a price difference between contracts.
Commissioner Balash informed the committee that the state
did not have any existing royalty contracts for Cook Inlet
oil sales. He stated that Cook Inlet oil production was
relatively low; 20 thousand to 24 thousand barrels-a-day
range. He relayed that Tesoro was the largest buyer of Cook
Inlet production at present.
Representative Wilson asked if the state received any
royalty from Cook Inlet production.
8:54:49 AM
Commissioner Balash affirmed that the state received
royalty from Cook Inlet production but emphasized the
volume of royalty was substantially smaller.
Representative Costello asked about the process and
decision criteria. She wondered if the process was based on
previous decisions.
Commissioner Balash replied that all sales of royalty were
guided by the statutes affecting DNR, specifically AS
38.05.183. The department was required to follow the
statutes and regulations and stated that the criteria were
the same for short-term and long-term contracts. Generally,
the state favored competitive sales but occasionally made
allowances for noncompetitive sales. In the current
instance the state solicited multiple buyers. However, only
two parties expressed interest: Flint Hills and Tesoro. He
furthered that the statutory criteria had to be considered
by the royalty board for a contract longer than one year.
The board was required to give notice, hold a public
hearing, and make a recommendation to the legislature about
the approval of a contract. Once in the hands of the
legislature, it had to be approved.
8:57:21 AM
DAN RILEY, TESORO, SACRAMENTO (via teleconference), pointed
out that Tesoro was an independent refiner and marketer of
petroleum products. He communicated that the company
started its Alaska operations when it purchased the Kenai
refinery in 1969. The capacity of Tesoro's Kenai refinery
was 72 barrels per day. He relayed that the Kenai refinery
focused on jet and diesel production. The refinery also
produced gasoline and heating oil. He furthered that Tesoro
operated the 68-mile pipeline that linked Tesoro's refinery
to the Port of Anchorage. He testified in support of the
legislation. He asserted that the price for RIK oil was
fair and provided the company with a sufficient supply of
crude. The availability of the contract would have a
positive impact on the Kenai refinery operations. He noted
the inclusion of a letter in committee members' packets
mentioning further points about Tesoro.
9:00:17 AM
Co-Chair Stoltze mentioned that he talked with folks from
the Kenai area who questioned why the price of fuel was as
high as it was with the Tesoro Refinery in Kenai. He asked
for Tesoro's wholesale prices and the prices prior to the
per-dollar sales tax added on by the municipalities.
Mr. Riley responded by stating that he was not privy to the
information Co-Chair Stoltze was looking for but remarked
that the market was competitive. He referred to a
presentation that was provided to the legislature in the
previous year which detailed the factors of transportation
fuel in Alaska. All aspects were considered in determining
the price paid at the pump.
Co-Chair Stoltze asked Mr. Riley to have the appropriate
people provide a written answer about pricing.
HB 287 was HEARD and HELD in committee for further
consideration.
9:01:59 AM
AT EASE
9:04:00 AM
RECONVENED
^OVERVIEW OF THE GUIDANCE DOCUMENTS (HEADS OF AGREEMENT AND
MEMORANDUM OF UNDERSTANDING)
Commissioner Balash discussed "Overview Of The Guidance
Documents (Heads Of Agreement + Memorandum Of
Understanding)"(copy on file). He stated that the overview
was intended to provide committee members the opportunity
to ask questions of the Department of Natural Resources
(DNR) regarding the Heads of Agreement (HOA) with Trans
Canada (TC) and Alaska's Liquid Natural Gas (AKLNG)
Memorandum of Understanding (MOU). The HOA and MOA helped
to support Governor Parnell's efforts to commercialize
Alaska's North Slope (ANS) gas with a variety of other
parties.
Commissioner Balash referred to slide 2: "Guidance
Documents and HB 277." He identified the HOA and MOA as
support documents. He specified that the HOA was a roadmap
for the overall activities and authorities of each of the
parties involved in the project: The State of Alaska, the
three North Slope producers [BP, ConocoPhillips, and
ExxonMobil], TC, and Alaska Gasline Development Corporation
(AGDC). He reported that there was also a MOU with TC that
described an agreement to transition from the Alaska
Gasline Inducement Act (AGIA) into a more traditional
commercial relationship where the state acted as the
shipper and TC as the transporter. It also spelled out some
specific key commercial terms that would be agreed to that
would be beneficial to the state's long-term interest. He
pointed out that both documents supported legislation, HB
277 and SB 138, that he anticipated would be heard before
the House Finance Committee in the following two weeks.
Commissioner Balash explained that HB 277 outlined
participation, percentage, and process, the three "P's." He
indicated that the intent of the state was to align the
interests of the state and the other parties allowing the
AKLNG project to move forward. He opined that rather than
struggling over some of the key terms that mattered to the
state, it developed an approach where the state
participated as an equity partner through the state's share
of the natural gas product. The state did not intend for
its agencies to take on corporate day-to-day
responsibilities. Instead, it would enter into contracts
with the producers and with TC and AGDC to facilitate the
commercialization of Alaska's gas as well as maximize the
value of the gas. He continued that the legislature and the
public would decide whether to advance the project further.
The department used a phased approach to allow for decision
making to occur as commitments were made by all parties.
The state saw a lot of potential and had a deliberate
process to move the project forward alongside the other
project sponsors.
9:09:33 AM
Commissioner Balash discussed slide 3: "What is a Heads of
Agreement?" He indicated that HOA was a common term used in
the LNG world. He referred to the definition from
www.investopedia.com:
A non-binding document outlining the main issues
relevant to a tentative partnership agreement. Heads
of agreement represents the first step on the path to
a full legally binding agreement or contract, and
serves as a guideline for roles and responsibilities
of the parties involved in a potential partnership
before any binding documents are drawn up.
Commissioner Balash commented that the definition called
attention to key items and commented that DNR would be
bringing a full legally binding contract back to the
legislature as soon as next fall.
Commissioner Balash identified all of the parties
participating in the HOA:
HEADS OF AGREEMENT
By and Among
The Administration of the State of Alaska
Alaska Gasline Development Corporation
TransCanada Alaska Development Inc.
ExxonMobil Alaska Production Inc.
ConocoPhillips Alaska Inc.
BP Exploration (Alaska) Inc.
FOR THE ALASKA LNG PROJECT
Commissioner Balash confirmed that all of the parties
signed the HOA.
9:10:56 AM
Commissioner Balash discussed slide 4: "Organization of the
Heads of Agreement":
The Heads of Agreement (HOA) is broken into 16 sections
that include:
· Recitals of recent events and understandings between
the parties.
· 13 Articles covering guidelines for the development of
the project and the roles and responsibilities of the
Parties to the agreement.
· And appendix articulating access and expansion
principles for the project.
· An exhibit that provides copies of the 3 letters to
Governor Parnell from the Producer Parties and
TransCanada.
Commissioner Balash explained that recitals provided a
context for the reader and a history of how the parties
came to an agreement. He commented that the 13 articles
listed were very specific about topics within the HOA. He
spoke of the appendix which outlined the pro-expansion
principles to be employed on the project. He emphasized
that there were a number of things that were different
about an LNG project from an overland project. The state
examined some of its policies and considerations of the
past that helped shape the HOA. He reported that in the
back of the document there were three letters of
correspondence between the governor and parties. In 2011,
the governor called on the parties to align on an LNG
project as opposed to the overland project that had been
licensed under AGIA. The correspondence showed a history.
9:12:52 AM
Commissioner Balash turned to slide 5: "Key Recitals." He
reported that the State of Alaska set out in law [AGIA] a
specific set of policies and a path forward between years
2007 and 2008. However, the project was targeted at the
North American gas markets. The drastic changes that the
state had seen as a result of shale gas development caused
the market to become a lost opportunity for Alaska's gas.
The Pacific Rim and LNG appeared to be the key opportunity
currently available to the state. He supposed that the work
done and the license under AGIA had value and would be able
to be added to the Alaska LNG efforts. He recounted that
the legislature adopted HB 4 [Legislation that passed in
2013 pertaining to the Alaska Gasline Development
Corporation and the Regulatory Commission of Alaska]
indicating its intention to pursue in-state gas. The HOA
that was signed in January 2014 outlined Alaska Gasline
Development Corporation's (AGDC) mission and acknowledged
the state's intent to keep the Alaska Stand Alone Pipeline
(ASAP) and AKLNG projects cooperating. He claimed that AGDC
would be able to carry the states interest in the project
and that when the agreement was signed the state was not
trying to obviate AGDC's mission. The agreement outlined
ramping up the preliminary front-end engineering design
(Pre-FEED) phase of the Alaska LNG project, which was
estimated to cost $400 million. The state's share of the
$400 million would be 20 to 25 percent. The other parties'
shares would be based on their prospective interest on the
North Slope.
9:16:03 AM
Commissioner Balash advanced to slide 6: "Key Definitions:"
He stated that the slide was included as a point of
reference when reading through the HOA. He mentioned that
item five, "TAG" which stood for "Tax as Gas", was an
important element of the agreement and would be discussed
in further detail in the future.
Commissioner Balash discussed slide 7: "Principles and
Benefits":
Article 2: Principles
1. Recognizes that if Enabling Legislation is
passed that the parties would negotiate contracts
that would incorporate the principles in the
agreement.
Commissioner Balash elaborated that commercial contracts
the state enters into required legislative approval. He
expressed the importance of the public being able to weigh
in on long-term contracts affiliated with the project. He
compared it to buying a house. The process included
agreeing to terms, practicing due diligence, and signing
closing documents.
Commissioner Balash reviewed the benefits of the AKLNG
project which included energy for homes and communities,
jobs for Alaskans, additional revenue for the state, and
opportunities for additional gas development. He stated
that there was 33 trillion cubic feet of proven resource at
Prudhoe Bay and Point Thompson. Federal, state, and private
geologists expected tremendous additional natural gas
resources on the North Slope. He asserted that once the
resource was discovered the state would need to preserve an
opportunity for development and delivery to market.
9:20:30 AM
Commissioner Balash discussed slide 8: "Alaska LNG Project
Work." He referenced Article 4 of the HOA stating that if
enabling legislation passed, work would need to be
conducted by and between parties. Service agreements for
transportation and liquefaction between AGDC and
TransCanada would need to be drafted. Offtake and balancing
agreements would also be necessary in the upstream. The
state would need to ensure that it would be receiving all
of the gas it needed in order to enter into other contracts
related to the project. He commented that LNG projects were
a daisy chain of contracts. He acknowledged that the most
important contract was the sales and purchase agreement;
the details of selling the LNG to the buyer. The buyer
would want to see the liquefaction plant, the pipeline, the
field, and the specific gas they were buying. From the
state's perspective its share of the gas would come at the
field. The state would enter into contracts downstream with
service providers as well as upstream to ensure getting its
share.
Commissioner Balash expressed the importance of the last
point on slide 8. The state and each of the producer
parties would initiate LNG marketing for Alaska gas,
something that was new and key to the present opportunity.
In the past two decades certain organizations or
individuals from Alaska had traveled to markets in Asia
trying to sell product they did not have. He opined that
the conversation would take another shape with available
product.
9:23:39 AM
Commissioner Balash discussed slide 9: "State Participation
in the Project." The state's participation would
potentially help to maximize the value of its resource. He
noted an in-depth study about the differences in an LNG
project versus an overland project. The differences started
with the way in which the gas was sold. He reported that
LNG sales contracts between buyers and sellers were unique
and proprietary. He furthered that although broad
characteristics carried from one contract to another, there
was not a transparent market clearing price mechanism for
LNG. He opined that another difference between an LNG and
an overland project was in the nature and regulation of
infrastructure. In the overland context the market was
transparent and highly liquid in a regulated
infrastructure. In an LNG project the pipeline may or may
not be regulated, but the liquefaction plant was not
regulated for access or rates, presenting a black box to
the State of Alaska from a value perspective.
Commissioner Balash relayed that the state was seeking a
way to participate for its share of gas. Under the terms of
the state's leases it was entitled to its royalty share.
However, the lessee was entitled to reasonable
transportation costs. He indicated that the state paid for
its share of the infrastructure either upfront or through
deductions over time. He explained that the state would
experience a better outcome by being involved on the front
end of the project, structuring the financing of the
state's share.
Commissioner Balash noted that the alignment of interest
achieved was an improvement in serving the state in the
long-run.
9:28:05 AM
Commissioner Balash discussed slide 10: "Regulatory
Framework, Access and Expansion":
Key Provisions
1. At least five Alaskan offtake points for
Alaskans to get their gas.
2. Locations of offtake points will be developed in
consultation with AGDC. AGDC's work on ASAP will
greatly benefit the State and Alaska LNG Project in
developing these locations.
3. Each Party's shares in capacity would be managed on a
proprietary basis; essentially creating "projects
within a project."
4. AGDC and TransCanada's shares of capacity in the
project are committed to provide access to third
parties on terms developed with the State.
Commissioner Balash stated that the regulatory framework
was a key point which he alluded to earlier in describing
some of the differences between an overland versus an LNG
project. Another critical factor was the state's access
into and out of the pipeline. He also mentioned that
opportunities for expansion were essential. He expounded
that if a party owned 32 percent of the project it would be
obligated to finance 32 percent of the project overall. The
state, as a 25 percent owner, would be responsible for
raising the capital or finding the partners to raise the
capital for its 25 percent. It would not matter how any of
the parties structured their financing. He reported that
there would not be a single tariff for the pipe. Each party
would have its own set of terms. Although physically there
would only be one pipe, metaphorically there would be four,
one for each sponsor. He believed that managing the
parties' shares on a proprietary basis would help to solve
some of the commercial problems that have plagued efforts
in the past. He continued by stating that the state's
interest was in low tariffs. They were good for the state's
bottom line and helped to make unexplored lands more
attractive. Meanwhile, those sponsors who did not
necessarily have the same interest as the state would be
able to set up their finances and their tariffs higher than
the state's. The state would not be affected by any prices
set by other investment parties because of how the
agreement is structured.
9:31:11 AM
Commissioner Balash moved to Appendix A on slide 11
"Appendix A: Pro-Expansion Principles." He indicated that
expansion issues were so fundamentally important to the
State of Alaska and its long-term future that it wanted the
terms detailed in the agreement with the other parties. The
key principle was that parties would be able to expand the
project without being vetoed by the other parties. For
example, if two of four partners wanted to expand, they
could do so as long as the expansion did not compromise the
ability to meet long-term obligations or negatively impact
the other parties. However, the cost and the risks of the
expansion were borne by the expansion parties. He mentioned
liquefaction trains.
Co-Chair Austerman asked for a definition of trains.
Commissioner Balash replied that trains were equipment
units that allowed for a given process to take place. There
would be trains located at the North Slope to be used for a
gas processing plant (GPP) and trains located in Nikiski
used for the gas liquefaction process. He continued that
they were units of infrastructure that would be able to be
plugged together similar to modules. The capacity of the
trains would be significant.
9:34:14 AM
Commissioner Balash elaborated that the liquefaction
equipment was fundamental to the ability to deliver to
buyers and would only be affected if all of the parties
agreed. If one of the parties had more gas to take to
market it would be able to propose adding a train and the
other parties would have the choice to participate. The
ability to expand the liquefaction terminal with additional
trains was essential especially since the state did not
have regulatory protection from the Federal Energy
Regulatory Commission (FERC) or the Regulatory Commission
of Alaska (RCA).
9:36:22 AM
Commissioner Balash moved to slide 12: "Enabling
Legislation: The Timeline":
· April 2014: Legislature passes enabling legislation.
· 2014-2015: Administration and Alaska LNG Project
Parties develop project enabling contracts, including,
but not limited to, agreements with TransCanada and
AGDC for project services for the State Gas Share, gas
offtake and balancing agreements with the Producer
Parties, and preliminary LNG or gas sales contracts.
· 2015: Legislature considers project enabling
contracts.
· 2015-2016: Parties decide whether to advance to FEED.
Commissioner Balash stated during the intervening period
the state would be keeping the legislature informed of
progress. The department did not want to come out of the
process in FY 15 with legislation that would not pass. The
department believed the cost of the front-end engineering
and design (FEED) phase would be approximately $2 billion.
The state would be looking at its portion of the cost, not
the full $2 billion.
Commissioner Balash pointed to slide 13: "Royalties and
Production Taxes: Key Provisions." He informed the
committee that royalty and production taxes needed to be
examined in order to establish the state's share. The state
would receive cash revenues from corporate income tax
payments and property tax payments. However, royalty and
production tax revenues would be handled such that the
state's royalty interest, 12.5 percent at Prudhoe Bay and
14 to 16 percent at Point Thomson, would be combined with
the state's production tax interest to equal the state's
gas share. He reported that the production tax would fall
within a range from 7 to 13 percent as outlined in the HOA.
The state's share would fall within 20 to 25 percent
overall.
Commissioner Balash addressed that taking the state's gas
in-kind would not be a problem except that because the LNG
business required a look through to the specific reserves
and resource, all of the gas at Prudhoe Bay and Point
Thomson would be required to support the particular
project. If the state switched back and forth from RIK to
RIV, it would create some significant commercial hardships
and obstacles for the lessees. The result would likely be a
decline in the state's value. He reported that the state
was considering the in-kind approach. The statutes directed
the state to take its oil and gas revenue in-kind unless
taking it in-value would be in the state's best interest.
Commissioner Balash recounted that DNR conducted an in-
depth study examining the state's options of taking its gas
royalties in-kind or in-value. The department found that
being paid in-kind presented challenges that would
potentially result in the state receiving a lower price
than producers. A provision was included in the HOA in
Article 8.8.3 that required a stringent attorney review to
avoid any violations of anti-competitive rules in the
United States or in other countries. He noted that each of
the producers were willing to negotiate separately with the
state on the sale or disposition of its share of gas. The
state would have an opportunity to leverage the producers'
marketing expertise which led DNR to think differently
about the option of being paid in-kind. Agreements were
currently not negotiated. He pointed out that the HOA was
premised on the state receiving its royalties in-kind.
However, the state had not committed itself to receiving
its share of royalties in-kind. The state would have to
feel satisfied with the marketing aspects prior to any
commitments.
9:43:19 AM
Commissioner Balash discussed slide 14: "Other Project
Enabling Terms and Additional State Support for the Alaska
LNG Project: Key Provisions." He addressed the first item
on the slide regarding property taxes. He indicated that
there would be a large benefit to structuring a payment in
lieu of tax, which would provide certainty to local
governments and project sponsors. He furthered that the
payment in lieu of tax could be structured in a variety of
ways and chosen by local governments. He referred to
Article 9 of the HOA which stated that the administration,
in consultation with local governments, would develop
payments in lieu of taxes. The state would also examine the
impacts of related construction on communities throughout
the Railbelt region. The state would have to account for
the impacts and help local governments address any
additional burdens and costs associated with the project.
Co-Chair Stoltze asked for detail on project benefits.
9:45:24 AM
Commissioner Balash noted that benefits would come with
some impact. He continued that the state did not want to
repeat some of the same experiences that occurred in
Fairbanks in the 1970s when the Trans-Alaska Pipeline
System (TAPS) was being constructed. He referenced the
domestic violence and sexual assault that occurred during
the construction of TAPS.
Commissioner Balash mentioned that the development and
installment of infrastructure and a healthy long-term oil
business would be fundamental to the overall economics of
the project. He discussed that the revenues from gas would
be used to account for the cost of infrastructure. The
upstream costs of maintaining Prudhoe Bay and other
producing fields were borne by oil. He asserted that if the
oil business was not healthy enough to bear the costs, the
gas business would have to which would be problematic for
the state.
9:47:59 AM
Commissioner Balash detailed slide 15: "Alaska Hire and
Content." He pointed out that the estimated total cost of
the project was $45 billion to $65 billion. He noted that
there would be as many as 15 thousand jobs associated with
the project during construction. He reported that roughly 1
thousand long-term operating and maintenance jobs would be
generated and would command high salaries. He noted that
Article 11 was found on page 16 of the HOA and provided key
direction for the Alaska LNG parties in developing the
project.
ANGELA RODELL, COMMISSIONER, DEPARTMENT OF REVENUE,
recounted three points relating to the HOA and MOU;
participation, percentage, and process. She stated that as
the state developed the HOA with the other parties, it had
to consider its participation not only from a percentage
standpoint but also from human capital and devotion of
resources perspectives on the part of DNR and the
Department of Revenue (DOR). In its review, DOR recognized
the opportunity to continue the state's relationship with
TransCanada moving forward. The state chose to enter into
an MOU with TransCanada.
Commissioner Rodell transitioned to slide 16: "What is a
MOU- Memorandum of Understanding":
The MOU outlines the terms of the State of Alaska's
relationship with TransCanada in the Midstream
component of the Alaska LNG Project; however, the MOU
will not be binding until the Legislature enacts
"Enabling Legislation."
Commissioner Rodell elaborated that the MOU only applied to
the pipeline and the gas treatment facilities. The MOU did
not apply to the liquefaction facilities, an additional
part of the project.
9:50:54 AM
Commissioner Rodell directed the committee's attention to
slide 17: "Key Terms of the MOU: Key Terms of Exhibit C":
1. Favorable Debt to Equity Ratio
· 75/25 ratio for rate-making purposes reduces the
State's tariff.
· Lower tariffs improve the State's overall cash
flows.
2. Cash Contributions by TransCanada
· TransCanada as project developer reduces the
State's exposure to cash calls and obligations
until the pipeline is in service.
3. Improved Value to the Treasury
· When you consider the opportunity cost of
utilizing the State's capital (which earns 6% in
the treasury), our NPV is improved overall.
4. Expansions
· TransCanada committed to 70/30 capital structure
for expansions.
5. Gas to Alaskans
· At least 5 offtake points
· Distance sensitive rates with three zones for
delivery
Commissioner Rodell emphasized the value of TransCanada
committing to some of the key terms important to the State
of Alaska. She commented that during Pre-FEED the state
would gather additional information and be in a better
financial position to commit its limited financial
resources to the project. The state would also be able to
take advantage of TransCanada's expertise. The MOU allowed
the state to maintain reserves and to earn an attractive
interest rate. She assured the group that TransCanada's
75/25 ratio for rate-making purposes and its 70/30 capital
structure commitment would not dictate what TransCanada
would ultimately finance.
9:53:06 AM
Commissioner Rodell advanced to slide 18: "Where We Are
Today?" She noted the Point Thomson settlement and the
joint work agreements. She furthered that TransCanada and
ExxonMobil had been working together under the AGIA
license. She reported that the state had invested $330
million and TransCanada and that ExxonMobil had contributed
an additional $130 million into AGIA. There was also work
done in Denali by British Petroleum (BP) and ConocoPhillips
equal to $200 million. The investment by the parties led to
the concept selection of the AKLNG project; creating a gas
treatment facility, an 800-mile pipeline, and a
liquefaction facility to be located at Nikiski.
Commissioner Rodell pointed next to HB 277, legislation
that would be brought before the committee, to enact the
MOU between the State of Alaska and TransCanada. She
reported that the HOA had been signed. She specified that
currently the legislature had to decide whether to go
forward with the Pre-FEED phase, as the administration had
envisioned, and contribute all of the AGIA and Denali work
to the Alaska LNG project. The other option was for the
state to refrain from going forward, agreeing to purchase
the $130 million worth of work from TransCanada that was
spent on AGIA. In the meantime, AGDC planned to advance to
a 2015 open season with ASAP (sharing with AKLNG).
9:54:46 AM
Commissioner Rodell discussed slide 19, "What Happens if HB
277 Passes?" She relayed that if the legislation passed the
state would enter the pre-FEED stage that would last 12 to
18 months. The estimated cost would be $435 million. The
producers would contribute about $327 million to $348
million of the costs. The state's share would be $35
million to 43 million and TransCanada would contribute $53
million to $67 million. At the end of the pre-FEED stage
the administration would return to the legislature with
information and contracts to continue into the next phase.
Also, the administration would seek legislative approval to
exercise the option to increase its investment to 40
percent. The state's cost would equal $21 million to $27
million for previous costs. The state would also have the
option to stop the project entirely at which point the
state would be liable to pay TransCanada for its
development costs incurred on behalf of the state. Lastly,
the state would have the option to continue with the
project at its current level of investment.
9:56:54 AM
Commissioner Rodell discussed slide 20: "What Happens after
FEED?" She stated that in two to three years the
administration would return to the legislature to make a
final investment decision. The FEED costs were currently
estimated at $1.8 billion. The producer share would be
approximately $1.4 billion. The state would cover
approximately $145 million to $180 million of the costs.
She interjected that the range in dollar amounts reflected
the state's percentage of investment to be between 20 to 25
percent. TransCanada would be investing between $215
million to 270 million for the liquefaction facility. If
all parties approved going forward with a final investment
decision the next phase would be construction. The state
would be obligated to make a final investment of about $10
billion. The state would again have the option of ending
the project prior to construction but would have to
reimburse TransCanada its investment of $183 million to
$337 million incurred on behalf of the state.
9:58:34 AM
Commissioner Rodell discussed slide 21: "Summary":
· The Heads of Agreement (HOA) and Memorandum of
Understanding (MOU) provide guidance on how the
powers provided in HB 277 will be used.
· At each stage in the project there are "off- ramps"
and decision points for Legislative and public
review.
· Commitments by the State will be made commensurate
with progress by the project.
Commissioner Rodell added that commitments by the state
would also be commensurate with the investments being made
by the other three sponsors of the project; ExxonMobil, BP,
and ConocoPhillips.
Co-Chair Austerman asked about the 20 to 25 percent
ownership in-kind and gas in lieu of taxes. He asked how
the money already invested in AGDC and the work that it had
done played into the 20 to 25 percent ownership. He
wondered about a percentage of value that the state was
assuming within the 20 to 25 percent.
10:00:28 AM
Commissioner Balash responded that the work AGDC did was
focused on environmental and engineering work tied to an
instate standard as compared to a FERC standard. He opined
that some things would fit well with AKLNG such as AGDC
sharing the state right-of-way. Each party's share of the
costs would be accounted for as the project moved forward
in development. The legislation specified that AGDC carried
the state's interest in the liquefaction for AKLNG but
would simultaneously continue to pursue ASAP. He indicated
that there would be a need to continue to separate the
projects until it was clear that AKLNG was going forward,
at which time the state would be able to focus on just one
project.
Co-Chair Stoltze indicated that HB 277 was currently in the
House Resources Committee and would be heard by the House
Labor and Commerce Committee before being heard in House
Finance Committee. However, he wanted to take advantage of
getting the questions answered early and while some of the
consultants were in Juneau for other hearings. The overview
was to help everyone formulate questions in preparation of
receiving the bill later on in session.
10:03:29 AM
Representative Gara noted that with oil the bulk of the
state's revenue was production tax and royalties. He
understood the concept of taking the tax and royalties in
the form of in-kind gas and indicated that royalty was
approximately 13 percent. He asserted that production tax
had always been greater than 13 percent but in the case of
the project it would be half or equal to the royalty. He
wanted to know how the commissioner had come up with his
figure.
Commissioner Balash contended that tax was not always
larger than royalty. He claimed the opposite was true for
the vast majority of the history of North Slope production.
He explained that it was important to note the difference
between gross and net tax in reference to gas. He furthered
that the numbers would look different even though the
outputs from a cash flow perspective would potentially be
unequaled. He remarked that the state was not asking to
negotiate tax rates. He informed the committee that
according to the constitution only the legislature was able
to set tax rates. The department was asking that a tax rate
be established as part of the legislative package.
Commissioner Balash reported that in identifying the range
that is seen in the HOA, the state conducted a royalty
study with Black and Veatch in 2013 reviewing a number of
options and opportunities. The study revealed that under
the status quo, without the state making any changes or
participating at all, the project would have a difficult
time competing for market and capital. The state had some
work to do if it wanted to bring its financial take down so
that it was more competitive and to achieve an environment
where the project was more likely to move forward. He
recommended that the state model its royalty after the
royalty rates of other projects. As the commissioner of
DNR, he did not think it was a good idea, nor did he
believe most Alaskans would want the state to reduce its
interest in the royalty.
Commissioner Balash opined that alternatives included
participation and the process of back calculating the
percentage expected from production tax and royalty. He
wanted to make sure the state was not needlessly reducing
its overall interest. He emphasized that value and cash
mattered and that the cost and charges of liquefaction
without participation would potentially yield higher rates.
He alleged that if all of the value was being drained
because of the charges for liquefaction, then a high
percentage of a thin margin would not be beneficial to the
state. He continued that the legislature's consultants had
done a good job of illustrating the risk to the state from
a wellhead perspective.
10:09:12 AM
Co-Chair Austerman clarified that the project was not
viable without state participation.
Commissioner Balash replied that if the project was to move
forward now, the state needed to take reasonable steps to
maximize its value. He stressed that the state's value
should not be consumed by transportation and liquefaction
costs.
Representative Gara agreed that at low prices royalties
could be higher than production taxes and at higher prices
the production tax was higher. He asked if the state was
bound to a tax rate in the agreement and inferred that an
expectation had been created with the oil companies that
the state would not adopt a tax rate higher than the
royalty. He asked for clarification.
Commissioner Balash replied that the legislation contained
provisions on production taxes for natural gas. He
explained that the HOA represented the circumstances under
which all of the parties were prepared to move forward
together. The parties would have to decide how to proceed
if the legislature decided to set a number that was higher
or lower. He reported that as long as the number fell
within a specific range all parties were ready to move
forward under the current terms set forth in the HOA. He
did not recommend moving forward with the project if the
legislature set a number that fell below 20 percent total
for the state gas share. He anticipated that other parties
would object to the state receiving higher than a 25
percent share, something that would need to be confirmed
with the other signatories.
10:13:01 AM
Co-Chair Austerman noted that multiple discussions would
occur when the bill came before the committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 3.19.14 HFIN TC MOU and AK LNG HOA in Context.pdf |
HFIN 3/19/2014 8:30:00 AM |
AK LNG HFIN Presentation DNR DOR |
| AK LNG Heads of Agreement.pdf |
HFIN 3/19/2014 8:30:00 AM |
AK LNG HFIN Presentation DNR DOR |
| AK LNG MOU.pdf |
HFIN 3/19/2014 8:30:00 AM |
AK LNG HFIN Presentation DNR DOR |
| HB 287 Briefing Paper and Sectional.pdf |
HFIN 3/19/2014 8:30:00 AM |
HB 287 |
| HB 287 DNR Tesoro Amendment Contract Presentation.pdf |
HFIN 3/19/2014 8:30:00 AM |
HB 287 |
| HB 287 Transmittal Letter.pdf |
HFIN 3/19/2014 8:30:00 AM |
HB 287 |
| Tesoro Support Letter HB 287 HFIN - Tangaro.pdf |
HFIN 3/19/2014 8:30:00 AM |
HB 287 |
| HB 287 Exhibit 1 link.pdf |
HFIN 3/19/2014 8:30:00 AM |
HB 287 |