Legislature(2013 - 2014)BARNES 124
03/25/2014 04:30 PM House RESOURCES
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| Start | |
| SB138 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 138 | TELECONFERENCED | |
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SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX
4:38:47 PM
CO-CHAIR FEIGE announced that the only order of business would
be CS FOR SENATE BILL NO. 138(FIN) am, "An Act relating to the
purposes, powers, and duties of the Alaska Gasline Development
Corporation; relating to an in-state natural gas pipeline, an
Alaska liquefied natural gas project, and associated funds;
requiring state agencies and other entities to expedite reviews
and actions related to natural gas pipelines and projects;
relating to the authorities and duties of the commissioner of
natural resources relating to a North Slope natural gas project,
oil and gas and gas only leases, and royalty gas and other gas
received by the state including gas received as payment for the
production tax on gas; relating to the tax on oil and gas
production, on oil production, and on gas production; relating
to the duties of the commissioner of revenue relating to a North
Slope natural gas project and gas received as payment for tax;
relating to confidential information and public record status of
information provided to or in the custody of the Department of
Natural Resources and the Department of Revenue; relating to
apportionment factors of the Alaska Net Income Tax Act; amending
the definition of gross value at the 'point of production' for
gas for purposes of the oil and gas production tax; clarifying
that the exploration incentive credit, the oil or gas producer
education credit, and the film production tax credit may not be
taken against the gas production tax paid in gas; relating to
the oil or gas producer education credit; requesting the
governor to establish an interim advisory board to advise the
governor on municipal involvement in a North Slope natural gas
project; relating to the development of a plan by the Alaska
Energy Authority for developing infrastructure to deliver
affordable energy to areas of the state that will not have
direct access to a North Slope natural gas pipeline and a
recommendation of a funding source for energy infrastructure
development; establishing the Alaska affordable energy fund;
requiring the commissioner of revenue to develop a plan and
suggest legislation for municipalities, regional corporations,
and residents of the state to acquire ownership interests in a
North Slope natural gas pipeline project; making conforming
amendments; and providing for an effective date."
4:39:07 PM
DEEPA PODUVAL, Principal, Management Consulting Division, Black
& Veatch Corporation; Consultant, Department of Natural
Resources (DNR): We are consultants to the Department of
Natural Resources, helping with economic analysis as well as
commercial support. I work the state, with DNR specifically,
for the past seven or eight years starting ... toward the end of
[State Gasline Development Act] SGDA, through [Alaska Gasline
Inducement Act] AGIA and for the last couple of years on the
Alaska [Liquefied Natural Gas] LNG Project.
4:40:12 PM
PETER ABT, Management Director, Management Consulting Division,
Black & Veatch Corporation; Consultant, Department of Natural
Resources (DNR): I've been working with the State of Alaska
since the royalty study was commissioned this past summer and my
primary area of expertise with it [is] LNG markets and
commercial structure.
MS. PODUVAL: And on the phone we have Jason De Stigter he is
manager with Black & Veatch and he has lead much of the analysis
that we've used to support the state. And he's available for
questions, Mr. Chair.
4:40:58 PM
MS. PODUVAL: So, what we have are two different sessions that
we're hoping to walk this committee through. We've broken out
our discussion of the transaction that is in front of you and
the enabling legislation into two different pieces. The first
is our observations on the Heads of Agreement, one of the two
major agreements that the state has entered into. And the
second, we'll be focusing on TransCanada's participation
specifically. Today what we're hoping to walk through is our
observations on the Heads of Agreement. And tomorrow, when
we're back here, we will be focusing on TransCanada and its
participation in the project.
CHAIR FEIGE: Okay and we've been joined by Representative
Isaacson in the gallery. If you'd like Rep. Johnson is not
here. So, if you want to sit at the table, go ahead.
MS. PODUVAL: Before we start walking through the specifics of
the Heads of Agreement (HOA), I wanted to show this chart [slide
3] and just sort of put into perspective what is at stake here
with the AK LNG Project. And what we're essentially showing
here is projected revenues for the state in two different
worlds: one without the Alaska LNG Project, an oil only world;
and the other with the Alaska LNG Project where there is oil as
well as gas production from the North Slope. And what we start
seeing here is that ... in the oil only world, the forecast - at
least as it is today - would be for declining revenues for the
state, and fairly aggressive at that. The Alaska LNG Project is
essentially forecast to potentially bring up to $4-$4.5 billion
per year of additional revenues to the state.
REPRESENTATIVE FEIGE: And those revenues are gross or net?
MS. PODUVAL: Those are net revenues to the state. One other
fact that I want to highlight while we're on this slide [slide
3] is that all of our analysis models these two worlds each time
we look at the project. And so, we model an oil only world and
use that as our base line and we layer on top of that a world
that has gas production from the North Slope and revenues
associated with that; and recognizing that there are some
interdependencies between those two here in Alaska. Whenever we
speak of revenues from the AK LNG Project what we're referring
to are incremental revenues that would be attributed to the
Alaska LNG Project and so it would be net of any impacts that
would occur to the state's revenues on the oil side, whether
positive or negative. If we go on to slide 4; just putting the
HOA within the context of the AK LNG Project's development
timeline. Where we are today in 2014 is ahead of the first of
these development stages, which is Pre-FEED and FEED,
essentially stands for Front-End Engineering and Design, and
it's the first step to starting to understand the project's cost
and scope better. As it's anticipated today, this will
hopefully kick off mid-2014 and go through the next 18 months
and would be expected to be completed at the end of 2015. The
next stage in the project's development would be the front-end
engineering and design. And this is where the detailed scoping
of the project will occur. And so, from a technical
perspective, the scope will be well described and defined, the
cost estimates associated with this project will become much
narrower than the $45-$65 billion or the $39-$54 billion that we
hear today. But there are also some other very important
project development steps that get achieved during the FEED
process. In addition to the technical specifications being
worked out, the second aspect that will get finalized during the
FEED process are the commercial arrangements associated with the
project. And that will include ... both the project's
commercial structure itself and how the different pieces ...
will be shared between all of the different stakeholders, but
also very importantly, this is a stage where discussions with
the market start to occur and the sales and purchase agreements
associated with the LNG will be negotiated and finalized during
this stage as well. The third aspect that we'll ... work
through FEED are the financing arrangements that will accompany
this project. And so, for each of the different stakeholders in
the project - the producers as well as notionally the state with
an equity share, and potentially TransCanada - this is the stage
during which discussions and negotiations are entered into in
the financial market as well and the debt that will be secured
to finance the project will all be worked out. And so, all of
that information -- having good information on the project's
scope and cost, having information on the price as well as the
volume ... that will be associated with the LNG that's coming
out of this project, and having the financing agreements in
place, essentially gives the different project participants
sufficient information to trigger a key point in the project's
development, which is denoted here as FID or final investment
decision. And that's really when the majority of the project's
construction activity and the project's costs related to that
will start being incurred. And so, if you look at the boxes at
the bottom, they associate costs with each of these project
development stages. The first state though Pre-FEED would have,
for the state, somewhere between $40 and a $100 million being
invested. Then you get to the FEED stage and the state's
investment goes to between $180 and about $450 million, or about
2 to 3 percent of the total investment. Then, it is after FID
when more information about the project is available that the $7
to $13 billion, or up to 95 to 97 percent of the project's
costs, will start being spent. If you get to FID and all of the
information in front of you does not point toward an
economically viable project -- in other words the market is not
there or the market is not willing to give the prices that would
be needed to support the cost structure of this project, or the
financing arrangements are simply not attractive enough to where
the different stakeholders can make money, at that point each of
the producers as well as the state, TransCanada, they would all
be taking that decision not to go ahead with the project and not
to put billions of dollars into a project that doesn't have all
of the pieces lined up. The flip side of that, or the ...
success path associated with that, is if you go through the FEED
process and have all of those elements lined up, at that point
there is sufficient comfort in the deals that have been struck
that this project will be economic to where you can actually
take the step where the state as well as all of the different
parties now start investing billions of dollars. So, what the
HOA really takes us through is Pre-FEED; its decisions
associated with for the state investing the $40 to $100 million
and to enter into commercial agreements with the other
stakeholders here that hone in on ... all of the details that
will support entering into FEED after Pre-FEED, if that is the
decision that the project developers take in essentially moving
the process forward.
4:50:15 PM
CO-CHAIR FEIGE: Question, Representative Hawker, then Kawasaki.
REPRESENTATIVE HAWKER: Thank you Mr. Chair. Good to see you
back again. I'd like to just - I've got your presentation here
- and I'd just like to establish a real foundational
understanding for myself. I think last fall, the last time you
were in front of House Resources here talking about the royalty
study, which of course plays into a lot of these economics that
we are going to be looking at here. There was a fairly lengthy
discussion about how that royalty study at the time was
necessarily based really on the estimated project costs of the
original AK LNG Project which was TransCanada's open season and
then their original plan to go to Valdez. There's certainly
been announcements of changes subsequent to that time. I'm just
wondering ... is this document still based on that original
TransCanada concept or have you been able to have access to and
are working with numbers that - recognizing that FEED is all
about tying things down a whole lot tighter - but is this really
about the current project and have you had the chance to
incorporate an update of the project from what it was last time
we were talking to you into the documents in front of us.
4:51:37 PM
MS. PODUVAL: Representative Hawker, through the Chair, thank
you. It's very nice to see you again too. The short answer is
yes. The cost estimates here incorporate the assessment that we
made .... Sorry, let me back up. The pipeline cost estimates
and the [gross domestic product] GDP cost estimates, I believe
are what you're referring to when you say we started with the
royalty study from AGIA cost estimates. And so, what we did as
part of the royalty study is to evaluate those cost estimates in
light of the changes in the market and update those cost
estimates to what would they, would be today, and we worked with
both Black & Veatch technical experts as well as the state's
technical experts in order to update that. And so, the cost
estimates that you're seeing here are essentially today's view
of what the project's cost would be. And again, they have a
wide range ... as you refer to. We fully expect that as the
project goes through the FEED stage that that range will get
narrowed down a lot more, but this is reflecting ... the best
available information today on what the project's cost estimates
are.
4:53:07 PM
REPRESENTATIVE HAWKER: Follow up ...
CO-CHAIR FEIGE: Follow up, Representative Hawker.
REPRESENTATIVE HAWKER: These are Black & Veatch's estimates,
though, they really have not been triangulated with the project
sponsors.
MS. PODUVAL: Representative Hawker, through the Chair, I
believe they are lined up with the range within which the
project sponsors have provided their cost estimate. And so,
their cost estimate goes from $45 billion to $65 billion and
our's falls somewhere in the middle of that range. And so,
we're at about $54 billion as our base case and we've done
sensitivities ... across both ends of that. And so to that
extent it has been triangulated against what the project
sponsors have provided as cost estimates as well.
4:53:51 PM
REPRESENTATIVE HAWKER: I guess then, my take away is -- Mr.
Chair. What you're telling me is no, you don't have access to
project cost information from the people that are actually the
project sponsors. But you see yourself landing with your
estimates, derived from the original TransCanada plan, ...
within the ranges provided by those project sponsors, which
gives you a sense they're being reasonable here.
MS. PODUVAL: Representative Hawker, through the Chair. Yes, to
the extent that the project has ... detailed cost estimates,
whatever that level of detail is at that point. That's not
something we have incorporated here, but the fact that our cost
estimates fall within that range give us comfort that we're in
the right ballpark.
4:54:31 PM
REPRESENTATIVE HAWKER: Thank you.
CO-CHAIR FEIGE: Representative Kawasaki, did you have a
question?
4:54:35 PM
REPRESENTATIVE KAWASAKI: Yea, thank you, Mr. Chairman. Thanks
for being here Deepa. And just to tag along to that last
question, ... several of us took a mega project seminar
discussing sort of the biggest issue when it comes to failure of
projects being the schedule-driven process that doom mega
projects more than any other single factor. Have you guys taken
that into account in the proposal that's before you? ... Do you
have a risk analysis? Or, ... you just picked a straight line
in the middle of the road, this is what we've heard from the
industry versus this is the low from the industry.
4:55:18 PM
MS. PODUVAL: Representative Kawasaki, through the Chair. We
have looked at the risk to the project from there being a delay
in the project schedule. And we will certainly list that as one
of the risks that this project carries, given the complexity of
this project as well as the scale of this project. So, ... in
combination with market prices, capital costs, schedule; those
would all be significant risk factors for this project. A lot
of the analysis that we show here ... picks sort of a base-case
view just to allow us to discuss the different aspects that we
are. But we have looked at risk analysis, ... testing the
bounds of that.
4:56:07 PM
CO-CHAIR FEIGE: Follow up, Representative Kawasaki?
REPRESENTATIVE KAWASAKI: Similarly to Enalytica yesterday, do
you have stress case ... scenario that we can see before we go
too much further here.
MS. PODUVAL: Representative Kawasaki, through the Chair. We
may have taken a slightly different approach, I don't know that
we have a stress scenario. We stressed it for different
variables and try to understand ... what some of the biggest
drivers are that can move the needle and which ones don't bubble
up to that level. But that's certainly something that we can
do; create one stress scenario and provide that to you.
4:56:47 PM
CO-CHAIR FEIGE: Follow up, Representative Kawasaki?
REPRESENTATIVE KAWASAKI: Thank you, Mr. Chairman, to follow up
then. ... The stress case scenarios that were presented
yesterday, but from the [Legislative Budget & Audit Committee]
LB&A consultants, were cost overruns at 25 percent, market
changing between $7 and $15 or something like that ... and un-
utilization. Can we figure what your stress case would be using
those similar numbers? And maybe, if you're using a different
analysis, that's completely fine too. I just would like to see
that. I have a different question, though, on the timeline.
CO-CHAIR FEIGE: Okay, go ahead.
REPRESENTATIVE KAWASAKI: Thank you, Mr. Chairman. On the
timeline, we had the Administration come in earlier and talk
about the estimated timeline and ... I think the concern from
committee members is that once we set this thing in motion, it's
really hard to stop or really hard to come back to us. Between
the Pre-FEED and the FEED stage, ... how much of a dedicated
time do we have? It seems like there's potentially a month or
two before we have to make a quick decision with available data
and then saying similarly placed in 2018. And then another
follow-up question would be if the legislature can't come to
some sort of resolution at that point, how impactful it is to
the timeline.
MS. PODUVAL: Representative Kawasaki, through the Chair. I
would probably defer those questions to the Administration
because they are closer to the negotiations with the producers
and ... will have much more information to you on how the ...
intersection of those different project development stages and
what sort of timeline ... would be available as a buffer between
those.
4:58:39 PM
CO-CHAIR FEIGE: Representative Hawker.
REPRESENTATIVE HAWKER: Thank you, Mr. Chair. Two foundational
questions again here. As you are presenting cost information
here ... are these only the direct costs of the state in pursing
the project, that is the things that we are going to have to
cash up to pay for? Or do these costs include what I'll call
the indirect costs of the foregone revenue, the pre-operations
revenue that is foregone as a result of allowing some of these
development costs to be deducted in determination of oil
revenues, which ... really shows up nicely on your previous
chart? So, first question is: When you show numbers here as
what it is going to cost us, are they just the direct numbers or
do they include the indirect?
4:59:29 PM
MS. PODUVAL: Representative Hawker through the Chair, the
numbers that are shown here are just the direct costs of the
project. The analysis that we show you in terms of the state's
revenues, NPVs, all of that incorporates direct as well as
indirect, as you are referring to it, of ... any production
credits that would impact oil taxes and all of that.
4:59:54 PM
REPRESENTATIVE HAWKER: And my last question is you're showing
on this chart ... your range of estimates recognizing everything
we've said so far in this meeting on the state's obligation, the
direct obligation. ... What is your estimate right now for the
modeling work here you're doing of total project cost?
5:00:22 PM
MS. PODUVAL: Our estimate for the project's cost is $45
billion.
REPRESENTATIVE HAWKER: Forty-five?
MS. PODUVAL: Yes, in today's dollars, so that's 2014 dollars.
5:00:37 PM
REPRESENTATIVE HAWKER: So ... that begs one more question. I
just want to make sure. When you are saying in 2014 dollars you
are discounting the future expenditures in those future years
back to 2014 dollars?
MS. PODUVAL: Correct. We actually work in the reverse. We
start with the cost estimate today and we escalate it for what
they will be in the dollars of the day. And so we start with
the $45 billion and escalate it forward and that gets us closer
to $54 or so billion in nominal terms.
REPRESENTATIVE HAWKER: Nominal and could you repeat that
number?
MS. PODUVAL: $54 billion in nominal terms, 54 or 55, yep.
REPRESENTATIVE HAWKER: Forty-five for ....
MS. PODUVAL: Dollars of the day, 2014 dollars, and 54, yes.
REPRESENTATIVE HAWKER: On nominal. Thank you.
MS. PODUVAL: Fifty-four or fifty-five, I'll have to check, but
in that range, if that helps.
REPRESENTATIVE HAWKER: For this conversation that is certainly
... more than adequate.
REPRESENTATIVE HAWKER: Thank you, Mr. Chair.
CO-CHAIR FEIGE: You're welcome. Okay.
5:01:45 PM
MS. PODUVAL: Slide 5 here. Again, just ... condensing into one
slide what we walked through in a couple of hearings on the
royalty study and trying to connect where we are to what the
study's findings and recommendations were. We just wanted to
take a few minutes here to touch again upon what the study's key
findings were, how they drove our recommendations, and how that
pointed towards a state equity participation in the project as a
viable alternative for the state to consider. The study looked
at four different aspects. The first was looking at the LNG
markets to understand ... is that an attractive market for us to
pursue. The second aspect of it was looking at the supply chain
and trying to cost the project and trying to understand what the
commercial structure associated with the project would be. The
third aspect was looking at a fiscal perspective and
understanding where the project would stack up compared to other
projects globally. And then the fourth one was trying to
understand the risks associated with project and commercial
strategies and options for the state. The key findings,
basically, said that the global LNG market is growing. It's
forecast to double between now and 2030, the demand for LNG, but
that it is also competitive, the supply is growing as well.
That this is an attractive growing market is being recognized
not just here in Alaska but a number of other projects worldwide
and that are all going to compete for this market. The
government take as well as the cost structure for the Alaska LNG
Project are high. And so, put together, what those factors
pointed us to is that there is room here to improve the
commercial attractiveness of the project for Alaska to be able
to compete effectively for this growing LNG demand with the
other projects that are all trying to meet it as well. And the
concept of is it possible to create or improve commercial
attractiveness of the Alaska LNG Project while still preserving
value to the state -- sort of the search for the elusive win-
win. The Alaska LNG Project is expected to be a large, complex,
and a high-cost project. ... each component of the project by
itself would be considered a world class complex project - just
the [gas treatment plant] GTP, just the pipeline, just the LNG
plant. Put them all together and ... it's a challenging
undertaking. Given that, one of the findings of the study was
that the project structure for AK LNG is likely to be some form
of an integrated project. And why that is the case is driven by
the complexity as well as the scale of the project. An
integrated structure where the producers own the infrastructure
associated with the AK LNG Project as well creates the
opportunity for more project control and that becomes critical
for success with a project like this. What you don't want to
have happen is the GTP is ready but the LNG plant is not or the
pipeline is ready and the other components are not. Having an
integrated project control essentially allows all of those
different development timelines to be lined up so the entire
project is ready at the earliest date it can be. If you put
those two together, what it points to is that we might have a
project that looks a lot like [Trans-Alaska Pipeline System]
TAPS, that's completely producer owned and integrated. And
along with that comes certain risks to the state and to the
extent that in creating value of and improving the commercial
attractiveness of the AK LNG Project the state stays cognizant
of those risks and is able to mitigate them, then that would be
valuable to the state. So, this concept of creating alignment
between the producers and the state starts becoming important.
And it was really the combination of those factors - how can we
improve the commercial attractiveness of the LNG project to the
producers and to where it can compete effectively for that
demand, how can we preserve value to the state in doing so and
how can we line ourselves up with the producers anticipating
this integrated project - that all led to the concept of the
state's equity participation in the project.
5:06:43 PM
MS. PODUVAL: One way of improving commercial attractiveness for
the state, and a somewhat ... more passive way, would be simply
to transfer value by reducing royalty or production tax. So,
stay in the structure that exists today and say we are modifying
our production tax structure so that we improve the
attractiveness of this project for the producers. And that
would entail... a transfer of value across the table from the
state to the producers. So, from that perspective you check the
improved commercial attractiveness, but not necessarily the
retaining value to the state and aligning with the producers for
transparency and all of these other objectives that the state
has. By being an equity participant in the project, it helps
the state to use those billions of dollars that it might have
... given the producers as reduction in taxes or a change in the
fiscal terms and use that as an investment to procure an
ownership share in the project. And along with that ownership
share, especially if it is set up where each of the different
parties has an equivalent part of the gas as well as an
equivalent share of the ownership of the project, helps to
create that path for the gas all the way to market and create
alignment where you are not having to negotiate with each other
on what the tariffs have to be for your gas to move on their
part of the project or vice versa. Now, ... that is sort of in
a quick few minutes nutshell the thought process getting to the
equity share. But we also recognized that there are significant
risks associated ... with participation in this project. I mean
if this project goes ahead, with or without participation, there
are risks that the state should recognize and manage. And we
highlighted a number of them in the royalty study and I'll touch
again in our discussion here on some of those.
CO-CHAIR FEIGE: Question?
REPRESENTATIVE HAWKER: End of the slide.
CO-CHAIR FEIGE: Okay.
5:09:06 PM
REPRESENTATIVE HAWKER: Thank you, Mr. Chair.
CO-CHAIR FEIGE: Sure.
REPRESENTATIVE HAWKER: The whole process that you've outlined
here makes a lot of sense of course. If follows right on the
dialogue you've led the legislature through with the royalty
study, issues, recommendations, and conclusion. I think we've
all come to see the desired attributes of alignment and
integration, as you called it here. And then, as you've got it
labeled, state equity participation seems to be the thing that
brings all that together - the alignment and the integration. I
guess my question is: Is it state equity participation if the
state transfers its ownership and control to the outside
commercial interest, which would be TransCanada of course? Is
that going to be viewed in your view ... that whether it is
actually state ownership and control for another third party
that we have assigned our actual ownership and sovereign
interest in these assets to and in fact we do not have the
ownership and control, ... that option where state has no
ownership, state has no control versus the state maintaining
ownership or control to some degree. Does that make a
difference in your perspective on the viability of state equity
participation to meet those objectives of alignment and
integration?
5:10:55 PM
MS. PODUVAL: Representative Hawker, through the Chair. In my
mind I've separated these two into two different decisions. The
first being ... does it make sense for the state to have an
equity participation in the project as opposed to any other
structure or staying in the current fiscal structure? And then
the second decision associated with that is if we've reached the
conclusion that state equity participation is beneficial to the
state, and there are merits associated with that, then how do we
optimize that equity participation? And bringing on a partner
or otherwise ... I think falls in that second decision on ... Is
this the best way to optimize the state's equity participation?
Having said that, I think your question on are we yielding
control or transparency by bringing on a third party such as
TransCanada into the mix, a lot of that will depend on the
actual terms that get negotiated in these agreements with
TransCanada. And we don't view that as creating any sort of
misalignment between the state and the producers and in some
ways that's almost the more important area to find alignment.
Like I said, the state bringing in TransCanada as a way to
optimize its equity participation is a discussion between the
state and TransCanada and those negotiations will hopefully -
and the agreements that will follow - will hopefully create
access to information for the state and help the state achieve
some of the same objectives as it would from an ownership
perspective as it would without TransCanada.
CO-CHAIR FEIGE: Follow up, Representative Hawker?
5:12:50 PM
REPRESENTATIVE HAWKER: Your words here, you said you, Black &
Veatch, don't see whether it is TransCanada or the state
ownership or control, whatever our matrix is, you don't see it
creating a misalignment with the producer entities. Do you have
any idea how they see it? And I know they're sitting in the
room here, but ... I don't know either, haven't asked them,
haven't talked to them. But I'm just curious do you know that
it doesn't or do you just think it doesn't?
5:13:18 PM
MS. PODUVAL: Representative Hawker, through the Chair, I
wouldn't presume to answer for them, I do not know. I would
point to the fact that they're actively in these negotiations
with TransCanada as well as in the room to indicate that it
works for them, but that's really all I would have to base it
on.
REPRESENTATIVE HAWKER: Thank you.
CO-CHAIR FEIGE: Any other questions? Do you have one?
5:13:46 PM
REPRESENTATIVE ISAACSON: I'm not sure how to phrase it, Mr.
Chair, but thank you. Following up with Representative Hawker's
question, Deepa, was the idea that ... the alignment depends on
the terms that we come to and we have to determine that. Now,
maybe that is what the rest of your presentation is about, I
take it, but what confused me a little bit - maybe you could me
even phrase the terms of my confusion - is if we assign our
ownership participation to a third party, any third party, and
depending on the terms ... what are the terms that we should
look for to make sure that ... we still have an active voice?
And is that common with sovereigns assigning a third party their
participation rights like we're doing?
5:14:42 PM
MR. ABT: Through the Chair, I'm sorry I haven't met you yet,
I'm Peter Abt with Black & Veatch. It's important as you get
into these discussions with TransCanada, or whomever that third
party is, that you walk into those discussions knowing clearly
what you want out of them. So, what's important to the state is
to maintain transparency, like to have a real appreciation for
the costs that will be incurred in the development of the
project. And that is a critical component to include in the
negotiations and the discussions with TransCanada. The element
of control is going to be very interesting discussion to have.
I think the state's participation and the level of control that
the state will have in the GTP and the pipeline will be driven
by whether or not they choose to exercise the buyback option.
But it is always a lever that they have in the process up to the
point that those decisions are made. And in terms of the
sovereign assigning its rights in other projects, there are
instances where that does happen indeed. There's a couple of
examples that may come to mind and it was in the early stages of
development of some of these projects. The Trinidadian
government assigned a lot of the rights to the development of
the project to the producers in that instance, primarily Amoco
and BP, so it's a situation that has occurred in the past, yes.
CO-CHAIR FEIGE: Representative Kawasaki.
5:17:02 PM
REPRESENTATIVE KAWASAKI: Thank you, Mr. Chairman. We're
talking a little bit about transparency and the ability for us
as a partner with a private entity to understand what things are
going on. The two reports that we have from LB&A's contractors
seem to talk about the ownership issue and privacy and
confidentiality and I'll just paraphrase. It just says it's
possible that a partnership with these private parties who
generally operate with greater confidentiality than public
entities could limit that transparency. Can you kind of address
that and then in terms of state standing versus reducing the
risk against our other partners that are available?
5:17:39 PM
MS. PODUVAL: Representative Kawasaki through the Chair, I think
we will probably touch on some of that later in the
presentation. But I will say that I'm not quite sure I follow
the view on transparency when we talk about how private entities
in some ways would have less transparency than public entities.
I think if we look at that from the state's perspective and the
options are to have an equity participation in the project or
not ... so, I may be misstating your premise, but if ... we're
thinking that having an equity participation would make us akin
to private entities being in business together, then that will
definitely be a framework where the state would have access to
more information than it would being on the outside as just a
sovereign. So, for example, ... the state would not have
information on where the producers are in their development
process; what the costs are that are being estimated for the
project; or any of that, being outside on the sovereign you'd be
waiting for press releases essentially to tell you that. Being
an equity participation and having a seat at the table, you're
at least part of the discussion and you know what they're up to
... with relation to this project.
CO-CHAIR FEIGE: Please continue.
5:19:24 PM
MS. PODUVAL: [slide 6] So, turning back to some of what the
royalty study pointed out and what led to this recommendation of
state equity participation, we want to use those criteria as ...
the benchmark against which we look at the Heads of Agreement
that the state has entered into. And so, the first being ...
create alignment through equity participation. The second was
improve commercial attractiveness of the Alaska LNG Project.
Preserve value to the state. And manage the risks that would
come ... with this structure as the state goes ahead with this
project. And so, what I want to do here is walk through each of
those four elements within the context of the HOA and say ...
have we gotten there, have we not gotten there, which areas are
the work in progress.
5:20:27 PM
MS. PODUVAL: [slide 7] So, looking at the first aspect which is
creating alignment through equity participation. Just touching
on the highlights of the Heads of Agreement and the concept that
it tries to capture, the central one here is that royalty taken
as gas and tax taken as gas together create a state gas share.
And then that state gas share is equivalent to the state's
equity share in the project. And the state's equity share in
turn impacts the investment that the state will make in the
project as well as the revenues that the state will earn in the
future. The structure as it's envisioned now would have the
state holding equity along the entire supply chain. And again,
this is breaking out the second decision which is once we have
this equity what are we going to with it, is there a partner
involved or not. The Heads of Agreement gets us to the point
where the state has an equity share through the entire supply
chain and has a path to market. And then the concept that
commitments are made in a stage-gated manner. And sitting today
before Pre-FEED has been done, the state is not committing
itself to spending billions of dollars and seeing this project
through all the way through construction and what's really being
contemplated here is decisions that enable Pre-FEED and move the
ball forward. So, these key elements help to create that
alignment that we were talking about and maybe the pieces that
are important in facilitating that alignment is this concept of
having a state gas share and having an equity in the project
that matches that state gas share and for each of the producers
to also have a share in the project that's proportional to their
gas. That structure and having the path through the entire
project helps create ... this concept of a project within a
project where each party has their own gas and their way of
getting that gas to market, and it in some ways reduces the
number of things you have to agree on. So, I think from the
perspective of alignment, the structure that's been laid out is
probably well thought out from that perspective. [slide 8]
Then looking at the attractiveness of the ... AK LNG Project and
whether what's being envisioned here improves the commercial
attractiveness of the project. We looked at what the producers'
returns from the project would be and the state's equity
investment in the project essentially improves the producers'
returns by between 3 and 4 percent in the project and that's
meaningful, given the scale of this project. And it is largely
achieved by the state contributing between 20 and 25 percent of
the upfront capital costs associated with this project. The
upfront capital costs are so significant that ... the state
taking on ... a meaningful portion of that essentially increases
the producers' returns on the project. And ... risk is being
shared with the state too, ... from the producers' perspective
the state has skin in the game. The other aspect ... that would
be seen as being attractive from the producers' perspective is
this concept of the state taking its share as gas. It allows
them to reduce the potential for valuation disputes out in the
future and to know at least from the experience with TAPS we've
seen that those can be expensive, long drawn out, and ...
resource intensive on both sides.
CO-CHAIR FEIGE: Representative Hawker, question?
REPRESENTATIVE HAWKER: Again, I wanted to get to the end of the
slide.
CO-CHAIR FEIGE: Okay, keep going.
MS. PODUVAL: Go ahead.
5:24:31 PM
REPRESENTATIVE HAWKER: Mr. Chair. Could you explain the
footnote on modified status quo.
5:24:43 PM
MS. PODUVAL: Representative Hawker through the Chair, thank you
for that question and I should have pointed that out when I
discussed this. We've culled out specifically here status quo
as modified status quo and the reason we've done that is we've
assumed that the production credits that are applicable on the
oil side with SB 21 would be extended to gas as sort of the
least that the state would have to do to have potentially an AK
LNG Project in a world where it did nothing else. And so, we're
trying to create a baseline for the world without state equity
participation saying what would the state have to do at the very
least ... to have an AK LNG project proceed. And we picked here
that this $5 per barrel production credit that's been offered on
the oil side would potentially be expended on the gas side as a
$5 per barrel of oil equivalent for gas recognizing that when SB
21 was structured that gas was not really addressed ... because
the focus was really on oil at that point. And so, that's the
benchmark we use here, and you will see it in a few other places
as well, to measure against the world where the state has an
equity participation to understand is it better, it is worse.
CO-CHAIR FEIGE: Follow up, Rep. Hawker?
5:26:14 PM
REPRESENTATIVE HAWKER: Thank you, Mr. Chair. I did see that
you've in several places here ... this is the first chart we've
got the footnote on.
MS. PODUVAL: Yes, and thank you for the question.
REPRESENTATIVE HAWKER: Raises the question: ... why here and
is this appropriate and relevant to the dialogue we should be
undertaking to make this modified status quo at this point in
time because when we ... passed [SB] 21 last year, the whole
idea ... was, frankly, to end these barrel of oil equivalency
conversions as it relates to gas. It was very, clearly, we knew
that we were dealing with the oil tax at a flat rate ... it was
a net tax basically, but a flat rate. Now, today as we are
looking forward at the enabling legislation, it completely
abandons net tax on gas, moves us into a gross tax, and again
we're now talking - not even only a gross dollar value tax - but
a tax that is paid in this project in molecules, not in dollars.
So, I'm just really truly asking how and why can a ... barrel of
oil equivalent $5 being factored into these calculations really
be relevant to us here.
MS. PODUVAL: Representative Hawker, through the Chair. I think
one of the things we recognized when we looked at ... just
status quo, SB 21 as it is, and the economics for the Alaska LNG
Project is that that's not a project that will likely go ahead,
not with that cost structure, not with that fiscal structure.
And so, with the recognition that that something would have to
be given on the fiscal side, ... whether or not this production
credit as we've assumed it here will get there, ... I would
again say likely not, if I had to guess. But it was for the
purpose of establishing a benchmark, it was nothing more than an
assumption to say that something would have to be done and maybe
this one is sort of the lowest hanging fruit from that
perspective as opposed to maybe changing the tax rate itself or
... any other combination that we could have picked.
CO-CHAIR FEIGE: Representative Hawker.
5:28:54 PM
REPRESENTATIVE HAWKER: Again, from my decision making. First
off, we, the legislature, have not extended this $5 a barrel of
oil equivalent adjustment to gas; ... we may, we may not.
However, what we do have in front of us -- and that's based on a
net tax -- so somewhere in here ... you have to be pricing gas
sales in this. And the whole point is we're getting away from
having to ... base that on an oil price. Somewhere there has to
be an oil price in that calculation, which complicates this.
The whole idea of going to gross molecules was to get away from
these vagaries to something that we have not given. If we
really were going to use a modified status quo, would it not be
much more meaningful to us to look at the decisions we are
making. And that is either starting with exactly what the
status quo is. Or, if we want to modify the status quo, should
we not be modifying it and looking at the $13 MCF gross tax
adjustment that is, in fact, the question that is before us in
the legislation. Like I said, this $5 is ... other than being a
footnote to this page, I don't think it's ever going to enter
into any calculation we ever see. And I understand modeling, I
understand the rationale you gave us, but I don't know that this
just doesn't create an artificial data point, an artificial
modified status quo that has very little reason. Again, I think
we should be using, if anything, that 13 percent gross tax
reduction or the 13 percent gross tax in molecules, rather than
this calculated number that's never going to see the light of
day.
5:30:56 PM
MS. PODUVAL: Representative Hawker, through the Chair. So, we
do use the 13 percent ... gross tax when we're looking at the
equity participation; so just for clarification that's the ...
after picture. ... and I would agree with what you just stated
that ... this is not real in that production credits have not
been extended to gas and we don't know what that would be on the
gas side, like I said .... We made a low hanging fruit
assumption on something would have to give on the gas side and
that's what we picked.
5:31:35 PM
REPRESENTATIVE HAWKER: Always a danger to assume the
legislature does anything, but thank you. I mean I understand
your rationale.
MS. PODUVAL: Thank you.
CO-CHAIR FEIGE: Representative Seaton, then [Representative]
Isaacson.
5:31:44 PM
REPRESENTATIVE SEATON: Thank you. For the producer [internal
rate of return] IRR, do we have to assume the base case or are
you ... calculating the 18 to 23 percent internal rate of return
-the green box - is that a calculation or are you having to
calculate this base price based on what something might be and
then inflating that by 3 to 4 percent. I mean, if we don't need
the base case that's ... all these assumptions and what would be
if there was a net tax on gas. And if you can just calculate
the IRR and let us know whether that IRR is sufficient in the
project to make it attractive or not, or is it really the
discrimination between these two taxing mechanisms.
5:32:38 PM
MS. PODUVAL: Representative Seaton, through the Chair. One
does not influence the other. They're just two different
calculations of what the producers' returns from the project
would be and so the stand alone calculation of what the
producers' returns from the project would be with state equity
participation is that 18 to ... 22 percent that you're seeing
here.
REPRESENTATIVE SEATON: Okay.
5:33:00 PM
CO-CHAIR FEIGE: Representative Isaacson.
REPRESENTATIVE ISAACSON: Thank you, Mr. Chair. So, if I
understand right from a couple slides back - the study findings
- you were saying we needed to reduce high government take and
you suggested that we would do this by modified production tax
or the royalty share. So, in this assumption the modified
status quo is that we modified the production tax. If we don't
modify the production tax using this modified status quo, what
does that do to the 3 to 4 percent which you said was
meaningful? Does it drop into a different category of meaning?
5:33:41 PM
MS. PODUVAL: We can get you the numbers. I don't have the
numbers off the top of my head what the comparison to the ...
unmodified status quo would be. But ... notionally the
producers' returns would be even lower in a status quo world
because with a modified status quo we're assuming ... they get a
fiscal break with the production credit extended to gas.
5:34:07 PM
REPRESENTATIVE ISAACSON: So, follow up?
CO-CHAIR FEIGE: Follow up.
REPRESENTATIVE ISAACSON: So, is that going to modify the rest
of the model that you present to us if we assume other than the
modified. How will we read the rest of this if the base
assumption is that we have a modified status quo.
MS. PODUVAL: ... The baseline for the producers would be even
lower revenues than what the modified status quo would show and
so ... from the perspective of the producers' returns with state
equity participation, we would improve that by more than 3 to 4
percent.
CO-CHAIR FEIGE: Follow up?
REPRESENTATIVE ISAACSON: So if I understand what you're saying,
if we go to the status quo the green box will drop down a little
bit, but ... this is before we talk about our equity, it'll
bounce back up even with the status quo [slide 8].
MS. PODUVAL: The blue box would drop down. The green box would
stay where it is.
REPRESENTATIVE ISAACSON: Ok. Alright. Thank you. And if you
would point that out throughout here - the presentation - that
would be helpful. Thank you.
CO-CHAIR FEIGE: Okay.
5:35:37 PM
MS. PODUVAL: Again, I would highlight that ... the numbers are
the numbers. We're standing here at a point in time looking
forward on a project that's going to be large on which we have
... fairly limited information. And so, really all the numbers
point to here are trends and directions that ... the project
moves with the state having an equity participation in the
project. Is the revenue going to be $4 billion from this
project? I mean, I'm not sure I would bet anything on that.
There's lots of uncertainties that are yet to be resolved about
this project and whether it's capital costs or price, or ... any
of the key assumptions that we're making here. All we can do -
all we're doing here - is ... make assumptions based on the best
information that you have today and ... try and study
sensitivities around those assumptions to understand how much it
moves your answer but really what we're focused on is ... is the
answer still valid? Does this conceptually make sense to do and
does it make sense to go through the next stage of this process
and go through Pre-FEED; get more information. At that point we
have to stop and think does it make sense to go through FEED and
get more information? Does it make sense to exercise a final
investment decision and go forward. And so, as more and more
information becomes available, the numbers will start being
better, will start making more sense. There will be more people
that will ... be able to defend those numbers and ... those
numbers will have greater validity. We just have to recognize
that this is so early in the process that ... whether it's the
[Legislative Budget & Audit Committee] LB&A consultants or us or
anybody else that's trying to run these numbers, we're making
use of the best information we have to make decisions.
5:37:46 PM
REPRESENTATIVE ISAACSON: Understood. Thank you.
CO-CHAIR FEIGE: Representative Kawasaki, question? And then
[Representative] Seaton.
REPRESENTATIVE KAWASAKI: I think part of that was answered.
Deepa, this is ... more of a directional analysis to showing an
improvement from a modified status quo to some sort of equity
partnership. I ... just have ... a couple questions; ... the
first one dealing with what an estimated internal rate of return
looks attractive in the first place. These numbers seem to be
fairly high for a major large-scale project.
5:38:17 PM
MS. PODUVAL: I think ... some of that information is
proprietary and hard to get .... And I would make the
distinction between an upstream expected return [on] investment
versus a midstream return on investment. Generally, for the
upstream ... from the producers' perspective, and they're
comparing this project to other opportunities they have for
exploration and development of resources worldwide, they will be
looking at it from the perspective of an upstream return on
investment and those tend to be high .... The numbers that I
see here are not too high within that context at all.
5:39:04 PM
REPRESENTATIVE KAWASAKI: Different question.
MS. PODUVAL: And again, something that you could follow up with
the producers when they're here, too.
CO-CHAIR FEIGE: Follow up?
REPRESENTATIVE KAWASAKI: No, it's actually a different
question. It's dealing with the third bullet point on the
reducing valuation disputes [slide 8]. Can you ... elaborate a
little bit on that. I think you started to speak about TAPS and
just some sort of an alignment there.
5:39:25 PM
MS. PODUVAL: Sure. Representative Kawasaki, through the Chair.
Having ... an equity participation in the project and the state
owning its half through the midstream and the downstream and
taking its gas as kind ... both tax as well as royalty on the
Slope - essentially takes away the entire discussion on what
shall the wellhead price be; what is an allowable deduction for
passage through the GTP, the pipeline, and the LNG plant. All
of that ... from a valuation perspective goes away. One of the
... sticking points when ... you're in a royalty-in-value world
is there's always constant ... misalignment between the
producers and the state from that regard. Where from their
perspective the wellhead value needs to be the lowest it can
possibly be because it influences ... the royalty and taxes that
they pay. And from the state's perspective, that needs to be
exactly the opposite. What happens here with equity
participation is: we don't have to argue with them about what
the wellhead price needs to be or what the tariff has to be
going through the GTP, LNG, and the pipeline because they can
set tariff on their side of the project however they want to
move their part of the gas. We will be moving - the state will
be moving - its share of the gas through the portion of the
project that the state owns. ... Like I said before, you don't
have to agree on more things than you have to agree on, from
that perspective.
REPRESENTATIVE KAWASAKI: Follow up?
CO-CHAIR FEIGE: Follow up, Representative Kawasaki?
5:40:58 PM
REPRESENTATIVE KAWASAKI: So, ... the state might elect to take
all of its gas in-kind but we sometimes take it in-value. I
guess, doesn't that set the State of Alaska arguing for the
lowest value for the entire project. And then how does that ...
impact ... the rest of the chain.
MS. PODUVAL: The structure that's being contemplated here would
have the state receiving its royalty in-kind, essentially, as
gas on the North Slope at the wellhead. And so, there's not
notionally a scenario where you would be in-value in this world
and want to have ... a low transportation cost through the
project.
REPRESENTATIVE KAWASAKI: Okay.
MS. PODUVAL: Because you've already in some ways prepaid for
that transportation cost through the project by making that
investment upfront.
5:42:11 PM
CO-CHAIR FEIGE: Okay. On to the next slide.
MR. PODUVAL: In moving to the concept of ... if we've created
more commercial attractiveness for this project from the
producers' perspective and coming to the state's perspective in
trying to understand have we also preserved value to the state,
or as much value as we can for the state, by making ... an
investment in the Alaska LNG Project? And that's ... the next
sort of criteria or sort of principle from the royalty study
that ... we're examining here. And again, ... we're trying to
understand that relative to an [royalty-in-value] RIV world
where the state does not make an equity investment in the
project. So, what the next two slides show are projected cash
flows to the state. And this one is standing in an RIV world
and you'll see that the mix of the state's revenues - it's about
$4 billion a year - the mix of the state's revenues are weighted
towards royalty and production tax and then property taxes is
the next big item, with some state corporate income tax [slide
10]. And that ... is the pocket of revenue that accrues to the
state in an RIV world. The other thing you'll notice here, too,
is that the upfront investment - so to speak - from the state's
perspective - or the negative cash flows that we show here are
... fairly small in the context of this project. And again
that's just reflecting the production tax credits that will
accrue as a result of the investment that's in dispute at Point
Thomson. ... and in the total cash flows ... adding all of this
up through 2041 is about $70 billion - let's say $68 billion.
Moving to ....
5:44:08 PM
CO-CHAIR FEIGE: Question? Representative Saddler.
CO-CHAIR SADDLER: Quick question. Deepa, there's two little
dips here after the first ... two-three years, and then also
2039. Are those ... assuming expansions?
MS. PODUVAL: Representative Saddler, through the Chair. That's
additional investment that gets made in the project both at
Point Thomson as well as if there's yet to find gas that has to
come in to keep the project full. There's upstream investment
associated with that and that causes the dip.
CO-CHAIR SADDLER: So you're assuming additional investment at
Point Thomson at about 2026, ... specifically?
MS. PODUVAL: ... the 2026 is a good question. I'll have to go
back and look at that but I was referring more to the 2036-2038
time period there. That's the dip where there's additional
investment in Point Thomson - just additional drilling, boost of
compression, etcetera to keep the production up.
CO-CHAIR SADDLER: Okay.
5:45:07 PM
CO-CHAIR FEIGE: Representative Wilson.
REPRESENTATIVE P. WILSON: Everybody in here probably knows
this, but what's the gray it's SCIT.
MS. PODUVAL: State Corporate Income Tax.
REPRESENTATIVE P. WILSON: Thank you.
5:45:17 PM
MS. PODUVAL: Then the next slide, on slide 11, looks at the
revenues to the state in a world with equity participation. And
so, a couple of things to focus on here is that -- again, the
total dollars ... it's a little over $4 billion in this scenario
with 25 percent equity that we're looking at -- the mix starts
looking a little different. There's still royalty, but
production tax is a component that's a little lower. Property
tax still stays significant, but we're also capturing some
revenues from project ownership. And that's ... simply a return
on the state's equity on the project. And so, the buckets under
which the state's capturing this revenue gets lightly modified.
And then the other pertinent fact is the total cash flow; again,
through this 2041 timeframe and it's about $70 billion, again -
a little over. And ... then there's the third fact here is that
... the state is investing more as can be seen by the negative
dip upfront in the project. And that's ... essentially the
state's 25 percent investment in the AK LNG Project. So, the
takeaway from ... this is that with state equity participation
there is a higher upfront investment in the project. The
revenues that accrue from the project keep the state whole
relative to what the state would have received in an royalty-in-
value world. And so, if you put that together with the fact
that the structure improves the commercial attractiveness of the
project from the producers' perspective and then say ... from
state's perspective it looks like the state has preserved its
value as well, then those two facts come together. And ... like
I said before, it's a search for that elusive win-win; but you
can see how the components of that could line up.
5:47:28 PM
CO-CHAIR FEIGE: Representative Kawasaki.
REPRESENTATIVE KAWASAKI: Thank you, Mr. Chairman. I'm looking
just between slide 10 and 11 and I know that the state ... we're
always trying to look for a win-win. ... I think that's good.
But ... in this case, we're saying that if the producers were
just to go it alone and build their own pipeline at some point
in time, I mean the same ... time ... we'd have projected cash
flow of $68 billion versus $72 [billion] if we somehow have some
equity partnership in this game. The problem that I've got is -
looking between graphs, page 11 and page 10 - is that there's
this huge negative where we're starting to pay a lot .... And
there's a value to that risk and I'm wondering if the value's
worth the risk ... and if you can elaborate on what your
thoughts are.
MS. PODUVAL: Representative Kawasaki, through the Chair. Yes,
that's definitely what's on the table here. With state equity
participation comes an investment upfront in the project -
that's sort of the ... cornerstone of that option. And what ...
this is showing is that the state gets paid back that investment
upfront in the project once the revenue stream starts to come.
5:48:52 PM
CO-CHAIR FEIGE: Follow up?
REPRESENTATIVE KAWASAKI: I mean, that's ... making a lot of
assumptions, but ... the difference between us doing nothing and
them going it alone. I don't know if they would or not, but if
they've got a commercial gasline they would; versus us being
some sort of partner taking an enormous amount of risk for a
project that lasts 20 years is $4 billion. That's the
difference; ... am I seeing that right, then?
MS. PODUVAL: Representative Kawasaki, through the Chair. That
assumes that your baseline is not zero; that the producers would
do a project without the state's participation in it; ...
frankly, that might be a fairly big assumption.
CO-CHAIR FEIGE: Representative Hawker, then [Representative]
Seaton.
5:49:44 PM
REPRESENTATIVE HAWKER: Thank you Mr. Chair; ... would you go to
page 11 please? Thank you ... both of these graphs ... there's a
lot of information embedded in these .... My first question is
when I'm looking over here at the vertical bar showing ... 12
percent of our value back to the state comes from what you're
calling "project ownership," is that 12 percent calculated from
simply when project goes into operation or is it net of project
costs?
MS. PODUVAL: Representative Hawker, through the Chair. Good
question. I want to say it is net of the investment upfront,
but let me confirm that with Jason, who's on the line. Jason,
can you confirm that for us? The percentages that we're showing
on the bar on the right ... they're net of the investment up
front, is that right?
5:50:57 PM
JASON DE STIGTER, Senior Consultant, Management Consulting
Division, Black & Veatch Corporation; Consultant, Department of
Natural Resources: Deepa, that is correct. All those bars,
including slide[s] 10 and 11 show net cash flow percentages.
MS. PODUVAL: Thank you, Jason.
5:51:16 PM
REPRESENTATIVE HAWKER: May I continue briefly here, sir?
CO-CHAIR FEIGE: You may ....
REPRESENTATIVE HAWKER: Thank you, 'cause that makes sense to me
now. If I compare the chart on page 10 to the chart on page 11.
Again ... and here you're saying, "Yes, there is a $4 billion
difference in total return to the state between ... obviously, a
ownership or total cash flow - $68 and $72 [billion] at the
bottom of this page that $4 billion. Are those numbers also net
of project costs? Is that a positive cash flow from day one to
the end of 2041 of those numbers?
5:52:00 PM
MS. PODUVAL: Representative Hawker, through the Chair. Yes,
those are net numbers. But I would caution away from taking -
from a takeaway from these slides - that there's $4 billion
incremental value to the state because of state equity
participation. And the reason I would say that is because ...
we're making so many assumptions related to these that that can
move around quite easily. And actually, when we get to the next
slide you'll see really ... how some of those variables that we
assume move that. The takeaway for me ... was that the state
hasn't lost value in improving the attractiveness of the project
for the producers. And ... that really was what was meaningful
in looking at this.
5:52:46 PM
REPRESENTATIVE HAWKER: And Mr. Chair, I think that's the point
I was about to try to make next with these two slides because it
appears ... it's showing - for the uninformed eye looking at
this - is, "Wow, look how much more we're getting?" But if
that's only if you look to the right hand of the graph and you
can see ... we look at the annual return is up there most of the
time ... between $4 and $5 nominal billions; but that doesn't
include that great big amount of money we've gotta spend going
in to that. And I guess my point being is, if we adjusted those
nominal billions coming in over those future years for the -
just call it a ratable share of that big deficit up front - we
get a line that looks an awful lot like the line on the top of
the other graph without any state investment in this. So, it
just seemed that really these two graphs are showing that - to
me, at least - that looking only at this metric of total cash
flow over the life of the project - and as you said yourself -
that $4 billion's a pretty vague number in there. There's
really not a lot - and this is a point that came ... to my
attention last night looking at our own consultants. There does
not seem to be an awful lot of value difference to the State of
Alaska between having TransCanada involved - ah strike that -
that's not the word I'm looking for. I'm thinking of equity
ownership through them. But there doesn't seem to be a lot of
value differential between a pure status quo, especially if I
don't factor in that $5 barrel of oil equivalency (BOE) into
your production taxes that we are not offering.
MS. PODUVAL: Right.
REPRESENTATIVE HAWKER: There doesn't seem to be a great deal of
value differential to the state between these two scenarios.
... And I guess then my question is, am I really wrong there?
And what I would imagine the real value is that we bring to the
table with this venture partner concept is that intangible --
that you've already beaten me to the punch on -- is the fact
that we could actually get a pipeline that's attractive to the
producers and we actually get a pipeline. But whether we got
TransCanada - I keep saying that - it's 'cause I keep thinking
of them as the equity holder here. Whether we take an equity
position or not, our economics really don't change a lot, but we
might actually get a project out of it is I think is where I see
these graphs going.
5:55:09 PM
MS. PODUVAL: Representative Hawker, through the Chair. I think
you basically summarized what the story is. It's that having an
equity participation in the project makes it more attractive for
the producers. ... we're not losing value, which is valuable in
itself. The state preserves its value from participating in the
project and there might actually be a project.
5:55:37 PM
REPRESENTATIVE HAWKER: And I'm - speculative question - it may
be wrong question, wrong time .... When we do make an
investment in the project, we undertake a great deal of risk, as
well, that increases our state risk. Is that risk worth taking
in these scenarios?
5:55:58 PM
MS. PODUVAL: Representative Hawker, through the Chair. In some
ways, directly or indirectly, I think the state bears this
project's risks and part of the way to think about it - at least
the way I've thought about it - is that the biggest risk to the
state is not having a project .... We started this presentation
just looking at a world with oil only, without an LNG project.
That in my mind is the biggest risk that the state has and so if
this is an option that brings all of the different stakeholders
to the table, preserves the value to the state, makes it
attractive enough for the producers to be putting the other 75
percent of the investment that's needed in the project, then ...
it seems like a viable path where you want to see how far this
can go and whether ... we can participate and make a project
happen.
5:56:52 PM
REPRESENTATIVE HAWKER: This ... rings well on my own ears. I
see the world the same way as you do that -- in the gives and
the gets -- you distill it all down, we might actually just get
a project out of this.
MS. PODUVAL: Right. That's exactly right.
5:57:05 PM
REPRESENTATIVE HAWKER: Thank you. Appreciate the ... latitude,
Mr. Chair.
CO-CHAIR FEIGE: Representative Seaton.
REPRESENTATIVE SEATON: Thank you, Mr. Chairman. Looking at
these graphs, of course the biggest risk to the state is the
upfront construction portion. If we're, by having the equity
position, allowing a midstream 18 to 22 percent IRR and we said
that's not really high compared to upstream investments, but a
good portion of our risk in the first five years of construction
here is upstream credits we're giving ... against oil taxes.
So, if the upstream investment - Point Thomson; there isn't that
much in Prudhoe Bay 'cause it's already there - ... if those
have much higher IRRs, do we really need to be offsetting those
investments by taking state credits and having state
participation in the upstream? As we were talking the other
night, ... our investment in facilities that are totally owned
by the oil companies there ... if we've got an 18 to 22 percent
midstream IRR and assuming that what you were talking about is a
much higher IRR in the upstream ....
5:58:42 PM
MS. PODUVAL: Representative Seaton, through the Chair. So,
when we look at the producers' return from the project, we look
at it as a combined project from their perspective. And so, the
returns that we ... pointed to, the 18 to 22 percent, are their
midstream and upstream combined so it's ... a little different
perspective from the state in that when we ... look at the
producers' cash flows from this project - both the investment
that they make upfront as well as their revenues once the
project is operational - their investment upfront includes not
just their midstream investment - the other 75 to 80 percent of
this project that they would be funding - but also the
investment that they have to make in the upstream ... more
specifically at Point Thomson because that's really where the
upstream dollars have to be spent for this project. And then we
look at their revenues associated with that and so the ...
return numbers that we show is a combined return on their entire
investment in the project. And so, their upstream return is not
higher than what we're showing here. It's part of it.
5:59:48 PM
CO-CHAIR FEIGE: Okay. Follow up?
REPRESENTATIVE SEATON: As we go forward and do some analysis,
I'd like to see some idea of tweaking what that tax credit of
gas infrastructure in the upstream against oil taxes is and what
that does to the economics or perceived economics of the
project. Could you ....
MS. PODUVAL: Yes, I think we can provide that. And just as an
interesting statistic, we looked at this -- it's not here but --
... if you look at just the upstream side of it in Point Thomson
and the investment that the state is making notionally with
production credits for the Point Thomson investment and then the
revenues the state would collect just from Point Thomson from
this project; the state gets a return of ... more than 25
percent on the state's ... investment through production credits
in Point Thomson. So, that ... was just interesting to look at,
but yes; we can provide you with more information that looks at
the producers' economics with and without the production credit.
REPRESENTATIVE SEATON: And thank you. And it doesn't have to
be all one or all the other. I mean, a couple of ranges;
because Mr. Chairman, I think that what I'm looking at is our
big risk is those upfront years of having to have that
investment without income from it, especially if we are reducing
... further our budgetary scope there. So, I think that that
might be something that would be very interesting to look at and
see whether it does really affect the project economics.
CO-CHAIR FEIGE: Representative Hawker.
6:01:39 PM
REPRESENTATIVE HAWKER: And thank you again, Mr. Chair, ...
still ... focusing on the project ownership issue; could you
explain the footnote? And I guess it really gets into what we
really are talking about in project ownership in the way this
graph is prepared .... What are the metrics? What do you mean
- can you explain the footnote - and particularly in the context
when you talk about it being the return on equity that the state
invests. This is all about a State of Alaska 25 percent equity
alternative .... Would that return on equity have to be shared
with TransCanada if we don't hold the 25 percent in its entirety
ourself? And how exactly does that work when we're basically
shipping our own gas on a pipe we built for ourself?
6:02:32 PM
MS. PODUVAL: Representative Hawker, through the Chair. What
we're showing here is the different splits of the state's
revenues it's almost an after the fact calculation because
property tax is what it is, state corporate income tax is what
it is, and ... we know how that works. But the other three
buckets together - royalty, production tax, and project
ownership -- what that all boils down to is that we have 25
percent of the LNG that's going to come out of this project to
sell. We sell that; we get a certain bucket of dollars. And
then we have that bucket of dollars and we need to split it out
between royalty, production tax, and project ownership. And the
way we've done that is we've assumed ... 13 percent of it is
royalty. And we've assumed that .... I'm sorry, the first step
to that is creating a tariff for the state to pay itself, okay.
And that's what we're capturing and we're assuming a 12 percent
return on equity that [the Department of Natural
Resources/Department of Revenue] DNR/DOR would pay to the
[Alaska Gasline Development Corporation] AGDC subsidiary
potentially, okay. And again, it's not creating money, it's
taking the money that we have and trying to put it into buckets.
REPRESENTATIVE HAWKER: Yes.
MS. PODUVAL: And so, the fourth bucket we split it into is this
project ownership and that's paying the 12 percent return and
it's basically going from one pocket to the other.
REPRESENTATIVE HAWKER: Yes. Thank you.
MS. PODUVAL: And then the rest of it ... you're splitting it in
that ratio of 13 percent as royalty and the rest is production
tax.
REPRESENTATIVE HAWKER: Perfect. Thank you.
CO-CHAIR FEIGE: Representative Saddler.
6:04:03 PM
CO-CHAIR SADDLER: I'm afraid that Deepa I did not hear the
answer whether the state would have to split that gray bar with
TransCanada or not. It may have been buried inside your answer,
but I didn't hear it so is this Alaska's in the pocket share or
is this something we must split with TransCanada.
6:04:31 PM
MS. PODUVAL: Representative Saddler through the Chair. If you
will bear with me and wait until we talk about TransCanada
tomorrow, I will give you more on that. I think the short
answer is to the extent that TransCanada comes into the picture
and has ownership of components of the project, then the project
ownership as we're showing here would be shared with
TransCanada. And I'll share with you tomorrow... what value is
transferred to TransCanada.
CO-CHAIR FEIGE: Okay.
6:04:49 PM
MS. PODUVAL: Moving on to slide 12, this is a really
interesting, and an important one, and we should probably take a
couple of minutes just to wrap our heads around what it's trying
to show. You've heard, and you've seen the enabling legislation
... that the state is contemplating a 20 to 25 percent share of
the project, and if you assume 13 percent is royalty, then that
leaves the remaining to be a, the gross tax number, that we're
looking at. And, what we're trying to explain here ... is the
set of assumptions and the framework that got to those magic
numbers. How did we know it was 20 to 25 percent that would
keep the state whole, relative to an RIV only world, and not 30
percent or not 10 percent, okay? So, the analysis we walked
through is that first of all, the first challenge is knowing
what your benchmark is, that you're trying to meet, right?
Because if you knew for certain what the number is, in a
royalty-in-value world, without state equity participation, then
you know what you're trying to beat, or match. But that is the
moving target that's going to be driven by the prices in the
market, as well as the capital cost for this project. Those are
the two big uncertainties that make that a moving target. And
so, we looked across ... a number of scenarios and we're
highlighting nine scenarios here that are combinations of
different price environments as well as different capital cost
environments. And we're taking the combination of those three,
and looking over these nine scenarios and trying to solve for
how much the gross tax rate, or how much the state's equity
participation percentage would have to be to be equal to what
the state would have received in a royalty only world, in a
royalty-in-value world, without equity participation. Okay?
And so, what you see here is that in a low price environment,
which is the line to the very left, the bar is low, because the
state would be receiving less royalty and less net production
tax in a world where prices are low. And so, the level of
equity participation that the state would need, or the amount of
gas - share of gas - that the state would need from the project,
to meet that benchmark is also correspondingly low. So,
depending on what your capital cost for the project is,
somewhere between, you know, 5 to 15 percent, 4 to 13 percent
as it's shown here, is the level of state equity participation
that would preserve value to the state. Then, we moved to the
high price environment and ... our bar is going to be high
because the state's royalty and production tax in a high price
environment, in a royalty-in-value only world, would be high.
And so, if need to match that level of revenues with an equity
participation, then the state would need a much higher share of
the gas to be able to match that. And that range is somewhere
between 30, 35 percent, as we're showing here. And then we
said, "Okay let's look at the middle." You know, what's between
these two cases, and across the base price for different capital
cost assumptions, again, we solve for how much equity does the
state need in the project? What is the share of gas that the
state needs, to preserve the value that it could have received
in an RIV only world? And that brought us to between 20 and 30
percent, and that was the recommendation that came out of the
royalty study: that the state should consider an equity
participation between 20 and 30 percent.
6:08:49 PM
REPRESENTATIVE HAWKER: Thank you. This really is a neat graph,
I've got to tell you, where the lines intersect at 24, 25,
that's the answer. But can you tell me what you used, dollar-
wise, and ... is it market destination, or ... what is low
price, base price, and high price to you in this model?
6:09:07 PM
MS. PODUVAL: Representative Hawker, through the Chair. They
are all with your LNG market prices, and so the netback element
would be shipping and then, whatever the project cost is.
REPRESENTATIVE HAWKER: How about dollars?
MS. PODUVAL: What the actual dollar numbers are associated with
this? We do it a little differently, ... we're thinking about
it more from nominal terms, but the base price assumption
essentially in today's terms would be: we start with the price
for oil, and so it's a $90 per barrel price of oil, and a 13.5
percent multiplier on the oil price, plus a dollar. And so,
what that gets you to is about a $13 price for LNG, in today's
dollars, and that's the base price environment. We go to the
high price environment, and that assumes $120 oil price, a 15
percent multiplier, and we have that dollar added to it as well,
give me a second here, I'll do the math. So, that's about a $19
price; that'd be high. And at the low price world, we're
assuming this is pegged off of Henry Hub, and so it would be
about $10, assuming a Henry Hub price of about $4 and then a $6
adder to account for the liquefaction ....
REPRESENTATIVE HAWKER: Thank you very kindly.
6:10:41 PM
CO-CHAIR FEIGE: Okay, Representative Saddler, then
[Representative] Olson.
CO-CHAIR SADDLER: So, I'll give feedback to you, so again, this
chart shows what level of state equity is required at different
price bands to make the same amount of money to the state as
would be earned under the modified status quo, right, okay. And
low price, $10, ... I kind of missed those, can you list those
prices again for what you described as low price, base price.
6:11:11 PM
MS. PODUVAL: Sure, 10, 13, 19.
CO-CHAIR SADDLER: And the low price of 10 was Henry Hub linked,
but the others were?
MS. PODUVAL: Oil linked.
CO-CHAIR SADDLER: Oil linked, okay.
MS. PODUVAL: And so, we assumed a $90 oil world in the ... base
price scenario, and a $120 oil world in the high price scenario.
CO-CHAIR SADDLER: Right, thank you.
6:11:23 PM
CO-CHAIR FEIGE: Representative Olson.
REPRESENTATIVE OLSON: Oh, thank you. I like this chart too,
but can you tell me which gas you were assuming comes on first
for this chart?
MS. PODUVAL: Representative Olson, through the Chair. ...
where the production comes from?
REPRESENTATIVE OLSON: Yeah, that would have an impact on the
chart, I believe.
MS. PODUVAL: We're assuming through the project that both Point
Thomson as well as Prudhoe Bay gas would be available 10 years
from now when the project would be operational. So, it would be
gas from Prudhoe as well as Point Thomson.
REPRESENTATIVE OLSON: No, I'm sorry. Which one did you assume
was coming on first?
MS. PODUVAL: They're both coming on at the same time in our
assumption, by 2024.
REPRESENTATIVE OLSON: Equal amounts, or ...
MS. PODUVAL: More Prudhoe than Point Thomson, and I can get you
the actual numbers.
REPRESENTATIVE OLSON: Thank you.
CO-CHAIR FEIGE: Okay, please continue.
6:12:15 PM
MS. PODUVAL: So on slide 13, what we really wanted to highlight
here is that the gross tax percentage is important. It sets
what the state's total share of the gas will be, what the total
state participation will be, investment as well as revenues.
And so, if you assume that royalty is about 13 percent, then
when we're talking about a 20 percent state equity participation
that corresponds to your 8 percent gross tax level. And when
you assume a 25 percent state equity participation that
corresponds to the 14 percent gross tax level, recognizing that
production tax is net of royalty. And so, you know, the state
maximizes its value the greater the share of the gas is that the
state has allocated to it and the greater the state's equity
participation; and just something for this legislature to be
mindful of as those decisions are in front of you.
CO-CHAIR FEIGE: Representative [P.] Wilson.
6:13:33 PM
REPRESENTATIVE P. WILSON: Would you just state that again, the
greater the equity?
MS. PODUVAL: The greater the state's equity participation is,
the greater the share of the gas that is assigned to the state.
And that creates a lot of value for the state; the value really
is in the gas. And so, the higher that percentage is the better
the state will be. So, moving to the next ...
6:13:56 PM
CO-CHAIR FEIGE: Representative ...
CO-CHAIR SADDLER: In the Chair's absence, so just, in the last
column there - State Investment - that's over, over what
timeline, time horizon?
MS. PODUVAL: That's through construction, essentially.
CO-CHAIR SADDLER: Through, up to construction. Okay.
MS. PODUVAL: Through the end of construction.
CO-CHAIR FEIGE: Representative Seaton.
6:14:13 PM
REPRESENTATIVE SEATON: Mr. Chair.
CO-CHAIR FEIGE: Representative Seaton.
REPRESENTATIVE SEATON: Thank you. You know the statement that
the value is in the gas; we had a chart earlier that showed that
a lot of the value in the project was in the midstream. Was ...
I misinterpreting that chart that we had from, I'm trying to
remember who presented that one, where the largest portion of
the value came in the midstream.
MS. PODUVAL: Representative Seaton through the Chair. I think
the largest costs for this project are in the midstream. You
can think about that as being value, if you are looking at the
return that you receive on that midstream. From the state's
perspective, the point here is that even though the state's
investment will increase with ... the greater the state's equity
participation will be, the state's revenues associated with
those greater volumes that come with higher equity participation
are more than sufficient to offset the investment upfront. And
so, if you're choosing between a 20 percent participation and a
25 percent participation, recognizing that there are different
investment levels associated with each of those, choosing the
one that has a higher state equity participation yields more
than sufficient value to offset that difference in cost and
that's really the point I was trying to make.
6:15:57 PM
MS. PODUVAL: [slide 14] So, moving on to the next aspect which
is .... This study pointed out a number of risks to the State
of Alaska and cautioned that the state should be managing these
risks as effectively as it can. ... I like ... what this
analysis shows, but it's essentially looking at the price
exposure that the state has and comparing how the state is
exposed to that in a royalty-in-value world without equity
participation, with the exposure that the state would have with
an equity participation. Okay. If you look at the middle set
of bars, the blue bars all show ... a status quo world without
equity participation. The green bars are a world with state
equity participation. If you look at the middle set of bars
that compare those two, again, we're looking at that combination
of ... prices can be high or low, capital costs can be high or
low, and so there's nine different scenarios being modeled here.
But the take-away from the middle set is that across the base
price scenario, regardless of the capital costs, the state's
value from the project is more or less equal, with equity
participation, as it would have been without the equity
participation. Okay? And it should be that way, by design,
because, again, we're trying to ... we tried to solve for what's
the level of state equity participation that would keep that ...
roughly equal. Now when you move to the low price scenarios,
what you will see is that the revenues that the state receives
with equity participation are, across all three of those
scenarios, higher than what the state would have received
without the equity participation. Okay? And so, what that
shows is from a low price environment perspective, having an
equity ownership in the project hedges the state's price risk in
that world. And then you move to the high price world and what
you see is that equity participation yields lower revenues than
the state would have received without the equity participation,
and staying in an RIV only world. Now, this is a happy world,
this is a happy world where we're making a lot of money anyway,
we're just not making as much money as we would have made in an
RIV only world. And so, what you see happening, is that having
equity participation in the project sort of flattens the state's
revenue profile and it flattens the state's exposure to price
risk. It increases the state's revenues in a low price world,
it decreases the state's revenues in a high price world relative
to RIV only and ... to that extent ... the state is giving up
some upside - if you want to look at it that way - for that
price protection in a low price environment, ... which would be
the scenario you want to protect against.
CO-CHAIR FEIGE: Okay, ... Representative Hawker.
6:19:29 PM
REPRESENTATIVE HAWKER: And thank you again, Mr. Chair. So, in
the green bar - 25 percent equity alternative - which is state
takes equity, it's the RIK scenario; is the presumptive rate in
this ... the production tax rate in this RIK scenario, the 13
percent of gross?
MS. PODUVAL: That's correct.
6:19:58 PM
REPRESENTATIVE HAWKER: If I might follow up? I guess, how did
you establish market price, basically, at the end of the day,
what comes back to the state 'cause there's been some arguments
about, or arguments - discussions about the state being ....
The whole point of this pipeline and the whole concept behind
RIK is the state is -- it's exactly what you're showing here.
We're able to ultimately get a higher return on an RIK sale, a
sale of our gas, than we would by taking it in-value back here
in the state. There's some argument that we're disadvantaged
because we're the small player in the world. Have you
discounted the market prices, or taken into consideration our
potential disadvantage in selling gas, or is it simply presuming
that there's some kind of worldwide market price that we're all
able to get equally?
MS. PODUVAL: Representative Hawker, through the Chair. You're
a little ahead of me, 'cause I'm coming to the marketing.
REPRESENTATIVE HAWKER: I'd be happy to withdraw the question.
MS. PODUVAL: I'm coming to the marketing arrangement that's
included in the HOA, which I believe will address that concern.
But as far as the assumptions go here, we're not assuming that
the state receives a discount relative to what ... the producers
receive.
REPRESENTATIVE HAWKER: Thank you.
6:21:25 PM
CO-CHAIR FEIGE: Representative Isaacson.
REPRESENTATIVE ISAACSON: Thank you, Mr. Chair. So, if I'm
reading this right, from your earlier description: we could
actually be singing "Oh happy day" even at the high price; if
this is the modified and we actually return back to the status
quo, the blue line goes down to some degree and that levels it
off even at the ... higher scenarios.
MS. PODUVAL: Through the Chair, yes, that is correct.
REPRESENTATIVE ISAACSON: Is there a, sorry.
CO-CHAIR FEIGE: Go ahead.
REPRESENTATIVE ISAACSON: Is there a significance, if, to that
at the higher price, or just a verification that we're on the
right track? If they're both level, balancing.
6:22:06 PM
MS. PODUVAL: Through the Chair, it would drop all of these blue
bars down, not just the high price world. And so ... I don't
think that actually changes what we're trying to do here or
where we're going. I think the validity of the equity
participation providing us sort of a hedge in our price exposure
would still hold true.
REPRESENTATIVE ISAACSON: Yeah. Thank you.
6:22:28 PM
CO-CHAIR FEIGE: Representative Saddler.
CO-CHAIR SADDLER: Thank you Mr. Chair. You made the statement
that having the equity position, or ownership, flattens the
state's risk, but that seems to be only in the base price band
... admittedly the low, medium, and high ranges of the base
price. But it seems to me that the other, left-hand tranche,
the low price, we are definitely advantaged and at the high
price we're disadvantaged, so can you help me understand your
statement a little bit more?
6:22:58 PM
MS. PODUVAL: Representative Saddler, through the Chair. And
that's exactly why I said it levels the state's exposure to
prices .... What we essentially see, what you would expect to
see, is ... in a low price world you receive the lowest
revenues, in a medium price world you receive ... a medium level
of revenues, a high price world - you receive ... high revenues.
CO-CHAIR SADDLER: Under equity?
MS. PODUVAL: Without the equity participation, right, in
general, that's how it would work. And you see that here, in
how the blue bars are structured. What I mean when I say that
equity participation sort of flattens the state's exposure is
that the green bars in the low price scenario are not as low as
the blue bars are. And so, the state earns more in the low
price world with equity participation, and conversely, as you
pointed out, in the high price, you don't earn as much with the
green bars as you would have with the blue bars. And so ... it
doesn't give you as much high side, it doesn't give you as much
low side, and it sort of flattens your price.
CO-CHAIR SADDLER: This is the ....
6:24:03 PM
MR. ABT: If I may, through the Chair, Representative Saddler.
What ... it helps to do is reduce the volatility that the state
would receive in terms of revenues into the state.
CO-CHAIR SADDLER: Okay.
CO-CHAIR FEIGE: We've got a little over seven minutes left, so
please continue.
6:24:26 PM
MS. PODUVAL: The second aspect of risk for the state ... we
said was capital cost. And touching upon it briefly here -
recognizing we're going to come back and talk about TransCanada
in more detail - ... essentially the capital cost risk exposure
to the state is highest before the project starts because there
aren't project revenues yet to support the cash calls ... that
would be demanded from the state. And to the extent that the
state thinks in TransCanada as a partner in this, to share in
those upfront capital costs, that is one mechanism for the state
to reduce its exposure to those cash calls early in the
project's development before you have revenues to offset any
cash calls with. In terms of the numbers, having TransCanada
participate allows the state to retain between 20 and 25 percent
of the gas share, while only being responsible for between 13
and 18 percent of the upfront capital costs. And that's because
they will be paying the remaining portion of the capital costs
associated with the [GTP and the pipeline. And this becomes
especially important if there are cost overruns associated with
this project. And that ... as we discussed before, ... is a
very real risk for this project ..., given how large it is and
how complex it is. ... we should all expect that costs will go
up with a much higher probability than they will go down for
this project. And so, ... having a partner to share ... that
investment requirement upfront - to the extent that that moves -
becomes even more valuable because there is some uncertainty in
what the cost for the project will be. And that's what we're
highlighting here, putting some numbers to it on slide 16. The
left panel essentially shows the state's investment with and
without TransCanada in the mix. And what it shows is under the
base level of capital costs for this project - the $45 billion
level - having TransCanada as a partner reduces the state's
upfront cash calls by about $3 billion or so.
CO-CHAIR FEIGE: Representative Saddler.
6:27:09 PM
CO-CHAIR SADDLER: And could you ... expand a little bit when
you say with TransCanada, with the specific conditions, is that
with buyback, without, parts of those numbers a little bit more
finely than what you're presenting here?
MS. PODUVAL: Representative Saddler, through the Chair, thank
you for that question. We're assuming here that this is with
the buyback, and so without the buyback, it will reduce the
state's capital investment even further. And ...
6:27:29 PM
CO-CHAIR FEIGE: Representative [P.] Wilson, then Seaton.
REPRESENTATIVE P. WILSON: Okay. Thank you Mr. Chairman.
TransCanada really has to, ... they want to maintain their
ability to have a profit in this. And so, if I remember right,
TransCanada says that they want to get the greater of either 60
percent of the 25 percent, or 14 percent ... of the pipeline,
correct?
MS. PODUVAL: Representative Wilson, through the Chair, yes.
REPRESENTATIVE P. WILSON: Okay.
MS. PODUVAL: That's correct.
REPRESENTATIVE P. WILSON: So, and then this, this is with ...
the buyback?
MS. PODUVAL: Yes, what we're showing here is with the buyback.
REPRESENTATIVE P. WILSON: Okay, thank you.
6:28:16 PM
MS. PODUVAL: And the panel on the right essentially shows here
that if there are cost overruns associated with this project,
and this is now a $54 billion project instead of a $45 billion
project, then again, having TransCanada as a partner can reduce
the ... investment that would be required from the state by
about $4 billion. And like I said, you know, ... we'll talk
about TransCanada in much more detail tomorrow, but just from
the prospective of ... is the state, managing its different
risks associated with equity participation, and looking at
capital cost exposure, having TransCanada is one way of reducing
that upfront capital cost exposure that the state would have
before there are project revenues.
6:29:06 PM
CO-CHAIR FEIGE: Representative Seaton.
REPRESENTATIVE SEATON: Thanks. On this, back one, on this
slide [slide 16] are we looking at the total project?
TransCanada isn't participating in the liquefaction, ... LNG
plant, and where does, what part is this?
MS. PODUVAL: Representative Seaton, through the Chair. We're
only assuming, as it's laid out in the [memorandum of
understanding] MOU, that TransCanada would be participating in
the GTP and the pipeline component of the project, and that the
state would be participating in the LNG plant as well as the
portion of the GTP and the pipeline through the buyback.
6:29:44 PM
REPRESENTATIVE SEATON: Okay. And the, but the LNG plant is
incorporated in.
MS. PODUVAL: Yes.
REPRESENTATIVE SEATON: Okay.
6:29:56 PM
MS. PODUVAL: [slide 17] Then looking at a third major aspect of
risk for the state, which is the potential loss of value through
RIK - and Representative Hawker, this is what you were asking
about earlier. To the extent that the state elects to take its
gas in-kind - associated with this project - ... there's a few
different alternatives in front of the state on how it chooses
to market this, this LNG. The first option is that the state
can market its own share, this one we would think of at least
with current capabilities, as possibly being the least
attractive one. ... there's a number of reasons why, that we
laid out in the royalty study, but one, the state would be
competing with the producers who have done this and are very
good at it. And that's not ... that's not an exciting place for
the state to be. The state does not have ... a marketing
organization set up ... or the experience to be able ... to
market ... this LNG successfully, from that perspective. The
second alternative would be for a third party to market the
state's share. So, the state could potentially negotiate with
... some LNG players, out in the market, that would purchase the
state's LNG at the terminal of the LNG plant and then remarket
it. This ... could be an alternative for the state to consider,
but it has some constraints that the state would have to be very
mindful of. One is that ... whoever this is that is going to
purchase, be this third party, purchase the state's LNG at the
end of the LNG plant and then remarket it, they're going to have
margin built in, and profit for themselves built into it, and so
by definition, the state may get ... a discount on, on its LNG,
that it sold. There could be some potential for upside if the
state's able to negotiate ... some sharing of the upside with
this third party, but ... that's generally not how these things
get structured. And there's examples of ... different
sovereigns that have gone down this path and ... not liked how
the world's turned out in terms of what they ended up selling it
to this marketer, and what they were able to then achieve in the
market, and there being a disconnect between those two. The
third option is that the producers market the state's share.
And this would be an option where the state could benefit from
the producers' marketing expertise. And so, they would
essentially clump the state's share of the LNG along with their
own when they're approaching the market and procure similar
terms to what they're getting for their own gas, for the state.
And this ... could recreate essentially a key advantage that the
state has in an RIV world, which is rather than competing with
the producers, ... we're achieving the same benefit that they do
because of their experience and expertise, and because they've
done this ... for a long time.
6:33:28 PM
UNKNOWN SPEAKER: Quick question?
CO-CHAIR FEIGE: You had a question first, I think,
Representative Seaton, then Kawasaki.
REPRESENTATIVE SEATON: Thanks. We've talked a number of times
about potential partners and looking at whether it's Mitsubishi
[Gas Chemical Company] or Korea Gas [Corporation] or whoever,
the, we've been told that when they buy a long-term portion of a
project they want, all the way up. So, is there anything in
your presentations, or have you looked at that kind of scenario,
as far as economics go and what we could get out of the revenue
stream versus the lowered risk by having either a partial or a
full buy-out. And is there anything ... that you see in these
contracts that would prevent us from exercising that option?
MR. ABT: Through the Chair, Representative Seaton, this is a
marketing alternative that we have discussed ... and evaluated.
And ... yes, there are plenty of buyers in the marketplace that
are interested in such a structure. There's nothing
contemplated within the current structure, that we're talking
about here, that prohibits the state from pursuing that option
if it is an alternative that it deems to be attractive.
REPRESENTATIVE SEATON: Okay. Thank you, Mr. Chair.
6:34:56 PM
CO-CHAIR FEIGE: And, let's see, Representative Kawasaki.
REPRESENTATIVE KAWASAKI: I think he was actually, he was next.
CO-CHAIR FEIGE: Or Representative Isaacson.
REPRESENTATIVE ISAACSON: All right, thank you, thank you. So,
I appreciate that this is a snapshot in time. But, we have 10
years to develop, perhaps if we wanted, expand AGDC's authority,
let's say, like Norway did with Statoil, to learn how to market
our gas. And I guess that would have to be a provision in the
HOA, if we ever wanted to contemplate. What would be your
experience ... and insight into ... how might that benefit
Alaska, even if it took us a little bit to ramp up, even after a
decade?
6:35:55 PM
MS. PODUVAL: Representative Isaacson, through the Chair.
That's ... that's certainly an option for the state to consider.
I don't, there's nothing ... in the HOA or any of the agreements
being contemplated right now that would preclude the state from
going that direction; and so, ... in the world of optionality
that is an option that is still open to the state to pursue.
Just something to think about is, we may have ... some of the
best marketing organizations already available to us through the
producers, and whether that will be a lower cost way of getting
there; ... again, that should be part of the state's evaluation.
6:36:42 PM
MR. ABT: If I may, through the Chair, Representative Isaacson.
One other thing to consider is we probably don't have 10 years,
right? These decisions and the [sales and purchase agreements]
SPAs that would support ... this project are necessary for
project financing. So, you probably need to have them
negotiated pretty much by 2017, so you might have three years
and executed by 2018. So, that really accelerates the
development of that expertise that would be necessary for the
state to acquire.
REPRESENTATIVE ISAACSON: Thank you, good point.
6:37:15 PM
CO-CHAIR FEIGE: Representative Kawasaki.
REPRESENTATIVE KAWASAKI: Thank you. And looking at this graph,
I think that is a concern amongst members ... that Alaska won't
be able to figure out its market, and then we'll have this gas
that is essentially not worth anything. ... is there a benefit
to ... putting that somewhere in the current enabling
legislation to protect the state from that risk, that sales be
done ... as a unit.
6:37:44 PM
MS. PODUVAL: Representative Kawasaki, through the Chair, if
you'll bear with me 'til we get to the next slide, I'll point
you to where there is language in the Heads of Agreement ...
that starts taking the state toward that direction. So, ... on
slide 18 here ... what we wanted to point it out, is that the
Heads of Agreement includes the producers' intent to negotiate
with the state to market the state's share of the gas. So, each
of them would proportionately market ... what they're
contributing to the state's share of the gas. And the state is
only obligated to take royalty-in-kind if the producers make
satisfactory arrangements for the disposition of the state's
share of LNG. And so, the agreements are moving in the right
direction to where the state can benefit from the producers'
marketing expertise. It's too early for those details to be
worked out, but directionally, ... that's where this could be
heading.
6:38:51 PM
CO-CHAIR FEIGE: Okay. Right, on to the next slide.
MS. PODUVAL: And again, trying to help us understand how that
alternative .... can work, essentially each of the different
producers would market what it's contributing to the state's gas
share. This is a very simple world that we're assuming here,
where the state takes a 25 percent equity participation, each of
the producers are producing a hundred units. But, to the extent
that they are each contributing 25 units, and that makes up the
state's gas share, then they would each be including those 25
units in the LNG that they're offering to the market and trying
to sell. And that's how the entire state gas share ... would be
marketed. You know, another thing is as part of these
negotiations, one of these producers may be willing to market a
greater share of the state's gas, and the state, potentially,
... if that is the case, with three different producers and
three different negotiations, the state could have some upside
in being able to pick ... which the best deal might be to market
the state's gas share, as well. And then, moving to the risks
associated with the structure itself of the state's
participation [slide 19]. Wanted to highlight some of the
elements that are incorporated within the Heads of Agreement and
how they might impact some of the things that are important to
the state. One key concept here is the concept of a project
within a project. To the extent that we've equalized the
upstream gas ... to the equity share ... through the AK LNG
project, that allows each of the stakeholders, the producers as
well as the state, to exercise ... almost complete ...
commercially the terms that it wants through its own part of the
project. The state does not need to ... agree with how the
producers would structure their part of the project
commercially, or what tariffs they might use or not use. And
similarly, the producers won't have a say in the way that the
state commercially sets up its part of the project. An
important aspect that that has ramifications for is the access
and pro-expansion principles that are included in the Heads of
Agreement. And what that points to is that each party has the
ability to initiate an expansion and that is really important,
because if you think about being ... a minority interest holder
in the project and if that's a decision that all of the parties
get to vote on and will only proceed with a majority decision or
a unanimous decision, then the state could get out-voted each
time it wants to initiate an expansion and have another producer
that finds gas on the Slope into the project. But to the extent
that the agreement will allow the state to initiate its own
expansion in the project and the producers will not be able to
veto that, ... with the caveat that it doesn't negatively impact
their current operations which is a fairly standard caveat
that's used with a lot of pipeline projects, ... that's valuable
to the state because it creates access within the project for
other producers that want to explore and produce in the North
Slope. It allows the state to create that expansion, offer
attractive terms, for those producers to be able to monetize
their gas. The stage-gated commitments aspect is another
important one, and we touched upon this a little earlier in our
discussion today. But at this point, the state's not
committing, you know, $13 billion as its share in this project.
What it's committing is to get through Pre-FEED and contribute
its proportionate share of that. At every stage-gate in this
project's development, the state, just like the producers, will
have a decision to make on whether to move to the next stage or
not and to bear the cost associated with that. And so, as more
and more information becomes available to the state, just like
it would to the different producers, the state will be able to
make more informed decisions about spending more money toward
this project. The fourth aspect we're highlighting here is
access to information. To the extent that the state has a seat
at the table, that creates access to information; ... like we
said before, you're not waiting on a press release to find out
what the producers are doing late into this project. You're
understanding, ... the engineering, what the cost estimates that
are being developed for the project, what is being done and what
is not being done related to this project. And that can be a
positive thing as well. All of these things, within the dotted
line here, [slide 20] ... are principles as they're laid out
right now. And they all need to be qualified in commercial
agreements ... that are being negotiated and ... are yet to be
finalized and signed. And this is definitely an area ... that
we should characterize as being a work in progress. Some of the
principles that are laid out are pointing in the right
direction, but there's a lot more detail and a lot more
certainty around these elements that have to be obtained ... in
the negotiations that are yet to come and to commercial
agreements that are yet to be signed.
6:44:54 PM
CO-CHAIR FEIGE: Representative Seaton.
REPRESENTATIVE SEATON: Thank you. Yesterday ... our
consultants raised the point about whether it was reasonable for
parties that were not investing in an expansion, they don't have
to pay anything, but if the unit cost was lower, they shared in
the benefit; and the question was, "Is that really reasonable?"
Or ... if they're guaranteed it won't cost them anything, then
the benefit should flow to the people that are doing the
expansion, if that occurs. So, do you have a take on that?
MS. PODUVAL: Representative Seaton, through the Chair. What
the expansion principles say, essentially, are that if there's
an expansion on the project and ... the expansion ends up
reducing the per unit cost of the project, then everyone gets to
share in that. If there's an expansion in the project, and it
results in the per unit cost going up, then the party that's
expanding bears that cost. The rationale for that, essentially,
is that if an expansion lowers the per unit cost, the original
project owners, essentially, built the infrastructure with the
chief expandability that the new party is benefitting from. And
so, one way to think about this is if we were not the party
that's expanding ... and it's Exxon that finds new gas and wants
to expand the project, and ... in order to expand the project
they're using the chief compression capacity that our pipeline
has.... Their next unit is not going to be as expensive because
they don't have to put steel in the ground like we did to build
the project. They only have to add relatively cheap compressors
to be able to move more gas through the project. Okay, that's
one way to think about it.
REPRESENTATIVE SEATON: Mr. Chair? I guess the question is if
all parties have the opportunity to proportionately invest in
the expansion ... and if they choose not to invest in the
expansion, then ... my question is, and what our ... consultants
raised was the question, "Does that make sense, if they're not
investing in the expansion, if they choose not to invest in the
expansion?" So, can something be negotiated in so that if
there's an expansion, everybody has the right to expand; but if
people want to participate in the expansion, then they would
share in the benefit?
MS. PODUVAL: Representative Seaton, through the Chair. The
short answer to that is yes, ... that's one way of doing it
where every party has the option to participate in the
expansion. And when we say participate in the expansion I guess
... they would be putting the money to facilitate the expansion,
they may not have more gas to put in the project and everyone
... can share in the benefit, but ... the structure that's being
contemplated here is not irrational either. And ... it's not
necessarily uncommon either ... where if there's a lowering of
the per unit cost in a project ... with an expansion, that the
original shippers benefit from that, whether or not they're part
of that expansion. You'll see this rolled-in rate philosophy
applied ... in the Lower 48 pipelines, for example, where all of
the initial shippers would benefit if an expansion lowers the
cost of the project, even though they're not investing more.
6:49:00 PM
REPRESENTATIVE SEATON: Well, and Mr. Chairman, and we had that
... in AGIA project as well, but there was ... a limit on the
cost at 115 percent, so there was some participation in the
expense as well, so they could go up to 115. Here we're saying
it's zero, you have ... no liability for any additional cost for
a rolled-in rate and yet you share in the benefits without any
further investment. So, I guess it's something that maybe we
can ask you guys to think about and see if there's ways of
structuring that so that we can answer our consultant s '
questions as well, maybe from a different standpoint.
MS. PODUVAL: Representative Seaton, ... certainly, there's
different ways to look at it. One way to look at it is maybe
this is the trade-off for having the unilateral right to expand
the project. And ... the trade-off here is that the original
shippers all get to share in the costs as they go down, but they
don't share in the cost if they go up. And that's what they
want in return for allowing you to expand the project at will.
But yes, we will think about ... if there are other ways that
this can be cut.
REPRESENTATIVE SEATON: Thanks, Mr. Chairman. I just want to
make sure that as we go forward with legislation, where the
legislature is considering this part, ... if we can incorporate
something in there that addresses the issue that was brought to
us by our consultants. So, thanks.
CO-CHAIR FEIGE: Okay. And, let's see, we're almost to the
slide we've all been waiting for, Representative Isaacson.
6:50:42 PM
REPRESENTATIVE ISAACSON: Thank you, I'll make it really quick.
Just to clarify the access to information. From what you've
been saying then, it's your understanding that this HOA would
have the access to information survive post-construction, or is
it just through construction and the initial commercial
agreements?
MS. PODUVAL: So the HOA ... is essentially just agreeing on
principles, at this point. It's the commercial agreements that
will be signed through Pre-FEED, FEED ... getting to FID that
will codify and lock in these principles and legal agreements
between these parties. And ... the HOA lays out the right
principles that move the state and the producers in the
direction towards ... all of these different objectives that the
state has. But, this is a work in progress, and the actual
agreements will reflect whether or not the state has ... access
to information, transparency, and all of these different things
that we want to see there.
REPRESENTATIVE ISAACSON: So, if I may, a short follow up. Do
we need to specify intent language then to satisfy what you
showed here in an earlier slide, number 8 I believe it is, in
order to keep disputes down; ... we need to have access to
information, that's been one of the sticky points for a long
time. ... is that already intentional in the language of this
HOA or do we need to specify that more particularly?
MS. PODUVAL: I believe the intent is included.
REPRESENTATIVE ISAACSON: Okay.
MS. PODUVAL: Like I said, the actual agreements ... will need
to convert those into legally binding terms.
REPRESENTATIVE ISAACSON: Thank you. Okay.
6:52:30 PM
CO-CHAIR FEIGE: Okay, on to the slide we've all been waiting
for.
MS. PODUVAL: The rest of them were not scintillating? Well,
slide 21 is where ... we're sort of looking at that scorecard
all together and saying ... we set out trying to see whether the
Heads of Agreement laid out principles ... and a structure that
created alignment through equity, improved the commercial
attractiveness, preserved value to the state, and helped us
manage the risks that we know we'll start getting exposed to.
From creating an alignment through equity participation through
equity, we said that the equity participation along the entire
supply chain as it's being contemplated now, creating the share
of state gas which is royalty and tax equivalent to what the
state's investment would be in the project, those are all
elements ... that help to create that alignment between the
producers and the state. The state's upfront capital investment
in the project through equity participation improves the
producers' return on the project, and ... it helps the state to
share the producers' risk ... and improve the commercial
attractiveness of the project from that perspective, for the
producers. We looked at the state's cash flows in a number of
different worlds - in the world without an equity participation,
in a world with equity participation - and saw where ... that
magical 20 to 25 percent number was at and what the rationale
behind that is. And within that range, the state essentially is
not losing value ... by incentivizing this project and that's
... a valuable combination we think; it looks better for the
producers, but the state is not bleeding value in order to do
that. From the perspective of managing risk, again, just the
structure of the equity participation reduces the volatility of
the state's revenues to prices and hedges in a low price
environment while taking away some of the upside and it helps to
manage the state's price exposure, it's one of the ways that
that's addressed. Having TransCanada participate in the project
is ... an alternative for the state to reduce its upfront
capital cost exposure before there are revenues available to
offset it. With respect to marketing the state's gas itself, as
well as the structure of the participation, those are elements
that are in flux. Again, the Heads of Agreement includes
principles and intent to solve those problems for the state and
to create a structure that would help the state meet its
objectives of ... access, expansion, transparency, access to
information, all of those, but that's definitely the area where
... this is very much a work in progress and there will be more
agreements and more details in the years ahead, where the state
has work to do ... in creating legally binding language that
facilitates the state to achieve all of those. Mr. Chair, ...
that's what we had in terms of a presentation, and I'm happy to
take any other questions we have.
6:55:55 PM
CO-CHAIR FEIGE: Representative Saddler.
CO-CHAIR SADDLER: So, just for easy of interpretation. So, the
far right bar, here, should we interpret dark green as A, light
green as B, and yellow as C, or is there a different ...?
MS. PODUVAL: Representative Saddler, through the Chair. Yes, I
think ... that's a fair representation.
CO-CHAIR FEIGE: No further questions from committee? That
concludes part one of your presentation, I think we look forward
to part two tomorrow. We will meet again at 1:00 p.m., right
here in Room 124. We're adjourned.
[CSSB 138(FIN)am was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HRES 3.25.14 Black & Veatch Presentation - HOA.pdf |
HRES 3/25/2014 4:30:00 PM |
SB 138 |