Legislature(2013 - 2014)BARNES 124
03/28/2014 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| 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 | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX
1:04:17 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."
CO-CHAIR FEIGE invited the speakers to make opening remarks in
relation to CSSB 138(FIN) am.
1:04:41 PM
DAVID VAN TUYL, Regional Manager, BP Exploration Alaska (BP),
gave a brief personal history and expressed his belief that
executing the Heads of Agreement (HOA) was the right way to
advance the [gas pipeline] project. His company has reviewed
[CSSB 138(FIN) AM] and is in support of the bill.
1:05:41 PM
W.A. (BILL) MCMAHON, Jr., Senior Commercial Advisor, ExxonMobil
Production Company (ExxonMobil), informed the committee he has
over 30 years of experience. He said ExxonMobil supports [CSSB
138(FIN) AM] and is ready to move into the next phase of the
project.
1:06:17 PM
PATRICK FLOOD, Supervisor, North Slope Gas Development Team,
ConocoPhillips Alaska, Inc. (ConocoPhillips), gave a brief
history of his experience in the oil and gas industry. He said
ConocoPhillips supports the HOA and [CSSB 138(FIN) AM], which is
consistent with the HOA.
1:07:42 PM
TONY PALMER, Vice-President, Major Projects Development,
TransCanada (TC), expressed TransCanada's support of [CSSB
138(FIN) AM].
1:08:03 PM
CO-CHAIR FEIGE opened the hearing to questions from the
committee.
CO-CHAIR SADDLER recalled testimony by Mr. Roger Marks
[petroleum economist, contract consultant to the Legislative
Budget and Audit Committee, at the hearing of 3/27/14] urging
the legislature to take the time necessary to seek better terms.
He asked whether there are potential benefits to the state, or
the other entities involved, by "waiting for something else
later on."
MR. VAN TUYL cautioned that schedule-driven megaprojects run
into problems. Taking sufficient time is important to avoid
mistakes; however, from BP's perspective, it is also important
to attain data and permits so that the project can compete in
the Asian market for natural gas as soon as possible. It is
expected that the defined range for the project on a cost/supply
basis allows the project to compete and monetize the resource,
therefore, the parties must keep doing the work necessary to
mature the cost estimate and obtain permits. Mr. Van Tuyl
stated that it behooves all of the parties to expeditiously
advance the project.
MR. MCMAHON observed that ultimately this project is going to be
underpinned with commitments from the liquefied natural gas
(LNG) [purchasers of LNG who comprise the] market. The
execution of the HOA by the three producers and the state was a
clear, strong signal to the market, and additional progress will
strengthen credibility for the project. He warned that
unwarranted pauses in the progress of the project will send a
[negative] signal to the market.
MR. FLOOD stated that ConocoPhillips is prepared to move into
the preceding front-end engineering and design (pre-FEED) phase,
as the project is at that point. In the event one party is not
ready, his company will work to solve problems and avoid any
delay to the extent possible.
1:12:28 PM
DAN FAUSKE, President, Alaska Gasline Development Corporation
(AGDC), Department of Commerce, Community & Economic Development
(DCCED), opined that all legislation should be thoroughly
investigated and analyzed. He recalled that previous
legislation related to a large project was significantly
improved over time, but the delay of one year was at a cost of
over $210 million. He pointed out that timely review is
important, albeit without "skip[ing] the steps."
MR. PALMER reiterated that the market is looking for a signal
that Alaska is ready to market its LNG globally, and has
indicated its interest. He agreed with the previous speakers on
the effects of a delay.
REPRESENTATIVE HAWKER drew attention to the HOA, ARTICLE 4:
ALASKA LNG PROJECT WORK, Article 4.5 which read [original
punctuation provided]:
During the Pre-FEED phase, each of the Producer
Parties and the State would initiate preliminary,
individual LNG or gas sales or shipping efforts.
During the FEED phase, each of those Parties would
seek to execute individual LNG (or gas) sales and
shipping agreements.
REPRESENTATIVE HAWKER reminded the presenters there has been
lengthy discussion about the state marketing its own gas by
seeking a joint marketing agreement with one or more of the
producer parties. He asked whether the use of the word
"individual" in Article 4.5 compromises the ability of the state
to negotiate a sales agreement in that regard.
1:16:25 PM
MR. MCMAHON responded that ExxonMobil does not see any
inconsistencies as the "individual" marketing term refers to the
fact that the parties would not market LNG jointly. He directed
attention to ARTICLE 8: ROYALTIES AND PRODUCTION TAXES, 8.3:
State Gas Share, 8.3.3 which read [original punctuation
provided]:
Consistent with advice from antitrust counsel, the
Producer Parties are willing, in conjunction with a
fiscal arrangement for an Alaska LNG Project under
which the State has a State Gas Share, to agree that
each Producer Party, if asked by the State, would
offer to negotiate separately with the State in good
faith to enter into an agreement with the State
regarding the purchase or other disposition of a
portion of the LNG that is made from the State's
deliveries of natural gas to the Alaska LNG Project,
with each Producer Party negotiating a potential
agreement regarding the purchase or other disposition
of a portion that equals or exceeds that Producer
Party's respective proportionate share of the total of
the Producer Party's capacities (i.e., exclusive of
the capacity owned or used by the State) in the LNG
Plant component of the Alaska LNG Project.
MR. MCMAHON said the intent of the above clause is to allow the
state to approach one or all of the producers to discuss
purchasing the state's gas; these discussions would be on an
individual basis. He noted that Articles 4.5 and 8.3.3 were
written with the advice of antitrust counsel, and there is no
conflict.
CO-CHAIR SADDLER asked for the strength of the commitment
[stated in 8.3.3].
1:18:03 PM
MR. VAN TUYL explained the language of 8.3.3 states the
commitment of each of the producer parties to negotiate in good
faith the envisioned agreements. One of the underpinning
principles in the HOA is for the state to be a direct
participant in the project and to take its 25 percent tax as a
combination of royalty-in-kind and gas. Under CSSB 138(FIN) am,
the Department of Natural Resources (DNR) would make a decision
[to market its gas jointly with one or more of the producers] if
the appropriate agreements are in place. The fact that a
portion of the taxes are paid through royalty-in-kind provides a
substantial incentive for each of the producers to ensure that
the state is able to reach an agreement as envisioned in 8.3.3.
CO-CHAIR SADDLER remarked:
Yesterday we heard a proposal that might suggest the
state should seek to have the producers market
Alaska's share of gas along with yours on whatever
basis described, but at the same price that your
companies were getting. ... My understanding is that
Alaska's gas would be at some price advantage. How
would that play out in efforts to try and market
Alaska's gas individually?
MR. MCMAHON said - based on advice from antitrust counsel - the
producers do not discuss marketing prices or purchase prices
amongst each other, or with the state, as they are potential
competitors.
1:20:24 PM
CO-CHAIR FEIGE recalled the cost overruns that occurred during
construction of the Trans-Alaska Pipeline System (TAPS).
Although the location of this project is not without some
existing supporting infrastructure, the state's equity stake in
the partnership puts it at risk should the need for additional
billions of dollars arise. He inquired as to the companies' and
the project's strategies to avoid cost overruns, and asked how
each producer has dealt with cost overruns historically.
MR. VAN TUYL stressed that each of the entities are motivated to
deliver the project at the lowest possible cost, because that
will define each parties' profits. The producers are highly
motivated to manage costs in a systematic and effective manner.
Using a stage-gate process to advance projects ensures that the
project does not "go to the next phase until certain risks are
quantified, defined, and everybody is comfortable ...." He said
each of the producers has delivered megaprojects successfully
and brings that collective experience from around the world to
the Alaska LNG Project. Furthermore, the entities involved have
the right expertise in Arctic operations, mega LNG projects, and
pipeline operations, to manage costs.
1:24:01 PM
MR. FLOOD agreed that the stage-gate process is critically
important for a project to proceed in a predictable manner. The
significant cost of the project is a risk shared by all of the
parties, and that risk motivates all to bring the project in at
the best possible cost without any sacrifice of health or the
environment. He opined that the parties' alignment with the
state is a key area of the pre-FEED and FEED work on planning
and execution.
MR. PALMER agreed with the previous speakers, and added that the
strength of the team and the state, and the records of the
corporations, indicate a focus on cost, quality, schedule, and
probability of success. All of the corporations provide
experience and expertise in different - and in some similar -
areas, and he offered to provide to the committee TC's
performance records on schedule and cost. In response to Co-
Chair Feige, he said he would do so.
1:26:19 PM
REPRESENTATIVE HAWKER directed attention to the HOA, ARTICLE 6:
REGULATORY FRAMEWORK, ACCESS AND EXPANSION, Articles 6.1, 6.2,
and [6.4 paragraph a.] which read [original punctuation
provided]:
6.1 The Parties have discussed a tailored regulatory
framework for the Alaska LNG Project under Section 3
of the Natural Gas Act, 15 U.S.C. § 717b ("NGA Section
3"), and recognize the availability of this framework
to meet the needs of all Parties.
6.2 During Pre-FEED, the Alaska PNG Project will be
advanced under NGA Section 3.
6.4 a. The Parties will support, including holding
discussions (as permitted by FERC rules) with the FERC
staff regarding the application and implementation of
NGA Section 3 to the Alaska LNG Project.
REPRESENTATIVE HAWKER said the aforementioned Articles commit to
using Section 3 of the National Gas Act, [15 U.S.C. §717b] (NGA
Section 3) as the regulatory umbrella under which the project
will be developed. Previous testimony from Mr. Marks indicated
that framework may not be appropriate for this type of pipeline
project due to the level of transparency required; in fact,
regulation under the Regulatory Commission of Alaska (RCA) may
be more appropriate.
MR. MCMAHON observed that Mr. Marks said NGA Section 3 applies
to LNG projects; however, the question relates to how much of
the project is applicable. He said the parties to the HOA -
along with the state and its co-venture partners - intend to
approach the Federal Energy Regulatory Commission (FERC) for
direction on the application and implementation of NGA Section 3
to the project.
REPRESENTATIVE HAWKER asked whether there is a substantial risk
that FERC would not agree to the application of NGA Section 3 as
the regulatory umbrella.
MR. MCMAHON said no.
CO-CHAIR SADDLER asked when a decision will be made on whether
TC will build the pipeline, and/or operate the pipeline to
midstream.
1:29:19 PM
MR. PALMER stated that TC would be pleased to be the party that
leads the construction and operation of the pipeline. At this
time, there has been no decision or serious discussion on this
matter because the next stage is pre-FEED, and the lead [party]
at the moment is ExxonMobil. TransCanada will be the lead party
for the pipeline in the pre-FEED stage, along with a team of
personnel from the team, and the decision will be made by the
entire group. In further response to Co-Chair Saddler, he said
it is not timely yet.
CO-CHAIR SADDLER asked for any comments from the producers.
MR. FLOOD confirmed that those decisions have not been made yet.
1:30:51 PM
REPRESENTATIVE SEATON recalled that for oil projects the "hurdle
rate ... is somewhere between 12 and 17 percent," and the range
for a gas pipeline was lower. Referring to the economics of the
project, he asked what kind of range the individual producers
have as a hurdle rate to determine the project.
MR. VAN TUYL advised that attaining a specific benchmark to
approve the project is not discussed amongst the producers. In
order for each of the parties to approve the project it will
look at the latest cost estimates and data, run its individual
economics, and seek corporate approval to fund the next phase.
Generally, LNG projects are low-margin projects and are very
capital intensive, thus maintaining low initial upfront costs is
very important.
CO-CHAIR FEIGE surmised there are laws that restrict the parties
from conferring on "these rates."
MR. VAN TUYL nodded in affirmation.
1:33:30 PM
REPRESENTATIVE SEATON remarked:
... I'm not asking for a specific number, I'm trying
to get a range ... I recall that we were talking in
those kind of ranges when we were talking oil
projects, and if this project is competing with
projects around the world that the companies
participate in, I'm trying to figure out whether ...
we're in the same range or typically the hurdle rate
that is used is lower for a gas line that's going to
be in competition with other projects in your company,
that would ... be assessed at higher hurdle rates.
MR. VAN TUYL clarified that the metrics used by BP to evaluate
an LNG project are fundamentally different from those used to
evaluate an oil project because of the capital cost. In fact,
one thing that distinguishes LNG projects from other projects is
their ability to generate cash for a longer period of time due
to long-term sales and purchase agreements, and long-term
financing.
REPRESENTATIVE SEATON asked for responses from the other
producers.
MR. MCMAHON informed the committee that ExxonMobil also looks at
metrics such as the rate of return, present value profit, and
actual value profit, but the best way to describe its approach
is related to risk management. An investment decision is based
on the cost of supply and on managing cost overruns through the
stage-gate process. Close watch on the regulatory permitting
process is needed also. For an LNG project, individual
contracts must be negotiated with credit-worthy customers.
Although he said he cannot share a particular hurdle rate, he
said ExxonMobil takes a holistic management approach that looks
at the metrics and the risks associated with a project.
1:37:05 PM
MR. FLOOD also could not offer a specific number; however, he
pointed out that when ConocoPhillips evaluates a project, the
real question is whether it is ready to take the next step. In
this case, subject to legislation and "the right" commercial
agreements, ConocoPhillips has determined the project is ready
for pre-FEED. He agreed that there will be assessment and risk
management at each stage using many different measurements.
Also, LNG projects offer a different risk profile than other oil
and gas projects due to counterparties and long-term sales and
purchase agreement. Regarding the testimony from Mr. Marks,
[the hurdle rate] is a convenient tool to compare projects, but
it is not the only consideration.
REPRESENTATIVE SEATON reminded the committee that Mr. Marks
estimated hurdle rates of between 8 percent and 12 percent, and
a project cost of between $45 billion and $65 billion. Mr.
Marks's estimated breakeven point for a $65 billion project at
12 percent was $17 on gas, which is probably uneconomic for
sales in Asia. Representative Seaton continued:
... I just want to make sure that we don't have a
project here that you, producers, need to show is
uneconomic so that another project such as an LNG
plant on the North Slope and shipment by sea would be
available in the future, and so that's why I'm trying
to balance these economics and see - [Mr. Marks] also
cautioned us we could be putting $600 million into
something that isn't going to get sanctioned ...
MR. VAN TUYL said:
BP believes that this project can compete in the Asian
markets and that's why we are where we are, that's why
we entered into the Heads of Agreement with the state,
that's why we're continuing to put our share of the
capital forward to advance the project. The simple
truth is: Today, we don't know for sure if it will
compete and we will be able to execute those sales and
purchase agreements with buyers ... but we think
there's a significantly highly enough likelihood that
we're ready to go into the pre-FEED phase if we get
this, this legislation passed.
MR. VAN TYLE reviewed the stage-gate process.
1:42:13 PM
MR. MCMAHON agreed with Mr. Van Tuyl, and added that if [CSSB
138(FIN) AM] passes and remains consistent with the HOA,
ExxonMobil is prepared to participate in pre-FEED, based on its
belief that the project has the potential to be commercially
viable.
MR. FLOOD agreed with the representatives of BP and ExxonMobil.
He assured the committee that ConocoPhillips believes that this
project can compete in the market on terms that are favorable to
its shareholders; the decision to advance to pre-FEED has been
made.
REPRESENTATIVE KAWASAKI directed attention to Exhibit C of the
Memorandum of Understanding (MOU), [dated 12/12/13, Key Item 9,
Termination Event Alaska LNG Midstream Services Term Sheet]
which gives TC a five-year time period for a "look-back" with
favorable terms. He expressed his discomfort with those
provisions because, "it doesn't seem clear that there's a clear
off-ramp."
MR. FLOOD noted that ConocoPhillips is supportive of the state's
participation in the HOA but is not a party to the MOU. He
deferred to the state and TC.
MR. VAN TUYL said BP is also not a party to the MOU. He agreed
that the provision directs that five years after the state
exercised the termination right, if the state continued to
pursue a project substantially similar, the state would have to
offer terms back to TC, qualified by the facts that caused the
termination.
1:46:16 PM
MR. PALMER observed that [the Key Item 9] clause is there as
part of the overall agreement with the state. The primary
rationale for the clause is based on the reality that TC earns
its money by investing through the development and construction
periods of a project, and then receives its return over the life
of the project as the owner and operator of the pipeline. This
is unlike a company that makes its return providing engineering
or construction services. As a shipper, the state is provided
with a number of "off-ramps" through the MOU, and if the state
exercises its termination right, TC must transfer its assets and
equity to the state in exchange for the return of its investment
with an allowance for funds used during construction (AFUDC).
Mr. Palmer pointed out that there is no profit margin for TC at
that point; therefore, if the state is provided with the
customary off-ramps, and if TC is required to convey its assets
and the state proceeds with a project without TC, it is
appropriate for TC to be fairly compensated.
REPRESENTATIVE KAWASAKI, addressing the producers, relayed Mr.
Marks's assertion that if the producers are highly interested in
an LNG project, they may proceed without the state. He asked
how the proposed agreements impact the producers should they
decide to "build your own line at some point in time."
MR. MCMAHON stressed that the state's participation in the
project has tremendous benefits for the producers and the state.
In fact, the state's decision to take its return by royalty-in-
kind and tax in lieu of production tax allows the parties to
avoid the historic disputes over the valuation of hydrocarbons
for settling royalty tax and production tax, and disputes over
cost deductions for pipelines and tankers. He opined that the
proposed agreements are optimal and the terms between the state
and TC are not an impediment to the project.
MR. VAN TUYL agreed with Mr. McMahon's comments and added that
BP has decided to advance the project as outlined in the HOA.
Although BP wants to advance the project jointly with the state,
if irreconcilable differences arose between the state and TC
that delayed the project for five years, he said he was unsure
how the project would be impacted.
1:53:20 PM
MR. FLOOD said the key element for ConocoPhillips is the state's
policy decision of participation [CSSB 138(FIN) am sections 1-12
for the Alaska Gasline Development Corporation]; process [CSSB
138(FIN) am sections 14-15]; and percentage [CSSB 138(FIN) am
section 36], as outlined in the HOA. He concluded that the
state's participation "at a percentage" is critical for
ConocoPhillips.
REPRESENTATIVE KAWASAKI recalled that in 2002 the Department of
Revenue (DOR) reported that "state ownership would not likely
improve the feasibility of the project or be valued by private-
sector sponsors. General consensus among industry
representatives interviewed [was that] a public-private
partnership relationship with the state either wouldn't help or
would be a hindrance to the project" due to political and
regulatory issues. He inquired as to what has changed since
2002.
MR. VAN TUYL opined facts have changed since 2002. Firstly, the
Alaska LNG Project includes the manufacturing of LNG and the
model to have direct state participation is a fairly common way
to advance such a megaproject. Secondly, the state has now
formed the Alaska Gasline Development Corporation (AGDC) to act
as a commercial entity independent from the state as regulator
or sovereign.
MR. MCMAHON added that a benefit seen by the producers in this
project is that the producers are allowed to invest in the
portion of the project associated with their gas.
Traditionally, producers were required to invest in a larger
percentage of the project in order to pay royalty and production
taxes to the state in cash. The state will benefit from the
proposed agreement because of its share in the cash flow from
the project and its participation in the marketing of the gas.
REPRESENTATIVE KAWASAKI inquired as to the partnership between
AGDC and the producers.
MR. FAUSKE expressed his support of the state's equity position
in the project, which is an important change since 2002. In
addition, the owners will be able to negotiate their shares of
the gas flowing through the pipe at a higher rate of return. An
ownership position puts the state in a stronger position for
negotiation, and promotes long-term fiscal stability and a more
congenial relationship with the producers. Internal issues,
such as providing natural gas for Alaskans, have also changed.
2:01:36 PM
REPRESENTATIVE P. WILSON returned attention to the HOA, Article
8.3 State Gas Share, 8.3.3 which read in part [original
punctuation provided]:
Consistent with advice from antitrust counsel, the
Producer Parties are willing, in conjunction with a
fiscal arrangement for an Alaska LNG Project under
which the State has a State Gas Share, to agree that
each Producer Party, if asked by the State,
REPRESENTATIVE P. WILSON asked for clarification from the
producers on the aforementioned language.
MR. FLOOD said the agreement is that for purposes of antitrust,
the good faith negotiations can be entered into upon the request
of the state and not upon initiation by the producers.
MR. VAN TUYL agreed with Mr. Flood, adding that the provision
envisions the state acting as a resource owner, but without an
established marketing arrangement. In order to solve this
problem, the state can choose to develop a marketing program,
contract with another company for marketing, or negotiate with
one or more of the producers to market its gas.
REPRESENTATIVE P. WILSON asked for an opinion from TC.
2:05:08 PM
MR. PALMER explained that TC would not be providing services to
market the gas, but would provide services to transport the gas
to the gas treatment plant (GTP) and through the pipeline.
REPRESENTATIVE HAWKER returned attention to the termination
events described in the MOU, and asked whether he was correct in
that the "five-year right to participate in any substantially
similar project" does not apply before a firm transportation
services agreement (FTSA) is negotiated. If that is so, at what
point is the FTSA negotiated.
MR. PALMER confirmed that Representative Hawker was correct.
The FTSA is targeted to be signed in 2015; if the proposed
legislation is approved, the FTSA would be signed within 90 days
after [CSSB 138(FIN) AM] became effective. The FTSA would come
back before the legislature prior to its signature by the
parties.
REPRESENTATIVE HAWKER surmised that if the state fails to
execute the FTSA prior to 12/31/15, the state would be in
default, and TC would have the right to terminate the venture
agreement.
MR. PALMER confirmed that under that circumstance TC would have
the right to terminate.
2:08:43 PM
CO-CHAIR SADDLER directed attention to the HOA, Appendix A, Pro-
Expansion Principles, which read in part [original punctuation
provided]:
A.1 Alaska LNG Project Expansion. The potential
expansion of any component of the Alaska LNG Project
(excluding the modification of an installed Alaska LNG
Project liquefaction train, or installation of a new
liquefaction train) would be addressed in the
agreements to be developed during Pre-FEED, reflecting
the following principles.
A.1.1. Following start-up of the Alaska LNG
Project, any Alaska LNG Party may initiate the
process for an expansion of any component of the
Alaska LNG Project in which that Alaska LNG Party
has an interest, unless that expansion would:
a. Materially and adversely affect or alter
the Alaska LNG Project facilities or
operations, including technical aspects, or
scheduling or quality of deliveries from the
Alaska LNG Project facilities;
b. Diminish service to the existing
shippers or users of the Alaska LNG Project;
c. Cause the Alaska LNG Project to be in
violation of any applicable environmental or
safety laws or regulation; or
d. Cause a violation of the Alaska LNG
Project right-of-way agreements or any other
contractual obligations with respect to the
Alaska LNG Project facilities.
CO-CHAIR SADDLER pointed out that expansion can only take place
at the expansion parties' cost and if there is no harm to the
non-expansion parties. Further, if there is a benefit to the
non-expansion parties, they have no cost. He asked why there
are no provisions in Appendix A to share the cost of expansion
if the expansion is a benefit to all of the parties.
2:09:37 PM
MR. FLOOD explained that expansion is done for capacity and the
parties that spend the money benefit from the increased
capacity. On the other hand, there are economic consequences of
an expansion. The original parties built a pipeline with a
certain economy of scale. The expanding party improves the
economy of scale [of the original pipeline] but "made [the
expansion] happen because everybody else [built the original
pipeline]." He characterized the above referenced provision as
a very fair provision that recognizes the contribution of the
original parties and says all of the parties will share, but not
in the capacity. However, all of the parties have a right to
join the expansion.
MR. VAN TUYL addressed the question of whether an expansion can
benefit non-expanders: If the existing facilities are in
operation and additional volume is added by an additional
compression station, the cost is low because the other
infrastructure is already there. Thus the incremental cost for
the expansion is low, and with more volume going through the
system, the average cost for all of the shippers is reduced. So
the parties that did not directly participate in the expansion
indirectly benefit. However, the non-expansion parties do not
gain access to the expansion volume. To address the question as
to why all of the parties should not have to pay for an
expansion, he described a scenario in which one party invests a
portion of the cost to move a certain volume of gas, and if
additional costs are added, that party's business plan is
unexpectedly at risk. The parties that want to expand should be
responsible for the additional cost of expansion.
2:15:19 PM
CO-CHAIR SADDLER asked whether the producers would want a
provision that when it is clear an expansion benefits non-
expansion parties, the non-expansion parties would be required
to pay a pro-rata share of the expansion costs.
MR. MCMAHON directed attention to Appendix A, A.1.2 which read
[original punctuation provided]:
The Expansion Parties will pay all costs related to
the expansion and will have access to and share the
incremental capacity developed by the expansion,
provided terms related to impacts on fuel use for an
expansion would be addressed during Pre-FEED by the
Parties. Those Alaska LNG Parties that do not elect
to participate in the proposed expansion ("Non-
Expansion Parties"), will be kept whole and will not
bear any costs related to the expansion, will not have
access to or share in the incremental capacity
developed by the expansion, and will not bear any
risks or adverse impacts of the expansion or that may
result from the expansion, including construction,
operation, commercial viability of the capacity
expansion or level or capacity utilization.
and Appendix A, A.1.3 which read [original punctuation
provided]:
Both the Expansion Parties and the Non-Expansion
Parties will share in the benefits of an expansion of
an Alaska LNG Project component (other than access to
or sharing of the expansion capacity). For example,
if incremental capital costs of expansion on a unit of
capacity basis are lower than the average pre-
expansion capital costs per unit of capacity, the
capital cost would be equalized, which could include
some reallocation of past costs. In addition, both
Expansion Parties and Non-Expansion Parties would
share proportionately in any reduction in unit
operating costs.
MR. MCMAHON said A.1.2 addresses spending additional money for
capacity and A.1.3 addresses how to share smaller benefits with
all parties.
CO-CHAIR SADDLER called attention to the incremental per unit
cost savings from expansion, and asked whether it is appropriate
to have those who benefit bear some of the cost.
MR. MCMAHON acknowledged that the benefits would flow to all
parties and if parties do not participate, they have no cost.
MR. FLOOD clarified that all parties have paid the initial costs
of development and construction. He advised that ConocoPhillips
considers both the position of the parties in the original
investment that are not participating in expansion, and also the
position of the expanders. He concluded that the principles in
Appendix A are fair provisions for both and there is no
motivation to do otherwise.
MR. PALMER redirected attention to A.1.3. [text found above].
He pointed out the above provision includes "... some
reallocation of past costs," which addresses the question raised
by Co-Chair Saddler.
2:18:30 PM
REPRESENTATIVE HAWKER returned attention to Exhibit C of the
MOU, [Key Item 9 Termination Event], heading Conveyance of
Transporter Alaska LNG Project Interest to Shipper, second
bullet point which read [original punctuation provided]:
Within a period of 5 years of SOA exercising its
termination right, if SOA participates in a pipeline
project to commercialize North Slope gas that is
substantially similar to the Alaska LNG Project, SOA
shall offer to Transporter an option to participate in
the GTP and Pipelines of such project on terms and
conditions consistent with those set forth in this
Term Sheet, except the cost of debt and ROE to be
negotiated based on conditions existing at the time.
The SOA shall not be obligated to offer the foregoing
option to the Transporter if:
i. the Transporter is in material default of the
PA or FTSA at the time of the termination, and
ii. the material default was capable of being
remedied, and
iii. Transporter was offered a reasonable time
period to remedy the material default and failed
to do so.
REPRESENTATIVE HAWKER said he is trying to assess whether the
language in the MOU matches the testimony given. He stated the
MOU clearly directs that within a five-year period of [the
state] exercising its termination right, it offers TC the five-
year option to participate on those similar terms. He then
directed attention to [Key Item 9, Termination Event], heading
Shipper's Rights To Terminate (Shipper Termination Event), which
read [original punctuation provided]:
Prior to FEED:
Any time provided a 90-day notice is given to
Transporter,
From state of FEED through FID:
Within 60 days from the date one or more ANS
Producers or Transporter withdraws from the
Alaska LNG Project
At any time if Shipper (or the ANS Producers, if
the SOA elects RIV) is unable to sign agreements
to sell all of its royalty or tax gas on terms
acceptable to Shipper.
At FID, for any reason.
REPRESENTATIVE HAWKER remarked:
... and we look at the Shipper's Right[s] To
Terminate, which here it says, 'prior to FEED' and as
we talked earlier, this transaction contemplates the
FTSA being executed prior to FEED, and I guess that's
my first question: Is that a correct understanding?
2:20:47 PM
MR. PALMER said yes. The project would be moving through pre-
FEED and into FEED by that timeframe.
REPRESENTATIVE HAWKER surmised that if the state fails to
negotiate and execute the FTSA by 12/31/15, the intention is for
that to coincide with the end of pre-FEED; thus if the FTSA is
not executed by the end of pre-FEED, TC has the right to
terminate.
MR. PALMER explained that TC and the group contemplated that it
would complete pre-FEED in the year 2015. He confirmed that
prior to FEED, the state has the right to terminate with 90
days' notice. In the event the state does not execute the FTSA
by the end of 2015, TC has the right - but not the obligation -
to terminate.
REPRESENTATIVE HAWKER expressed his understanding of the
previous testimony that should the legislature execute a right
to terminate prior to executing a FTSA, the five-year obligation
to TC would not exist.
MR. PALMER said correct.
2:23:08 PM
REPRESENTATIVE HAWKER opined the testimony makes this provision
very clear but the MOU as written does not specify "a
termination right after the execution of the FTSA."
MR. PALMER acknowledged discussions with the administration on
this matter and expressed his intent to clarify the meaning
through his testimony; in fact, TC has executed the MOU in good
faith and his testimony has confirmed "that would only apply
once the FTSA is in place."
2:24:31 PM
REPRESENTATIVE TARR observed that the producers do not have some
of the same financial responsibilities the state has related to
risk assessment and its financial responsibilities in the case
of a termination. She said the state would have difficulty
anticipating the reasons why the producers would terminate.
2:25:15 PM
MR. FLOOD responded that he was unclear about not having
financial responsibilities because the producers have financial
responsibilities in regard to pre-FEED; consistent with their
share of the project, the producers have the same financial
responsibilities as the state. Regarding how the state could
anticipate the producers' actions, he noted that ConocoPhillips
is prepared to enter the pre-FEED phase and to make an
assessment at the end of the pre-FEED phase as to whether to go
forward with the project at FEED.
REPRESENTATIVE TARR clarified that she was referring to the
penalties the state would incur at termination because of its
relationship with TC, pointing out the state "would still be
vulnerable to your choice of ending the project ...." She
concluded that the producers are ready to proceed into pre-FEED,
but are unable to commit to later stages without further
assessment.
2:27:23 PM
MR. VAN TUYL said yes. The project will be evaluated one stage
at a time should the proposed legislation pass; however, in 18
months all parties will reevaluate the project. He stressed the
importance of maintaining a disciplined, stage-gate approach,
and assured the committee that BP is highly motivated to
addressing any impediment to commercializing its gas.
2:28:46 PM
REPRESENTATIVE SEATON stated one of the problems to address is
the risk of failure to sanction. Although the state has been
working toward the success of the project, the decision [to
proceed] "is really going to be with any one of the three
producers ... [based on] whatever the economics are." He
related that a suggestion was made to pursue an option with the
producers that the state buy into the project once it's
sanctioned, or at FEED, and then pay back the incremental cost,
as the major capital is funded after the point of sanction and
state participation at that point would be assured. He asked
for comments from the producers.
2:30:20 PM
MR. MCMAHON, speaking for ExxonMobil, said it is important to be
involved early in the project because there will be a lot of
decisions during pre-FEED that will not be revisited at the
final investment decision (FID). For example, at pre-FEED, the
producers will be working to accommodate the in-state delivery
of gas, and designing the pipeline for off-take points to
deliver gas in-state as well as to the LNG plant. He assumed
the state would seek to influence these decisions. Furthermore,
the alignment of the proposed agreement provides for the early
presence of the state along with the producers, TC, and AGDC.
Mr. McMahon restated that the stage-gate process requires the
parties to pause at the end of pre-FEED; this process will
manage the capital exposure for all of the parties. He deferred
to the administration for its comments.
2:32:37 PM
REPRESENTATIVE HAWKER returned attention to the HOA, ARTICLE 6:
REGULATORY FRAMEWORK, ACCESS AND EXPANSION, Article 6.3,
paragraph c. which read [original punctuation provided]:
c. Each Producer Party's individual capacity in the
Alaska LNG Project components would be owned and
operated on a proprietary basis.
REPRESENTATIVE HAWKER asked the producers for their
interpretation of the aforementioned paragraph.
2:33:39 PM
MR. VAN TUYL explained this provision envisions that the project
would be regulated by FERC under NGA Section 3. Regulation
under NGA Section 3 provides advantage to the project because of
its flexibility. He described the flexibility as allowing a
"pipe within a pipe," in that one 42-inch pipeline is divided
into four quarters operated independently by each of the four
entities. This provides the producers certainty of terms, and
provides the state choices of access and tariff terms.
REPRESENTATIVE HAWKER then directed attention to the HOA,
ARTICLE 6: REGULATORY FRAMEWORK, ACCESS AND EXPANSION, Article
6.3, paragraph b. which read [original punctuation provided]:
b. AGDC and TADI shares of capacity in the Alaska LNG
Project components would be owned and operated, in
whole or in part, on terms that would provide access
for third-parties, for both in-state and export
volumes. These access terms would be developed by the
State, AGDC and TADI and would utilize contract
carriage principles.
REPRESENTATIVE HAWKER advised paragraph b. refers to the state's
and [TransCanada Alaska Development Inc.'s (TADI's)] share of
capacity and their terms of access for third-parties for in-
state and export volumes. He asked whether paragraph b. implies
that the producers would operate their pipe within a pipe in a
manner that would deny future access under any terms.
2:36:38 PM
MR. VAN TUYL, speaking for BP, answered that there is no
implication in the language of Article 6.3, paragraph c., that
BP would operate its portion of the capacity in a manner in
which access would be specifically prohibited.
MR. MCMAHON said if ExxonMobil were to grant third-party access
it would negotiate terms with the third-party to use its
capacity.
MR. FLOOD agreed with the other producers' comments subject to
the commercial terms regarding capacity. He also agreed there
is no prohibition from entering into agreements with third-
parties at this time.
REPRESENTATIVE HAWKER understood that the pipes within a pipe
are proprietary and operated under a regulatory framework
constructed in the HOA, therefore, the producers are not
obligated to have a formal tariff developed under any ratemaking
structure; in fact, the tariff would be part of each producer's
cost portfolio.
2:38:56 PM
MR. MCMAHON said correct. Each producer is free to structure
the costs of moving the gas from the North Slope to the LNG
plant, the pipeline, and the GTP internally.
CO-CHAIR SADDLER said previous testimony has informed the
committee that the ownership structures of LNG projects change
during development and/or during operations. He asked whether
the producers desire that the equity-ownership structure of the
state's share of the project remains the same throughout the
project.
MR. VAN TUYL responded that ownership of the infrastructure is
an asset that each of the parties may retain or sell as it sees
fit. Typically, there are certain transfer limitations or
stipulations included in commercial agreements related to the
financial or technical capabilities of an incoming entity.
Otherwise, parties are free to divest at will.
2:41:37 PM
MR. PALMER acknowledged that in the Alaska LNG Project Equity
Option Agreement of the MOU, there is a provision enabling the
state - if desired - to purchase 40 percent of TC's share and in
certain circumstances to vend to a party that is an "LNG
player."
CO-CHAIR SADDLER pointed out there are also provisions that
limit the state from selling its share - up to 40 percent - to a
competitor of TC; however, there are no similar provisions
limiting to whom TC can sell its assets.
2:43:04 PM
MR. PALMER said correct, there is not a limitation on TC in the
Equity Option Agreement. He explained that TC's fundamental
business is investing in pipeline opportunities across North
America; in fact, TC historically has increased, not decreased,
its percentage of ownership in pipeline assets over time. He
agreed with Mr. Van Tuyl it is important that incoming partners
do not diminish the value of the partnership, and stressed that
TC would seek to increase its interest in the project, given the
opportunity.
CO-CHAIR SADDLER asked whether the producers desire the right of
first refusal should TC choose to divest.
MR. MCMAHON acknowledged that is not a term that came up during
the HOA discussions. Furthermore, ExxonMobil desires to own its
share of the project equal to its volume of gas, and would not
see a need for the addition of [the right of first refusal].
[MR. FLOOD indicated no.]
[MR. VAN TUYL indicated no.]
2:45:18 PM
REPRESENTATIVE TARR asked for the ramifications, if any, of the
amendment to allow municipalities, regional corporations, and
residents to participate in ownership. She also requested an
assessment of the changes in the role of AGDC.
MR. FAUSKE recalled the ability of residents, municipalities,
and corporations to invest in state projects and generate
capital, has been proposed before and is a good idea. As a
matter of fact, when Alaska Housing Finance Corporation (AHFC)
sells its bonds there is a 24-hour retail period opportunity
during which Alaskans invest. He opined the language [of the
portion of the bill related to AGDC] has been improved to
clarify AGDC's function as a separate entity.
MR. MCMAHON said ExxonMobil does not take exception with the
concept of residents, municipalities, and regional corporations
investing in the project, as long as ExxonMobil is allowed to
own its share of the project equal to its throughput.
[MR. FLOOD indicated agreement.]
[MR. VAN TUYL indicated agreement.]
2:49:00 PM
REPRESENTATIVE HAWKER directed attention to ARTICLE 7: GENERAL
ENABLING LEGISLATION, Article 7.5 which read [original
punctuation provided]:
The Administration will submit to the Alaska
Legislature, and the Parties will support, to the
extent permitted by law, legislation in a 2015
legislative session to ratify any Alaska LNG Project-
enabling contracts developed by the Parties under the
process authorized in the 2014 legislation and address
any other matters the Parties mutually agree are
necessary for advancement of the Alaska LNG Project.
REPRESENTATIVE HAWKER advised the aforementioned article refers
to contracts that will be brought back to the legislature, and
the legislative decision will be made between pre-FEED and FEED.
He requested a description of what is entailed in "project-
enabling contracts" and asked, "What should we be anticipating
out of this provision?"
2:50:07 PM
MR. VAN TUYL began by reviewing the overall construct of the HOA
envisioned a two-step process: The first step was SB 138, which
established participation, percentage, and process. The second
step was established in Article 7.5, and also alluded to in
paragraph 7.2 c. which read:
c. Allow for inclusion of contract terms which could
include and address: State participation; a State
share of gas (royalty in kind and gas in lieu of
production taxes); property taxes; upstream costs and
lease expenditures; in-state gas deliveries; ownership
interest; operating agreements; gas treatment,
transportation, and liquefaction services agreements;
State LNG or gas sales contract; contract duration and
durability; periodic project reporting; Alaska hire;
Alaska contracting; and other terms necessary to
advance projects to commercialize Alaska's natural gas
resources.
MR. VAN TUYL said the aforementioned paragraph contains
additional details about issues beyond participation,
percentage, and process. He was unsure whether all of the
details would be included in one or multiple individual or
collective contracts, although it is expected that multiple
contracts would be necessary after the progression of
discussions with the administration and the legislature.
MR. PALMER added that a specific item that would come forward
would be an FTSA agreement for the state's consideration.
REPRESENTATIVE SEATON referred to the additional terms included
in Article 7.2. He expressed his and others' concern that this
provision grants carte blanche for oil tax fiscal certainty, and
questioned whether an amendment to [CSSB 138(FIN) AM] that
removes oil tax fiscal certainty as an additional term could be
negotiated.
2:53:02 PM
MR. MCMAHON responded that all of the parties are challenged by
how to put together agreements that will enable the project. He
advised the best way to solve a problem is to consider every
approach, and he encouraged the committee to let the proposed
language stand and proceed to the development of the enabling
contracts. The parties who executed the HOA have made a
commitment to involve the legislature in finding solutions to
problems through confidential briefings; keeping all options
open facilitates finding an answer for the producers, AGDC, TC,
the legislature, the administration, and Alaskans.
REPRESENTATIVE SEATON restated his concern about ending up with
a 25-year contract setting oil tax fiscal certainty. In fact,
if oil tax fiscal certainty is one of the items to be negotiated
with the producers, "we better be upfront with it now." He
cautioned that this issue is too important to be included with
other terms to be negotiated.
MR. VAN TUYL agreed with Mr. McMahon and added that BP has
directly participated in past efforts [to commercialize Alaska's
natural gas] and learned from experience. However, BP accepts
that [CSSB 138(FIN) AM] and subsequent legislation "ha[ve] to
... work for everybody, it can't be worked in a silo and come as
a surprise to people." He reminded the committee that the
processes in the HOA and [CSSB 138(FIN) AM] intend for
legislative consultation, and warned that removing general
language related to one hot-button issue may prevent finding a
creative solution to a problem.
2:57:33 PM
MR. FLOOD stated that senior management at ConocoPhillips has
made clear and consistent statements about the requirement of
stability and predictability of fiscal terms related to large
LNG projects. ConocoPhillips has not negotiated for the
referred-to terms, and he was unable to predict the outcome of
the proposed negotiations.
MR. VAN TUYL further noted that last year a major step was taken
to provide an "oil fiscal environment that engenders additional
investment" through [Senate Bill 21, passed in the 28th Alaska
State Legislature], which has had a corresponding reaction by
the industry evidenced by additional investment at several oil
production sites. He concluded that the solution to this issue
has been undertaken.
2:59:18 PM
MR. FLOOD concurred.
REPRESENTATIVE SEATON expressed concern that Senate Bill 21 was
characterized as "first steps and ... a good way to start." He
remarked:
Negotiating with the administration on that is not
exactly my preference [for] solving the issue.
CO-CHAIR SADDLER recalled previous discussion about financing
the project through tax-free bonds such as general obligation
(GO) bonds or Alaska Railroad Corporation (ARRC) bonds; in fact,
AGDC has some authority to issue GO bonds. He asked about any
of the possibilities for the state underwriting its financing
share using debt- and tax-fee bonds.
3:00:32 PM
MR. FAUSKE confirmed that AGDC has the authority to issue debt,
and he said he would examine ARRC's ability to issue tax-exempt
bonds. Tax-exempt debt in the U.S. is controlled by the
Internal Revenue Service (IRS) and before issuing millions of
dollars in tax-exempt bonds to finance a project, approval from
IRS is required by way of a private letter ruling. However,
AGDC would be more inclined to issue revenue bonds, most of
which are taxable, depending on circumstances, and he provided
an example. General obligation bonding is a right of the state,
thus AHFC has a GO rating and Mr. Fauske offered to pursue this
possibility for AGDC. He pointed out the difference in bonds
with a GO rating is that one is pledging the full faith and
credit of the state, which requires a vote of the people and,
because of their authority to tax, Alaska GO bonds are
attractive to investors.
REPRESENTATIVE TARR directed attention to the HOA, ARTICLE [10:
ADDITIONAL STATE SUPPORT FOR THE ALASKA LNG PROJECT, Article
10.1, paragraph e. which read [original punctuation provided]:
e. A healthy, long-term oil business; and
REPRESENTATIVE TARR asked the producers whether Senate Bill 21
fulfilled the requirement of support for a healthy, long-term
oil business.
MR. VAN TUYL answered that Senate Bill 21 provides a good
framework for additional investment, and BP looks forward to
continued investment in oil development.
MR. MCMAHON concurred, adding that Senate Bill 21 has spurred
renewed investment on the North Slope, which is evidence of a
healthy oil business.
MR. FLOOD said yes, " ... that appears to be a healthy oil
business."
REPRESENTATIVE TARR then directed attention to paragraph c.
which read [original punctuation provided]:
c. Appropriations and permitting for the construction
of necessary in-state infrastructure (e.g., roads,
bridges), including drafting, introducing and
supporting legislation;
REPRESENTATIVE TARR recalled that previous estimates for
transportation infrastructure improvements, roads, and bridges
for an earlier gas pipeline project were up to $2 billion. She
pointed out that there has not been an updated presentation
describing these costs for the Alaska LNG Project, except that
the HOA directs that all of these costs would be borne by the
state.
3:05:29 PM
MR. MCMAHON said there has been no discussion on this subject,
but during pre-FEED the producers will determine what is needed
in infrastructure development, and will work with the state and
federal government on implementation.
MR. VAN TUYL acknowledged the language does relate to "support
for" which needs to come in a variety of forms in addition to
funding, such as support during the permitting phase and from
the Department of Transportation & Public Facilities (DOT&PF).
He agreed this discussion would arise during pre-FEED.
REPRESENTATIVE TARR cautioned that a $2 billion investment in
infrastructure is 50 percent more than the state's estimated
low-end total investment of $4 billion, and that possibility
should be part of the legislature's deliberations.
CO-CHAIR FEIGE observed "to some degree, a lot of that
infrastructure improvement has already occurred ... we have one
more bridge to go on the Richardson Highway, then we're ready."
REPRESENTATIVE JOHNSON reminded the committee of previous
testimony from the commissioner of DOT&PF that the department
has been working diligently in the last few years, thus "the
numbers are considerably different." He said the commissioner's
comments are on the record before the House Transportation
Standing Committee in 2014, and opined that "we're almost
pipeline ready in terms of transportation."
REPRESENTATIVE HAWKER stated that moving forward with the
project under the HOA is predicated upon the passage of
satisfactory enabling legislation, which would be [CSSB 138(FIN)
AM]. In addition, under the conditions of the MOU, TC must
agree that [CSSB 138(FIN) AM] is satisfactory enabling
legislation. He asked whether the enabling legislation must be
satisfactory to all of the parties unilaterally, or if the
Alaska LNG Project could advance without an established
partnership between the state and TC as directed by the MOU.
3:09:43 PM
MR. VAN TUYL restated that BP's objective is to find a solution
to any problem that affects reaching a decision for the project.
Although it is possible to proceed through a stage-gate without
one of the original parties, the best way forward is as
identified in the HOA: the producers, the state, and the
state's choice of TC for its business partner in the midstream.
MR. MCMAHON concurred, adding that ExxonMobil is committed to
work with the state, the other producers, TC, and AGDC to reach
the pre-FEED stage following the directives of the HOA and [CSSB
138(FIN) AM].
3:11:41 PM
MR. FLOOD stressed that ConocoPhillips believes the key concept
of the HOA is state participation, percentage, and process -
while recognizing that the administration will make choices on
its share of the project - and will work to keep the project
moving.
[CSSB 138(FIN) am was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HRES 3.28.14 TC Capital Project Performance.pdf |
HRES 3/28/2014 1:00:00 PM |
SB 138 |