Legislature(2013 - 2014)BARNES 124

03/25/2014 04:30 PM RESOURCES


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04:38:22 PM Start
04:38:47 PM SB138
06:56:17 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Time & Date Change --
+= SB 138 GAS PIPELINE; AGDC; OIL & GAS PROD. TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Administration Consultants: Black & Veatch - TELECONFERENCED
Deepa Poduval
+ Bills Previously Heard/Scheduled TELECONFERENCED
         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