Legislature(2013 - 2014)BARNES 124

03/28/2014 01:00 PM RESOURCES

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01:04:06 PM Start
01:04:17 PM SB138
03:12:50 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
+ Gasline Panel Discussion - ExxonMobil, BP, TELECONFERENCED
ConocoPhillips, TransCanada, AGDC
+ Bills Previously Heard/Scheduled TELECONFERENCED
         SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                     
1:04:17 PM                                                                                                                    
CO-CHAIR FEIGE  announced that the  only order of  business would                                                               
be CS  FOR SENATE BILL NO.  138(FIN) am, "An Act  relating to the                                                               
purposes, powers,  and duties of  the Alaska  Gasline Development                                                               
Corporation;  relating to  an in-state  natural gas  pipeline, an                                                               
Alaska  liquefied  natural  gas project,  and  associated  funds;                                                               
requiring state  agencies and other entities  to expedite reviews                                                               
and  actions  related  to natural  gas  pipelines  and  projects;                                                               
relating to  the authorities  and duties  of the  commissioner of                                                               
natural resources relating to a  North Slope natural gas project,                                                               
oil and  gas and gas only  leases, and royalty gas  and other gas                                                               
received by the  state including gas received as  payment for the                                                               
production  tax on  gas;  relating  to the  tax  on  oil and  gas                                                               
production, on  oil production, and  on gas  production; relating                                                               
to the duties of the commissioner  of revenue relating to a North                                                               
Slope natural  gas project and  gas received as payment  for tax;                                                               
relating to confidential information  and public record status of                                                               
information provided  to or in  the custody of the  Department of                                                               
Natural  Resources and  the Department  of  Revenue; relating  to                                                               
apportionment factors of the Alaska  Net Income Tax Act; amending                                                               
the definition  of gross value  at the 'point of  production' for                                                               
gas for  purposes of the  oil and gas production  tax; clarifying                                                               
that the  exploration incentive credit,  the oil or  gas producer                                                               
education credit, and  the film production tax credit  may not be                                                               
taken against  the gas  production tax paid  in gas;  relating to                                                               
the  oil  or  gas  producer   education  credit;  requesting  the                                                               
governor to  establish an  interim advisory  board to  advise the                                                               
governor on  municipal involvement in  a North Slope  natural gas                                                               
project;  relating to  the development  of a  plan by  the Alaska                                                               
Energy  Authority   for  developing  infrastructure   to  deliver                                                               
affordable  energy to  areas  of  the state  that  will not  have                                                               
direct  access  to a  North  Slope  natural  gas pipeline  and  a                                                               
recommendation  of a  funding  source  for energy  infrastructure                                                               
development;  establishing  the  Alaska affordable  energy  fund;                                                               
requiring  the commissioner  of  revenue to  develop  a plan  and                                                               
suggest  legislation for  municipalities, regional  corporations,                                                               
and residents  of the state  to acquire ownership interests  in a                                                               
North  Slope  natural  gas pipeline  project;  making  conforming                                                               
amendments; and providing for an effective date."                                                                               
CO-CHAIR FEIGE  invited the speakers  to make opening  remarks in                                                               
relation to CSSB 138(FIN) am.                                                                                                   
1:04:41 PM                                                                                                                    
DAVID  VAN TUYL,  Regional Manager,  BP Exploration  Alaska (BP),                                                               
gave  a brief  personal  history and  expressed  his belief  that                                                               
executing  the Heads  of Agreement  (HOA)  was the  right way  to                                                               
advance the  [gas pipeline]  project.   His company  has reviewed                                                               
[CSSB 138(FIN) AM] and is in support of the bill.                                                                               
1:05:41 PM                                                                                                                    
W.A. (BILL)  MCMAHON, Jr., Senior Commercial  Advisor, ExxonMobil                                                               
Production Company  (ExxonMobil), informed  the committee  he has                                                               
over 30 years  of experience.  He said  ExxonMobil supports [CSSB                                                               
138(FIN) AM]  and is  ready to  move into the  next phase  of the                                                               
1:06:17 PM                                                                                                                    
PATRICK  FLOOD, Supervisor,  North  Slope  Gas Development  Team,                                                               
ConocoPhillips  Alaska,  Inc.   (ConocoPhillips),  gave  a  brief                                                               
history of his  experience in the oil and gas  industry.  He said                                                               
ConocoPhillips supports the HOA and  [CSSB 138(FIN) AM], which is                                                               
consistent with the HOA.                                                                                                        
1:07:42 PM                                                                                                                    
TONY   PALMER,   Vice-President,  Major   Projects   Development,                                                               
TransCanada  (TC),  expressed   TransCanada's  support  of  [CSSB                                                               
138(FIN) AM].                                                                                                                   
1:08:03 PM                                                                                                                    
CO-CHAIR  FEIGE   opened  the  hearing  to   questions  from  the                                                               
CO-CHAIR   SADDLER  recalled   testimony  by   Mr.  Roger   Marks                                                               
[petroleum  economist,  contract  consultant to  the  Legislative                                                               
Budget and  Audit Committee,  at the  hearing of  3/27/14] urging                                                               
the legislature to take the  time necessary to seek better terms.                                                               
He asked  whether there are  potential benefits to the  state, or                                                               
the  other  entities involved,  by  "waiting  for something  else                                                               
later on."                                                                                                                      
MR.  VAN TUYL  cautioned  that  schedule-driven megaprojects  run                                                               
into  problems.   Taking sufficient  time is  important to  avoid                                                               
mistakes; however,  from BP's perspective,  it is  also important                                                               
to attain  data and permits  so that  the project can  compete in                                                               
the Asian  market for  natural gas  as soon as  possible.   It is                                                               
expected that the defined range  for the project on a cost/supply                                                               
basis allows  the project to  compete and monetize  the resource,                                                               
therefore,  the parties  must keep  doing the  work necessary  to                                                               
mature  the cost  estimate  and  obtain permits.    Mr. Van  Tuyl                                                               
stated  that it  behooves  all of  the  parties to  expeditiously                                                               
advance the project.                                                                                                            
MR. MCMAHON observed that ultimately  this project is going to be                                                               
underpinned  with  commitments  from the  liquefied  natural  gas                                                               
(LNG)  [purchasers  of  LNG  who   comprise  the]  market.    The                                                               
execution of the  HOA by the three producers and  the state was a                                                               
clear, strong signal to the  market, and additional progress will                                                               
strengthen  credibility   for  the  project.     He  warned  that                                                               
unwarranted pauses  in the  progress of the  project will  send a                                                               
[negative] signal to the market.                                                                                                
MR. FLOOD  stated that  ConocoPhillips is  prepared to  move into                                                               
the preceding front-end engineering  and design (pre-FEED) phase,                                                               
as the project is  at that point.  In the event  one party is not                                                               
ready,  his company  will work  to solve  problems and  avoid any                                                               
delay to the extent possible.                                                                                                   
1:12:28 PM                                                                                                                    
DAN  FAUSKE, President,  Alaska  Gasline Development  Corporation                                                               
(AGDC), Department of Commerce,  Community & Economic Development                                                               
(DCCED),  opined  that  all   legislation  should  be  thoroughly                                                               
investigated   and  analyzed.      He   recalled  that   previous                                                               
legislation  related   to  a  large  project   was  significantly                                                               
improved over time,  but the delay of  one year was at  a cost of                                                               
over  $210  million.    He  pointed out  that  timely  review  is                                                               
important, albeit without "skip[ing] the steps."                                                                                
MR. PALMER  reiterated that  the market is  looking for  a signal                                                               
that  Alaska  is  ready  to  market its  LNG  globally,  and  has                                                               
indicated its interest.  He  agreed with the previous speakers on                                                               
the effects of a delay.                                                                                                         
REPRESENTATIVE  HAWKER  drew attention  to  the  HOA, ARTICLE  4:                                                               
ALASKA  LNG  PROJECT  WORK,  Article  4.5  which  read  [original                                                               
punctuation provided]:                                                                                                          
     During  the  Pre-FEED  phase,   each  of  the  Producer                                                                    
     Parties  and  the  State  would  initiate  preliminary,                                                                    
     individual  LNG  or  gas  sales  or  shipping  efforts.                                                                    
     During  the FEED  phase, each  of  those Parties  would                                                                    
     seek  to  execute individual  LNG  (or  gas) sales  and                                                                    
     shipping agreements.                                                                                                       
REPRESENTATIVE  HAWKER reminded  the  presenters  there has  been                                                               
lengthy  discussion about  the  state marketing  its  own gas  by                                                               
seeking  a joint  marketing agreement  with  one or  more of  the                                                               
producer  parties.    He  asked  whether  the  use  of  the  word                                                               
"individual" in Article 4.5 compromises  the ability of the state                                                               
to negotiate a sales agreement in that regard.                                                                                  
1:16:25 PM                                                                                                                    
MR.  MCMAHON   responded  that  ExxonMobil   does  not   see  any                                                               
inconsistencies as the "individual"  marketing term refers to the                                                               
fact that the parties would not  market LNG jointly.  He directed                                                               
attention  to ARTICLE  8: ROYALTIES  AND  PRODUCTION TAXES,  8.3:                                                               
State  Gas   Share,  8.3.3   which  read   [original  punctuation                                                               
     Consistent  with  advice  from antitrust  counsel,  the                                                                    
     Producer  Parties are  willing, in  conjunction with  a                                                                    
     fiscal  arrangement for  an  Alaska  LNG Project  under                                                                    
     which the  State has a  State Gas Share, to  agree that                                                                    
     each  Producer  Party, if  asked  by  the State,  would                                                                    
     offer to  negotiate separately with  the State  in good                                                                    
     faith  to  enter  into  an  agreement  with  the  State                                                                    
     regarding  the  purchase  or  other  disposition  of  a                                                                    
     portion  of  the LNG  that  is  made from  the  State's                                                                    
     deliveries of  natural gas to  the Alaska  LNG Project,                                                                    
     with  each  Producer   Party  negotiating  a  potential                                                                    
     agreement regarding  the purchase or  other disposition                                                                    
     of  a  portion that  equals  or  exceeds that  Producer                                                                    
     Party's respective proportionate share  of the total of                                                                    
     the  Producer Party's  capacities  (i.e., exclusive  of                                                                    
     the capacity  owned or  used by the  State) in  the LNG                                                                    
     Plant component of the Alaska LNG Project.                                                                                 
MR. MCMAHON said  the intent of the above clause  is to allow the                                                               
state  to  approach  one  or  all of  the  producers  to  discuss                                                               
purchasing  the state's  gas; these  discussions would  be on  an                                                               
individual  basis.   He noted  that Articles  4.5 and  8.3.3 were                                                               
written with  the advice  of antitrust counsel,  and there  is no                                                               
CO-CHAIR  SADDLER  asked  for  the  strength  of  the  commitment                                                               
[stated in 8.3.3].                                                                                                              
1:18:03 PM                                                                                                                    
MR.  VAN  TUYL  explained  the   language  of  8.3.3  states  the                                                               
commitment of each  of the producer parties to  negotiate in good                                                               
faith  the  envisioned  agreements.    One  of  the  underpinning                                                               
principles  in  the  HOA  is  for   the  state  to  be  a  direct                                                               
participant in  the project and to  take its 25 percent  tax as a                                                               
combination of royalty-in-kind and gas.   Under CSSB 138(FIN) am,                                                               
the Department of  Natural Resources (DNR) would  make a decision                                                               
[to market its gas jointly with  one or more of the producers] if                                                               
the  appropriate  agreements are  in  place.    The fact  that  a                                                               
portion of the taxes are  paid through royalty-in-kind provides a                                                               
substantial incentive  for each of  the producers to  ensure that                                                               
the state is able to reach an agreement as envisioned in 8.3.3.                                                                 
CO-CHAIR SADDLER remarked:                                                                                                      
     Yesterday we  heard a proposal  that might  suggest the                                                                    
     state  should   seek  to  have  the   producers  market                                                                    
     Alaska's  share of  gas along  with  yours on  whatever                                                                    
     basis  described,  but  at the  same  price  that  your                                                                    
     companies were  getting. ...  My understanding  is that                                                                    
     Alaska's gas  would be  at some  price advantage.   How                                                                    
     would  that  play out  in  efforts  to try  and  market                                                                    
     Alaska's gas individually?                                                                                                 
MR. MCMAHON said  - based on advice from antitrust  counsel - the                                                               
producers  do not  discuss marketing  prices  or purchase  prices                                                               
amongst  each other,  or with  the state,  as they  are potential                                                               
1:20:24 PM                                                                                                                    
CO-CHAIR FEIGE  recalled the cost  overruns that  occurred during                                                               
construction   of  the   Trans-Alaska  Pipeline   System  (TAPS).                                                               
Although  the  location  of  this project  is  not  without  some                                                               
existing supporting  infrastructure, the state's equity  stake in                                                               
the partnership  puts it at  risk should the need  for additional                                                               
billions of dollars arise.  He  inquired as to the companies' and                                                               
the project's  strategies to avoid  cost overruns, and  asked how                                                               
each producer has dealt with cost overruns historically.                                                                        
MR. VAN TUYL stressed that each  of the entities are motivated to                                                               
deliver the  project at  the lowest  possible cost,  because that                                                               
will  define each  parties' profits.   The  producers are  highly                                                               
motivated to manage  costs in a systematic  and effective manner.                                                               
Using a stage-gate  process to advance projects  ensures that the                                                               
project does  not "go to the  next phase until certain  risks are                                                               
quantified, defined, and everybody is  comfortable ...."  He said                                                               
each  of the  producers has  delivered megaprojects  successfully                                                               
and brings  that collective experience  from around the  world to                                                               
the Alaska LNG Project.   Furthermore, the entities involved have                                                               
the right expertise in Arctic  operations, mega LNG projects, and                                                               
pipeline operations, to manage costs.                                                                                           
1:24:01 PM                                                                                                                    
MR.  FLOOD  agreed  that the  stage-gate  process  is  critically                                                               
important for a project to proceed  in a predictable manner.  The                                                               
significant cost  of the project is  a risk shared by  all of the                                                               
parties, and that  risk motivates all to bring the  project in at                                                               
the best  possible cost  without any sacrifice  of health  or the                                                               
environment.   He  opined that  the parties'  alignment with  the                                                               
state is  a key area  of the pre-FEED  and FEED work  on planning                                                               
and execution.                                                                                                                  
MR. PALMER agreed with the  previous speakers, and added that the                                                               
strength  of the  team  and the  state, and  the  records of  the                                                               
corporations, indicate  a focus  on cost, quality,  schedule, and                                                               
probability  of  success.    All   of  the  corporations  provide                                                               
experience and  expertise in  different - and  in some  similar -                                                               
areas,  and  he   offered  to  provide  to   the  committee  TC's                                                               
performance records  on schedule  and cost.   In response  to Co-                                                               
Chair Feige, he said he would do so.                                                                                            
1:26:19 PM                                                                                                                    
REPRESENTATIVE HAWKER  directed attention to the  HOA, ARTICLE 6:                                                               
REGULATORY FRAMEWORK,  ACCESS AND  EXPANSION, Articles  6.1, 6.2,                                                               
and  [6.4   paragraph  a.]   which  read   [original  punctuation                                                               
     6.1 The  Parties have  discussed a  tailored regulatory                                                                    
     framework for  the Alaska LNG  Project under  Section 3                                                                    
     of the Natural Gas Act,  15 U.S.C. § 717b ("NGA Section                                                                    
     3"), and  recognize the availability of  this framework                                                                    
     to meet the needs of all Parties.                                                                                          
     6.2  During Pre-FEED,  the Alaska  PNG Project  will be                                                                    
     advanced under NGA Section 3.                                                                                              
     6.4  a. The  Parties  will  support, including  holding                                                                    
     discussions (as permitted by FERC  rules) with the FERC                                                                    
     staff regarding the application and implementation of                                                                      
     NGA Section 3 to the Alaska LNG Project.                                                                                   
REPRESENTATIVE HAWKER said the  aforementioned Articles commit to                                                               
using Section 3  of the National Gas Act, [15  U.S.C. §717b] (NGA                                                               
Section 3)  as the  regulatory umbrella  under which  the project                                                               
will be developed.   Previous testimony from  Mr. Marks indicated                                                               
that framework may  not be appropriate for this  type of pipeline                                                               
project  due to  the  level of  transparency  required; in  fact,                                                               
regulation under  the Regulatory  Commission of Alaska  (RCA) may                                                               
be more appropriate.                                                                                                            
MR. MCMAHON  observed that Mr.  Marks said NGA Section  3 applies                                                               
to LNG  projects; however,  the question relates  to how  much of                                                               
the project  is applicable.   He  said the parties  to the  HOA -                                                               
along  with the  state and  its co-venture  partners -  intend to                                                               
approach  the Federal  Energy  Regulatory  Commission (FERC)  for                                                               
direction on the application and  implementation of NGA Section 3                                                               
to the project.                                                                                                                 
REPRESENTATIVE HAWKER  asked whether there is  a substantial risk                                                               
that FERC would not agree to  the application of NGA Section 3 as                                                               
the regulatory umbrella.                                                                                                        
MR. MCMAHON said no.                                                                                                            
CO-CHAIR SADDLER  asked when a  decision will be made  on whether                                                               
TC  will  build the  pipeline,  and/or  operate the  pipeline  to                                                               
1:29:19 PM                                                                                                                    
MR. PALMER stated  that TC would be pleased to  be the party that                                                               
leads the  construction and operation  of the pipeline.   At this                                                               
time, there  has been no  decision or serious discussion  on this                                                               
matter because the  next stage is pre-FEED, and  the lead [party]                                                               
at the moment is ExxonMobil.   TransCanada will be the lead party                                                               
for the  pipeline in  the pre-FEED  stage, along  with a  team of                                                               
personnel from  the team, and  the decision  will be made  by the                                                               
entire group.   In further response to Co-Chair  Saddler, he said                                                               
it is not timely yet.                                                                                                           
CO-CHAIR SADDLER asked for any comments from the producers.                                                                     
MR. FLOOD confirmed that those decisions have not been made yet.                                                                
1:30:51 PM                                                                                                                    
REPRESENTATIVE SEATON recalled that  for oil projects the "hurdle                                                               
rate ... is  somewhere between 12 and 17 percent,"  and the range                                                               
for a gas pipeline was lower.   Referring to the economics of the                                                               
project, he  asked what  kind of  range the  individual producers                                                               
have as a hurdle rate to determine the project.                                                                                 
MR.  VAN TUYL  advised  that attaining  a  specific benchmark  to                                                               
approve the project  is not discussed amongst the  producers.  In                                                               
order for  each of  the parties  to approve  the project  it will                                                               
look at  the latest cost  estimates and data, run  its individual                                                               
economics, and  seek corporate approval  to fund the  next phase.                                                               
Generally,  LNG projects  are low-margin  projects  and are  very                                                               
capital intensive, thus maintaining  low initial upfront costs is                                                               
very important.                                                                                                                 
CO-CHAIR FEIGE surmised there are  laws that restrict the parties                                                               
from conferring on "these rates."                                                                                               
MR. VAN TUYL nodded in affirmation.                                                                                             
1:33:30 PM                                                                                                                    
REPRESENTATIVE SEATON remarked:                                                                                                 
     ... I'm  not asking for  a specific number,  I'm trying                                                                    
     to get  a range ...  I recall  that we were  talking in                                                                    
     those  kind   of  ranges  when  we   were  talking  oil                                                                    
     projects,  and  if  this   project  is  competing  with                                                                    
     projects   around   the   world  that   the   companies                                                                    
     participate in,  I'm trying to  figure out  whether ...                                                                    
     we're in  the same range  or typically the  hurdle rate                                                                    
     that is  used is lower for  a gas line that's  going to                                                                    
     be in competition with other  projects in your company,                                                                    
     that would ... be assessed at higher hurdle rates.                                                                         
MR. VAN  TUYL clarified that the  metrics used by BP  to evaluate                                                               
an LNG  project are  fundamentally different  from those  used to                                                               
evaluate an  oil project because of  the capital cost.   In fact,                                                               
one thing that distinguishes LNG  projects from other projects is                                                               
their ability  to generate cash for  a longer period of  time due                                                               
to  long-term  sales  and   purchase  agreements,  and  long-term                                                               
REPRESENTATIVE  SEATON   asked  for  responses  from   the  other                                                               
MR. MCMAHON informed the committee  that ExxonMobil also looks at                                                               
metrics such  as the  rate of return,  present value  profit, and                                                               
actual value  profit, but the  best way to describe  its approach                                                               
is related to  risk management.  An investment  decision is based                                                               
on the cost  of supply and on managing cost  overruns through the                                                               
stage-gate  process.   Close watch  on the  regulatory permitting                                                               
process  is  needed  also.     For  an  LNG  project,  individual                                                               
contracts  must  be   negotiated  with  credit-worthy  customers.                                                               
Although he  said he  cannot share a  particular hurdle  rate, he                                                               
said ExxonMobil  takes a holistic management  approach that looks                                                               
at the metrics and the risks associated with a project.                                                                         
1:37:05 PM                                                                                                                    
MR. FLOOD  also could  not offer a  specific number;  however, he                                                               
pointed  out that  when ConocoPhillips  evaluates a  project, the                                                               
real question is whether  it is ready to take the  next step.  In                                                               
this  case, subject  to legislation  and  "the right"  commercial                                                               
agreements, ConocoPhillips  has determined  the project  is ready                                                               
for pre-FEED.   He agreed that there will be  assessment and risk                                                               
management  at  each  stage using  many  different  measurements.                                                               
Also, LNG projects offer a  different risk profile than other oil                                                               
and gas  projects due to  counterparties and long-term  sales and                                                               
purchase  agreement.   Regarding  the testimony  from Mr.  Marks,                                                               
[the hurdle rate]  is a convenient tool to  compare projects, but                                                               
it is not the only consideration.                                                                                               
REPRESENTATIVE  SEATON  reminded  the committee  that  Mr.  Marks                                                               
estimated hurdle rates  of between 8 percent and  12 percent, and                                                               
a  project cost  of between  $45 billion  and $65  billion.   Mr.                                                               
Marks's estimated  breakeven point for  a $65 billion  project at                                                               
12  percent was  $17 on  gas,  which is  probably uneconomic  for                                                               
sales in Asia.  Representative Seaton continued:                                                                                
     ...  I just  want to  make sure  that we  don't have  a                                                                    
     project  here  that you,  producers,  need  to show  is                                                                    
     uneconomic  so  that another  project  such  as an  LNG                                                                    
     plant on the  North Slope and shipment by  sea would be                                                                    
     available in the  future, and so that's  why I'm trying                                                                    
     to balance these  economics and see -  [Mr. Marks] also                                                                    
     cautioned  us we  could be  putting  $600 million  into                                                                    
     something that isn't going to get sanctioned ...                                                                           
MR. VAN TUYL said:                                                                                                              
     BP believes that this project  can compete in the Asian                                                                    
     markets and that's why we  are where we are, that's why                                                                    
     we entered into the Heads  of Agreement with the state,                                                                    
     that's why  we're continuing  to put  our share  of the                                                                    
     capital  forward to  advance the  project.   The simple                                                                    
     truth is:   Today, we  don't know  for sure if  it will                                                                    
     compete and we will be  able to execute those sales and                                                                    
     purchase  agreements  with  buyers  ...  but  we  think                                                                    
     there's a  significantly highly enough  likelihood that                                                                    
     we're ready  to go  into the pre-FEED  phase if  we get                                                                    
     this, this legislation passed.                                                                                             
MR. VAN TYLE reviewed the stage-gate process.                                                                                   
1:42:13 PM                                                                                                                    
MR. MCMAHON  agreed with Mr.  Van Tuyl,  and added that  if [CSSB                                                               
138(FIN)  AM]  passes  and  remains   consistent  with  the  HOA,                                                               
ExxonMobil is prepared  to participate in pre-FEED,  based on its                                                               
belief  that the  project has  the potential  to be  commercially                                                               
MR. FLOOD agreed  with the representatives of  BP and ExxonMobil.                                                               
He assured  the committee that ConocoPhillips  believes that this                                                               
project can compete in the market  on terms that are favorable to                                                               
its shareholders;  the decision to  advance to pre-FEED  has been                                                               
REPRESENTATIVE KAWASAKI  directed attention  to Exhibit C  of the                                                               
Memorandum of  Understanding (MOU), [dated 12/12/13,  Key Item 9,                                                               
Termination  Event  Alaska  LNG Midstream  Services  Term  Sheet]                                                               
which gives  TC a  five-year time period  for a  "look-back" with                                                               
favorable  terms.    He  expressed   his  discomfort  with  those                                                               
provisions because, "it  doesn't seem clear that  there's a clear                                                               
MR. FLOOD noted that ConocoPhillips  is supportive of the state's                                                               
participation in  the HOA  but is  not a  party to  the MOU.   He                                                               
deferred to the state and TC.                                                                                                   
MR. VAN TUYL said  BP is also not a party to the  MOU.  He agreed                                                               
that  the  provision directs  that  five  years after  the  state                                                               
exercised  the  termination  right,  if the  state  continued  to                                                               
pursue a project  substantially similar, the state  would have to                                                               
offer terms  back to TC, qualified  by the facts that  caused the                                                               
1:46:16 PM                                                                                                                    
MR. PALMER  observed that  [the Key  Item 9]  clause is  there as                                                               
part  of the  overall  agreement  with the  state.   The  primary                                                               
rationale for  the clause is based  on the reality that  TC earns                                                               
its money  by investing through the  development and construction                                                               
periods of a project, and then  receives its return over the life                                                               
of the  project as the owner  and operator of the  pipeline. This                                                               
is unlike a  company that makes its  return providing engineering                                                               
or construction services.    As a shipper, the  state is provided                                                               
with a  number of "off-ramps" through  the MOU, and if  the state                                                               
exercises its termination right, TC  must transfer its assets and                                                               
equity to the state in exchange  for the return of its investment                                                               
with  an allowance  for funds  used during  construction (AFUDC).                                                               
Mr. Palmer pointed  out that there is no profit  margin for TC at                                                               
that  point;  therefore,  if  the  state  is  provided  with  the                                                               
customary off-ramps, and  if TC is required to  convey its assets                                                               
and  the  state  proceeds  with  a  project  without  TC,  it  is                                                               
appropriate for TC to be fairly compensated.                                                                                    
REPRESENTATIVE  KAWASAKI, addressing  the producers,  relayed Mr.                                                               
Marks's assertion that if the  producers are highly interested in                                                               
an LNG  project, they may  proceed without  the state.   He asked                                                               
how  the proposed  agreements impact  the  producers should  they                                                               
decide to "build your own line at some point in time."                                                                          
MR.  MCMAHON  stressed  that the  state's  participation  in  the                                                               
project has tremendous benefits for  the producers and the state.                                                               
In fact, the  state's decision to take its  return by royalty-in-                                                               
kind and  tax in  lieu of  production tax  allows the  parties to                                                               
avoid the  historic disputes over  the valuation  of hydrocarbons                                                               
for settling  royalty tax and  production tax, and  disputes over                                                               
cost deductions  for pipelines and  tankers.  He opined  that the                                                               
proposed agreements are  optimal and the terms  between the state                                                               
and TC are not an impediment to the project.                                                                                    
MR. VAN  TUYL agreed with  Mr. McMahon's comments and  added that                                                               
BP has  decided to advance  the project  as outlined in  the HOA.                                                               
Although BP wants to advance  the project jointly with the state,                                                               
if  irreconcilable differences  arose  between the  state and  TC                                                               
that delayed  the project for five  years, he said he  was unsure                                                               
how the project would be impacted.                                                                                              
1:53:20 PM                                                                                                                    
MR. FLOOD said the key  element for ConocoPhillips is the state's                                                               
policy decision of participation  [CSSB 138(FIN) am sections 1-12                                                               
for the  Alaska Gasline  Development Corporation];  process [CSSB                                                               
138(FIN)  am sections  14-15]; and  percentage [CSSB  138(FIN) am                                                               
section  36], as  outlined in  the HOA.   He  concluded that  the                                                               
state's  participation   "at  a   percentage"  is   critical  for                                                               
REPRESENTATIVE KAWASAKI  recalled that in 2002  the Department of                                                               
Revenue  (DOR) reported  that "state  ownership would  not likely                                                               
improve the feasibility  of the project or be  valued by private-                                                               
sector    sponsors.       General   consensus    among   industry                                                               
representatives   interviewed   [was   that]   a   public-private                                                               
partnership relationship  with the state either  wouldn't help or                                                               
would  be  a hindrance  to  the  project"  due to  political  and                                                               
regulatory  issues.   He inquired  as to  what has  changed since                                                               
MR. VAN TUYL opined facts have  changed since 2002.  Firstly, the                                                               
Alaska  LNG Project  includes the  manufacturing of  LNG and  the                                                               
model to have  direct state participation is a  fairly common way                                                               
to  advance such  a megaproject.    Secondly, the  state has  now                                                               
formed the  Alaska Gasline Development Corporation  (AGDC) to act                                                               
as a  commercial entity independent  from the state  as regulator                                                               
or sovereign.                                                                                                                   
MR. MCMAHON  added that a benefit  seen by the producers  in this                                                               
project  is that  the  producers  are allowed  to  invest in  the                                                               
portion   of    the   project   associated   with    their   gas.                                                               
Traditionally,  producers were  required  to invest  in a  larger                                                               
percentage of the project in  order to pay royalty and production                                                               
taxes to  the state  in cash.   The state  will benefit  from the                                                               
proposed agreement  because of  its share in  the cash  flow from                                                               
the project and its participation in the marketing of the gas.                                                                  
REPRESENTATIVE KAWASAKI  inquired as  to the  partnership between                                                               
AGDC and the producers.                                                                                                         
MR. FAUSKE expressed  his support of the  state's equity position                                                               
in the  project, which  is an  important change  since 2002.   In                                                               
addition, the  owners will be  able to negotiate their  shares of                                                               
the gas flowing through the pipe at  a higher rate of return.  An                                                               
ownership  position puts  the state  in a  stronger position  for                                                               
negotiation, and  promotes long-term fiscal stability  and a more                                                               
congenial  relationship with  the  producers.   Internal  issues,                                                               
such as providing natural gas for Alaskans, have also changed.                                                                  
2:01:36 PM                                                                                                                    
REPRESENTATIVE P.  WILSON returned attention to  the HOA, Article                                                               
8.3  State  Gas  Share,  8.3.3   which  read  in  part  [original                                                               
punctuation provided]:                                                                                                          
     Consistent  with  advice  from antitrust  counsel,  the                                                                    
     Producer  Parties are  willing, in  conjunction with  a                                                                    
     fiscal  arrangement for  an  Alaska  LNG Project  under                                                                    
     which the  State has a  State Gas Share, to  agree that                                                                    
     each Producer Party, if asked by the State,                                                                                
REPRESENTATIVE  P.  WILSON  asked   for  clarification  from  the                                                               
producers on the aforementioned language.                                                                                       
MR. FLOOD said  the agreement is that for  purposes of antitrust,                                                               
the good faith negotiations can  be entered into upon the request                                                               
of the state and not upon initiation by the producers.                                                                          
MR. VAN  TUYL agreed  with Mr. Flood,  adding that  the provision                                                               
envisions the  state acting as  a resource owner, but  without an                                                               
established  marketing  arrangement.    In order  to  solve  this                                                               
problem, the  state can  choose to  develop a  marketing program,                                                               
contract with  another company for  marketing, or  negotiate with                                                               
one or more of the producers to market its gas.                                                                                 
REPRESENTATIVE P. WILSON asked for an opinion from TC.                                                                          
2:05:08 PM                                                                                                                    
MR. PALMER explained  that TC would not be  providing services to                                                               
market the gas,  but would provide services to  transport the gas                                                               
to the gas treatment plant (GTP) and through the pipeline.                                                                      
REPRESENTATIVE  HAWKER  returned  attention  to  the  termination                                                               
events described in the MOU, and  asked whether he was correct in                                                               
that  the "five-year  right to  participate in  any substantially                                                               
similar  project" does  not apply  before  a firm  transportation                                                               
services agreement (FTSA) is negotiated.   If that is so, at what                                                               
point is the FTSA negotiated.                                                                                                   
MR.  PALMER confirmed  that  Representative  Hawker was  correct.                                                               
The  FTSA is  targeted  to be  signed in  2015;  if the  proposed                                                               
legislation is approved, the FTSA  would be signed within 90 days                                                               
after [CSSB 138(FIN)  AM] became effective.  The  FTSA would come                                                               
back  before  the  legislature  prior to  its  signature  by  the                                                               
REPRESENTATIVE  HAWKER  surmised  that  if  the  state  fails  to                                                               
execute  the  FTSA prior  to  12/31/15,  the  state would  be  in                                                               
default, and  TC would  have the right  to terminate  the venture                                                               
MR. PALMER confirmed that under that circumstance TC would have                                                                 
the right to terminate.                                                                                                         
2:08:43 PM                                                                                                                    
CO-CHAIR SADDLER directed attention to the HOA, Appendix A, Pro-                                                                
Expansion Principles, which read in part [original punctuation                                                                  
     A.1  Alaska  LNG  Project  Expansion.    The  potential                                                                    
     expansion of  any component of  the Alaska  LNG Project                                                                    
     (excluding the modification of  an installed Alaska LNG                                                                    
     Project liquefaction  train, or  installation of  a new                                                                    
     liquefaction   train)  would   be   addressed  in   the                                                                    
     agreements to be  developed during Pre-FEED, reflecting                                                                    
     the following principles.                                                                                                  
          A.1.1. Following start-up of the Alaska LNG                                                                           
          Project, any Alaska LNG Party may initiate the                                                                        
          process for an expansion of any component of the                                                                      
          Alaska LNG Project in which that Alaska LNG Party                                                                     
          has an interest, unless that expansion would:                                                                         
               a.  Materially and adversely affect or alter                                                                     
               the Alaska LNG Project facilities or                                                                             
               operations, including technical aspects, or                                                                      
          scheduling or quality of deliveries from the                                                                          
               Alaska LNG Project facilities;                                                                                   
               b. Diminish service to the existing                                                                              
          shippers or users of the Alaska LNG Project;                                                                          
               c. Cause the Alaska LNG Project to be in                                                                         
               violation of any applicable environmental or                                                                     
               safety laws or regulation; or                                                                                    
               d. Cause a violation of the Alaska LNG                                                                           
          Project right-of-way agreements or any other                                                                          
          contractual obligations with respect to the                                                                           
          Alaska LNG Project facilities.                                                                                        
CO-CHAIR SADDLER pointed  out that expansion can  only take place                                                               
at the  expansion parties' cost  and if there  is no harm  to the                                                               
non-expansion parties.   Further,  if there is  a benefit  to the                                                               
non-expansion parties,  they have  no cost.   He asked  why there                                                               
are no  provisions in Appendix A  to share the cost  of expansion                                                               
if the expansion is a benefit to all of the parties.                                                                            
2:09:37 PM                                                                                                                    
MR. FLOOD explained  that expansion is done for  capacity and the                                                               
parties  that   spend  the  money  benefit   from  the  increased                                                               
capacity.  On the other  hand, there are economic consequences of                                                               
an  expansion.   The original  parties  built a  pipeline with  a                                                               
certain  economy of  scale.   The  expanding  party improves  the                                                               
economy  of  scale [of  the  original  pipeline] but  "made  [the                                                               
expansion]  happen because  everybody  else  [built the  original                                                               
pipeline]."   He characterized the above  referenced provision as                                                               
a very  fair provision  that recognizes  the contribution  of the                                                               
original parties and says all of  the parties will share, but not                                                               
in the  capacity.  However,  all of the  parties have a  right to                                                               
join the expansion.                                                                                                             
MR. VAN TUYL  addressed the question of whether  an expansion can                                                               
benefit  non-expanders:    If  the  existing  facilities  are  in                                                               
operation  and  additional  volume  is  added  by  an  additional                                                               
compression  station,   the  cost   is  low  because   the  other                                                               
infrastructure is already  there.  Thus the  incremental cost for                                                               
the  expansion is  low, and  with more  volume going  through the                                                               
system, the average cost for all  of the shippers is reduced.  So                                                               
the parties  that did not  directly participate in  the expansion                                                               
indirectly benefit.   However, the  non-expansion parties  do not                                                               
gain access to the expansion volume.   To address the question as                                                               
to  why  all  of the  parties  should  not  have  to pay  for  an                                                               
expansion, he described  a scenario in which one  party invests a                                                               
portion  of the  cost to  move a  certain volume  of gas,  and if                                                               
additional  costs  are  added,  that  party's  business  plan  is                                                               
unexpectedly at risk.  The parties  that want to expand should be                                                               
responsible for the additional cost of expansion.                                                                               
2:15:19 PM                                                                                                                    
CO-CHAIR  SADDLER  asked  whether  the  producers  would  want  a                                                               
provision  that  when it  is  clear  an expansion  benefits  non-                                                               
expansion parties,  the non-expansion  parties would  be required                                                               
to pay a pro-rata share of the expansion costs.                                                                                 
MR. MCMAHON directed attention to Appendix A, A.1.2 which read                                                                  
[original punctuation provided]:                                                                                                
     The  Expansion Parties  will pay  all costs  related to                                                                    
     the expansion  and will  have access  to and  share the                                                                    
     incremental  capacity   developed  by   the  expansion,                                                                    
     provided terms  related to impacts  on fuel use  for an                                                                    
     expansion  would be  addressed during  Pre-FEED by  the                                                                    
     Parties.   Those Alaska LNG  Parties that do  not elect                                                                    
     to  participate   in  the  proposed   expansion  ("Non-                                                                    
     Expansion Parties"),  will be  kept whole and  will not                                                                    
     bear any costs related to  the expansion, will not have                                                                    
     access  to   or  share  in  the   incremental  capacity                                                                    
     developed  by  the expansion,  and  will  not bear  any                                                                    
     risks or adverse  impacts of the expansion  or that may                                                                    
     result  from  the  expansion,  including  construction,                                                                    
     operation,   commercial  viability   of  the   capacity                                                                    
     expansion or level or capacity utilization.                                                                                
and Appendix A, A.1.3 which read [original punctuation                                                                          
     Both  the  Expansion   Parties  and  the  Non-Expansion                                                                    
     Parties will share  in the benefits of  an expansion of                                                                    
     an Alaska  LNG Project component (other  than access to                                                                    
     or sharing  of the  expansion capacity).   For example,                                                                    
     if incremental capital costs of  expansion on a unit of                                                                    
         capacity basis are lower than the average pre-                                                                         
     expansion  capital  costs  per unit  of  capacity,  the                                                                    
     capital cost  would be  equalized, which  could include                                                                    
     some  reallocation of  past costs.   In  addition, both                                                                    
     Expansion  Parties  and   Non-Expansion  Parties  would                                                                    
     share   proportionately  in   any  reduction   in  unit                                                                    
     operating costs.                                                                                                           
MR. MCMAHON said A.1.2 addresses spending additional money for                                                                  
capacity and A.1.3 addresses how to share smaller benefits with                                                                 
all parties.                                                                                                                    
CO-CHAIR SADDLER called attention to the incremental per unit                                                                   
cost savings from expansion, and asked whether it is appropriate                                                                
to have those who benefit bear some of the cost.                                                                                
MR. MCMAHON acknowledged that the benefits would flow to all                                                                    
parties and if parties do not participate, they have no cost.                                                                   
MR. FLOOD clarified that all  parties have paid the initial costs                                                               
of development and construction.   He advised that ConocoPhillips                                                               
considers  both  the position  of  the  parties in  the  original                                                               
investment that are not participating  in expansion, and also the                                                               
position of the  expanders.  He concluded that  the principles in                                                               
Appendix  A  are  fair  provisions  for  both  and  there  is  no                                                               
motivation to do otherwise.                                                                                                     
MR.  PALMER redirected  attention to  A.1.3. [text  found above].                                                               
He   pointed  out   the  above   provision  includes   "...  some                                                               
reallocation of past costs," which  addresses the question raised                                                               
by Co-Chair Saddler.                                                                                                            
2:18:30 PM                                                                                                                    
REPRESENTATIVE  HAWKER returned  attention  to Exhibit  C of  the                                                               
MOU,  [Key  Item  9 Termination  Event],  heading  Conveyance  of                                                               
Transporter  Alaska  LNG  Project  Interest  to  Shipper,  second                                                               
bullet point which read [original punctuation provided]:                                                                        
     Within  a  period of  5  years  of SOA  exercising  its                                                                    
     termination right,  if SOA  participates in  a pipeline                                                                    
     project  to  commercialize  North  Slope  gas  that  is                                                                    
     substantially similar  to the  Alaska LNG  Project, SOA                                                                    
     shall offer to Transporter  an option to participate in                                                                    
     the  GTP and  Pipelines of  such project  on terms  and                                                                    
     conditions  consistent with  those  set  forth in  this                                                                    
     Term  Sheet, except  the cost  of  debt and  ROE to  be                                                                    
     negotiated based  on conditions  existing at  the time.                                                                    
     The SOA shall  not be obligated to  offer the foregoing                                                                    
     option to the Transporter if:                                                                                              
          i. the Transporter is in material default of the                                                                      
          PA or FTSA at the time of the termination, and                                                                        
         ii.  the  material  default was  capable  of  being                                                                    
          remedied, and                                                                                                         
        iii.  Transporter  was  offered  a  reasonable  time                                                                    
          period to remedy the material default and failed                                                                      
          to do so.                                                                                                             
REPRESENTATIVE HAWKER  said he  is trying  to assess  whether the                                                               
language in the MOU matches the  testimony given.   He stated the                                                               
MOU  clearly  directs that  within  a  five-year period  of  [the                                                               
state] exercising its  termination right, it offers  TC the five-                                                               
year  option to  participate on  those  similar terms.   He  then                                                               
directed attention  to [Key Item  9, Termination  Event], heading                                                               
Shipper's Rights To Terminate  (Shipper Termination Event), which                                                               
read [original punctuation provided]:                                                                                           
     Prior to FEED:                                                                                                             
          Any time provided a 90-day notice is given to                                                                         
     From state of FEED through FID:                                                                                            
          Within 60 days from the date one or more ANS                                                                          
          Producers or Transporter withdraws from the                                                                           
          Alaska LNG Project                                                                                                    
          At any time if Shipper (or the ANS Producers, if                                                                      
          the SOA elects RIV) is unable to sign agreements                                                                      
          to sell all of its royalty or tax gas on terms                                                                        
          acceptable to Shipper.                                                                                                
     At FID, for any reason.                                                                                                    
REPRESENTATIVE HAWKER remarked:                                                                                                 
     ...  and   we  look   at  the  Shipper's   Right[s]  To                                                                    
     Terminate, which here  it says, 'prior to  FEED' and as                                                                    
     we  talked earlier,  this transaction  contemplates the                                                                    
     FTSA being executed  prior to FEED, and  I guess that's                                                                    
     my first question:  Is that a correct understanding?                                                                       
2:20:47 PM                                                                                                                    
MR. PALMER  said yes.  The  project would be moving  through pre-                                                               
FEED and into FEED by that timeframe.                                                                                           
REPRESENTATIVE  HAWKER  surmised  that  if  the  state  fails  to                                                               
negotiate and execute the FTSA  by 12/31/15, the intention is for                                                               
that to  coincide with the end  of pre-FEED; thus if  the FTSA is                                                               
not  executed  by the  end  of  pre-FEED,  TC  has the  right  to                                                               
MR. PALMER explained  that TC and the group  contemplated that it                                                               
would  complete pre-FEED  in the  year 2015.   He  confirmed that                                                               
prior  to FEED,  the state  has the  right to  terminate with  90                                                               
days' notice.   In the event the state does  not execute the FTSA                                                               
by the end of  2015, TC has the right - but  not the obligation -                                                               
to terminate.                                                                                                                   
REPRESENTATIVE   HAWKER  expressed   his  understanding   of  the                                                               
previous testimony  that should  the legislature execute  a right                                                               
to terminate prior to executing  a FTSA, the five-year obligation                                                               
to TC would not exist.                                                                                                          
MR. PALMER said correct.                                                                                                        
2:23:08 PM                                                                                                                    
REPRESENTATIVE HAWKER  opined the testimony makes  this provision                                                               
very  clear  but   the  MOU  as  written  does   not  specify  "a                                                               
termination right after the execution of the FTSA."                                                                             
MR. PALMER  acknowledged discussions  with the  administration on                                                               
this  matter and  expressed  his intent  to  clarify the  meaning                                                               
through his testimony;  in fact, TC has executed the  MOU in good                                                               
faith  and his  testimony has  confirmed "that  would only  apply                                                               
once the FTSA is in place."                                                                                                     
2:24:31 PM                                                                                                                    
REPRESENTATIVE TARR observed that the  producers do not have some                                                               
of the same  financial responsibilities the state  has related to                                                               
risk assessment  and its financial  responsibilities in  the case                                                               
of  a termination.   She  said  the state  would have  difficulty                                                               
anticipating the reasons why the producers would terminate.                                                                     
2:25:15 PM                                                                                                                    
MR.  FLOOD  responded  that  he  was  unclear  about  not  having                                                               
financial responsibilities  because the producers  have financial                                                               
responsibilities  in regard  to pre-FEED;  consistent with  their                                                               
share  of the  project,  the producers  have  the same  financial                                                               
responsibilities as  the state.   Regarding  how the  state could                                                               
anticipate the  producers' actions, he noted  that ConocoPhillips                                                               
is  prepared  to  enter  the   pre-FEED  phase  and  to  make  an                                                               
assessment at the  end of the pre-FEED phase as  to whether to go                                                               
forward with the project at FEED.                                                                                               
REPRESENTATIVE  TARR  clarified that  she  was  referring to  the                                                               
penalties the  state would  incur at  termination because  of its                                                               
relationship  with TC,  pointing out  the state  "would still  be                                                               
vulnerable  to your  choice  of  ending the  project  ...."   She                                                               
concluded that the producers are  ready to proceed into pre-FEED,                                                               
but  are  unable  to  commit  to  later  stages  without  further                                                               
2:27:23 PM                                                                                                                    
MR. VAN TUYL  said yes.  The project will  be evaluated one stage                                                               
at a  time should the  proposed legislation pass; however,  in 18                                                               
months all parties will reevaluate  the project.  He stressed the                                                               
importance  of maintaining  a  disciplined, stage-gate  approach,                                                               
and  assured  the  committee  that  BP  is  highly  motivated  to                                                               
addressing any impediment to commercializing its gas.                                                                           
2:28:46 PM                                                                                                                    
REPRESENTATIVE SEATON  stated one of  the problems to  address is                                                               
the risk  of failure to  sanction.   Although the state  has been                                                               
working  toward the  success  of the  project,  the decision  [to                                                               
proceed]  "is really  going  to  be with  any  one  of the  three                                                               
producers  ...  [based  on]  whatever the  economics  are."    He                                                               
related that a  suggestion was made to pursue an  option with the                                                               
producers  that  the  state  buy   into  the  project  once  it's                                                               
sanctioned, or at  FEED, and then pay back  the incremental cost,                                                               
as the  major capital is funded  after the point of  sanction and                                                               
state participation  at that  point would be  assured.   He asked                                                               
for comments from the producers.                                                                                                
2:30:20 PM                                                                                                                    
MR. MCMAHON, speaking for ExxonMobil,  said it is important to be                                                               
involved early  in the  project because  there will  be a  lot of                                                               
decisions  during pre-FEED  that  will not  be  revisited at  the                                                               
final investment decision  (FID).  For example,  at pre-FEED, the                                                               
producers will  be working to  accommodate the  in-state delivery                                                               
of  gas,  and  designing  the pipeline  for  off-take  points  to                                                               
deliver gas  in-state as well  as to the  LNG plant.   He assumed                                                               
the state would seek to  influence these decisions.  Furthermore,                                                               
the alignment  of the proposed  agreement provides for  the early                                                               
presence of  the state  along with the  producers, TC,  and AGDC.                                                               
Mr.  McMahon restated  that the  stage-gate process  requires the                                                               
parties  to pause  at  the  end of  pre-FEED;  this process  will                                                               
manage the capital exposure for all  of the parties.  He deferred                                                               
to the administration for its comments.                                                                                         
2:32:37 PM                                                                                                                    
REPRESENTATIVE HAWKER  returned attention to the  HOA, ARTICLE 6:                                                               
REGULATORY   FRAMEWORK,  ACCESS   AND  EXPANSION,   Article  6.3,                                                               
paragraph c. which read [original punctuation provided]:                                                                        
      c. Each Producer Party's individual capacity in the                                                                       
        Alaska LNG Project components would be owned and                                                                        
     operated on a proprietary basis.                                                                                           
REPRESENTATIVE   HAWKER    asked   the   producers    for   their                                                               
interpretation of the aforementioned paragraph.                                                                                 
2:33:39 PM                                                                                                                    
MR. VAN TUYL explained this  provision envisions that the project                                                               
would  be regulated  by FERC  under  NGA Section  3.   Regulation                                                               
under NGA Section 3 provides  advantage to the project because of                                                               
its  flexibility.   He described  the flexibility  as allowing  a                                                               
"pipe within  a pipe,"  in that one  42-inch pipeline  is divided                                                               
into four  quarters operated  independently by  each of  the four                                                               
entities.   This provides the  producers certainty of  terms, and                                                               
provides the state choices of access and tariff terms.                                                                          
REPRESENTATIVE  HAWKER  then  directed   attention  to  the  HOA,                                                               
ARTICLE 6:  REGULATORY FRAMEWORK,  ACCESS AND  EXPANSION, Article                                                               
6.3, paragraph b. which read [original punctuation provided]:                                                                   
     b.  AGDC and TADI shares  of capacity in the Alaska LNG                                                                    
     Project  components would  be  owned  and operated,  in                                                                    
     whole or  in part, on  terms that would  provide access                                                                    
     for  third-parties,   for  both  in-state   and  export                                                                    
     volumes.  These access terms  would be developed by the                                                                    
     State,  AGDC  and  TADI   and  would  utilize  contract                                                                    
     carriage principles.                                                                                                       
REPRESENTATIVE HAWKER advised paragraph  b. refers to the state's                                                               
and  [TransCanada Alaska  Development Inc.'s  (TADI's)] share  of                                                               
capacity  and their  terms of  access for  third-parties for  in-                                                               
state and export volumes.   He asked whether paragraph b. implies                                                               
that the  producers would operate their  pipe within a pipe  in a                                                               
manner that would deny future access under any terms.                                                                           
2:36:38 PM                                                                                                                    
MR.  VAN  TUYL,  speaking  for  BP, answered  that  there  is  no                                                               
implication in  the language of  Article 6.3, paragraph  c., that                                                               
BP  would operate  its portion  of the  capacity in  a manner  in                                                               
which access would be specifically prohibited.                                                                                  
MR. MCMAHON said  if ExxonMobil were to  grant third-party access                                                               
it  would  negotiate  terms  with  the  third-party  to  use  its                                                               
MR. FLOOD  agreed with the  other producers' comments  subject to                                                               
the commercial  terms regarding capacity.   He also  agreed there                                                               
is  no  prohibition from  entering  into  agreements with  third-                                                               
parties at this time.                                                                                                           
REPRESENTATIVE  HAWKER understood  that the  pipes within  a pipe                                                               
are  proprietary  and  operated   under  a  regulatory  framework                                                               
constructed  in  the  HOA,  therefore,   the  producers  are  not                                                               
obligated to have a formal  tariff developed under any ratemaking                                                               
structure; in fact,  the tariff would be part  of each producer's                                                               
cost portfolio.                                                                                                                 
2:38:56 PM                                                                                                                    
MR. MCMAHON  said correct.   Each producer  is free  to structure                                                               
the  costs of  moving the  gas from  the North  Slope to  the LNG                                                               
plant, the pipeline, and the GTP internally.                                                                                    
CO-CHAIR  SADDLER  said  previous   testimony  has  informed  the                                                               
committee that  the ownership structures  of LNG  projects change                                                               
during development  and/or during  operations.  He  asked whether                                                               
the producers  desire that the equity-ownership  structure of the                                                               
state's  share of  the project  remains the  same throughout  the                                                               
MR. VAN  TUYL responded that  ownership of the  infrastructure is                                                               
an asset that each  of the parties may retain or  sell as it sees                                                               
fit.    Typically,  there are  certain  transfer  limitations  or                                                               
stipulations  included in  commercial agreements  related to  the                                                               
financial  or  technical  capabilities  of  an  incoming  entity.                                                               
Otherwise, parties are free to divest at will.                                                                                  
2:41:37 PM                                                                                                                    
MR. PALMER  acknowledged that  in the  Alaska LNG  Project Equity                                                               
Option Agreement  of the MOU,  there is a provision  enabling the                                                               
state - if desired - to purchase  40 percent of TC's share and in                                                               
certain  circumstances  to  vend  to  a party  that  is  an  "LNG                                                               
CO-CHAIR  SADDLER  pointed out  there  are  also provisions  that                                                               
limit the state from selling its share  - up to 40 percent - to a                                                               
competitor  of  TC;  however, there  are  no  similar  provisions                                                               
limiting to whom TC can sell its assets.                                                                                        
2:43:04 PM                                                                                                                    
MR. PALMER said  correct, there is not a limitation  on TC in the                                                               
Equity  Option Agreement.   He  explained  that TC's  fundamental                                                               
business  is investing  in  pipeline  opportunities across  North                                                               
America; in  fact, TC historically has  increased, not decreased,                                                               
its percentage  of ownership  in pipeline assets  over time.   He                                                               
agreed with Mr.  Van Tuyl it is important  that incoming partners                                                               
do not diminish  the value of the partnership,  and stressed that                                                               
TC would seek to increase its  interest in the project, given the                                                               
CO-CHAIR SADDLER asked whether the  producers desire the right of                                                               
first refusal should TC choose to divest.                                                                                       
MR. MCMAHON acknowledged  that is not a term that  came up during                                                               
the HOA discussions.  Furthermore,  ExxonMobil desires to own its                                                               
share of  the project equal to  its volume of gas,  and would not                                                               
see a need for the addition of [the right of first refusal].                                                                    
[MR. FLOOD indicated no.]                                                                                                       
[MR. VAN TUYL indicated no.]                                                                                                    
2:45:18 PM                                                                                                                    
REPRESENTATIVE TARR asked  for the ramifications, if  any, of the                                                               
amendment  to allow  municipalities,  regional corporations,  and                                                               
residents to  participate in  ownership.   She also  requested an                                                               
assessment of the changes in the role of AGDC.                                                                                  
MR.  FAUSKE recalled  the ability  of residents,  municipalities,                                                               
and  corporations  to  invest  in  state  projects  and  generate                                                               
capital,  has been  proposed before  and is  a good  idea.   As a                                                               
matter of  fact, when Alaska  Housing Finance  Corporation (AHFC)                                                               
sells  its bonds  there is  a 24-hour  retail period  opportunity                                                               
during which  Alaskans invest.   He opined  the language  [of the                                                               
portion  of  the bill  related  to  AGDC]  has been  improved  to                                                               
clarify AGDC's function as a separate entity.                                                                                   
MR.  MCMAHON said  ExxonMobil does  not take  exception with  the                                                               
concept of  residents, municipalities, and  regional corporations                                                               
investing in  the project,  as long as  ExxonMobil is  allowed to                                                               
own its share of the project equal to its throughput.                                                                           
[MR. FLOOD indicated agreement.]                                                                                                
[MR. VAN TUYL indicated agreement.]                                                                                             
2:49:00 PM                                                                                                                    
REPRESENTATIVE HAWKER  directed attention  to ARTICLE  7: GENERAL                                                               
ENABLING   LEGISLATION,   Article   7.5  which   read   [original                                                               
punctuation provided]:                                                                                                          
     The   Administration   will   submit  to   the   Alaska                                                                    
     Legislature,  and  the  Parties will  support,  to  the                                                                    
     extent  permitted   by  law,  legislation  in   a  2015                                                                    
     legislative session  to ratify any Alaska  LNG Project-                                                                    
     enabling contracts  developed by the Parties  under the                                                                    
     process authorized in the  2014 legislation and address                                                                    
     any  other  matters  the  Parties  mutually  agree  are                                                                    
     necessary for advancement of the Alaska LNG Project.                                                                       
REPRESENTATIVE HAWKER  advised the aforementioned  article refers                                                               
to contracts  that will be  brought back to the  legislature, and                                                               
the legislative decision will be  made between pre-FEED and FEED.                                                               
He  requested a  description  of what  is  entailed in  "project-                                                               
enabling contracts"  and asked,  "What should we  be anticipating                                                               
out of this provision?"                                                                                                         
2:50:07 PM                                                                                                                    
MR. VAN TUYL began by reviewing  the overall construct of the HOA                                                               
envisioned a two-step process:  The  first step was SB 138, which                                                               
established participation,  percentage, and process.   The second                                                               
step  was established  in Article  7.5,  and also  alluded to  in                                                               
paragraph 7.2 c. which read:                                                                                                    
     c.  Allow  for inclusion of contract  terms which could                                                                    
     include  and address:    State  participation; a  State                                                                    
     share  of gas  (royalty  in  kind and  gas  in lieu  of                                                                    
     production taxes);  property taxes; upstream  costs and                                                                    
     lease expenditures; in-state  gas deliveries; ownership                                                                    
     interest;   operating    agreements;   gas   treatment,                                                                    
     transportation,  and liquefaction  services agreements;                                                                    
     State LNG or gas  sales contract; contract duration and                                                                    
     durability;  periodic project  reporting; Alaska  hire;                                                                    
     Alaska  contracting;  and   other  terms  necessary  to                                                                    
     advance projects to  commercialize Alaska's natural gas                                                                    
MR.  VAN   TUYL  said   the  aforementioned   paragraph  contains                                                               
additional   details    about   issues    beyond   participation,                                                               
percentage,  and process.    He  was unsure  whether  all of  the                                                               
details  would  be included  in  one  or multiple  individual  or                                                               
collective  contracts,  although  it is  expected  that  multiple                                                               
contracts   would  be   necessary   after   the  progression   of                                                               
discussions with the administration and the legislature.                                                                        
MR. PALMER  added that  a specific item  that would  come forward                                                               
would be an FTSA agreement for the state's consideration.                                                                       
REPRESENTATIVE SEATON  referred to the additional  terms included                                                               
in Article 7.2.   He expressed his and others'  concern that this                                                               
provision grants carte blanche for  oil tax fiscal certainty, and                                                               
questioned  whether  an  amendment  to [CSSB  138(FIN)  AM]  that                                                               
removes oil tax  fiscal certainty as an additional  term could be                                                               
2:53:02 PM                                                                                                                    
MR. MCMAHON responded  that all of the parties  are challenged by                                                               
how to put together agreements that  will enable the project.  He                                                               
advised the  best way  to solve  a problem  is to  consider every                                                               
approach, and  he encouraged  the committee  to let  the proposed                                                               
language stand  and proceed  to the  development of  the enabling                                                               
contracts.    The  parties  who  executed the  HOA  have  made  a                                                               
commitment  to involve  the legislature  in finding  solutions to                                                               
problems  through  confidential  briefings; keeping  all  options                                                               
open facilitates finding  an answer for the  producers, AGDC, TC,                                                               
the legislature, the administration, and Alaskans.                                                                              
REPRESENTATIVE SEATON  restated his concern about  ending up with                                                               
a 25-year  contract setting oil  tax fiscal certainty.   In fact,                                                               
if oil tax fiscal certainty is  one of the items to be negotiated                                                               
with  the producers,  "we better  be upfront  with it  now."   He                                                               
cautioned that  this issue is  too important to be  included with                                                               
other terms to be negotiated.                                                                                                   
MR.  VAN TUYL  agreed  with Mr.  McMahon and  added  that BP  has                                                               
directly participated in past  efforts [to commercialize Alaska's                                                               
natural gas]  and learned from  experience.  However,  BP accepts                                                               
that  [CSSB 138(FIN)  AM] and  subsequent legislation  "ha[ve] to                                                               
... work for everybody, it can't be  worked in a silo and come as                                                               
a  surprise to  people."    He reminded  the  committee that  the                                                               
processes  in  the   HOA  and  [CSSB  138(FIN)   AM]  intend  for                                                               
legislative  consultation,  and   warned  that  removing  general                                                               
language related  to one hot-button  issue may prevent  finding a                                                               
creative solution to a problem.                                                                                                 
2:57:33 PM                                                                                                                    
MR.  FLOOD stated  that senior  management at  ConocoPhillips has                                                               
made  clear and  consistent statements  about the  requirement of                                                               
stability  and predictability  of fiscal  terms related  to large                                                               
LNG  projects.    ConocoPhillips   has  not  negotiated  for  the                                                               
referred-to terms,  and he was  unable to predict the  outcome of                                                               
the proposed negotiations.                                                                                                      
MR. VAN TUYL further noted that  last year a major step was taken                                                               
to provide  an "oil fiscal environment  that engenders additional                                                               
investment" through  [Senate Bill 21,  passed in the  28th Alaska                                                               
State  Legislature], which  has had  a corresponding  reaction by                                                               
the industry  evidenced by additional  investment at  several oil                                                               
production sites.   He concluded that the solution  to this issue                                                               
has been undertaken.                                                                                                            
2:59:18 PM                                                                                                                    
MR. FLOOD concurred.                                                                                                            
REPRESENTATIVE SEATON  expressed concern that Senate  Bill 21 was                                                               
characterized as "first steps and  ...  a good way to start."  He                                                               
       Negotiating with the administration on that is not                                                                       
     exactly my preference [for] solving the issue.                                                                             
CO-CHAIR  SADDLER recalled  previous  discussion about  financing                                                               
the  project through  tax-free bonds  such as  general obligation                                                               
(GO) bonds or Alaska Railroad  Corporation (ARRC) bonds; in fact,                                                               
AGDC has  some authority to issue  GO bonds.  He  asked about any                                                               
of  the possibilities  for the  state underwriting  its financing                                                               
share using debt- and tax-fee bonds.                                                                                            
3:00:32 PM                                                                                                                    
MR. FAUSKE confirmed  that AGDC has the authority  to issue debt,                                                               
and he said  he would examine ARRC's ability  to issue tax-exempt                                                               
bonds.    Tax-exempt  debt  in  the U.S.  is  controlled  by  the                                                               
Internal  Revenue Service  (IRS) and  before issuing  millions of                                                               
dollars in tax-exempt  bonds to finance a  project, approval from                                                               
IRS is  required by  way of  a private  letter ruling.   However,                                                               
AGDC  would be  more inclined  to  issue revenue  bonds, most  of                                                               
which are  taxable, depending on  circumstances, and  he provided                                                               
an example.  General obligation bonding  is a right of the state,                                                               
thus AHFC has  a GO rating and Mr. Fauske  offered to pursue this                                                               
possibility for  AGDC.   He pointed out  the difference  in bonds                                                               
with  a GO  rating is  that one  is pledging  the full  faith and                                                               
credit of  the state, which  requires a  vote of the  people and,                                                               
because  of  their   authority  to  tax,  Alaska   GO  bonds  are                                                               
attractive to investors.                                                                                                        
REPRESENTATIVE TARR  directed attention to the  HOA, ARTICLE [10:                                                               
ADDITIONAL  STATE SUPPORT  FOR THE  ALASKA  LNG PROJECT,  Article                                                               
10.1, paragraph e. which read [original punctuation provided]:                                                                  
     e.  A healthy, long-term oil business; and                                                                                 
REPRESENTATIVE TARR  asked the producers  whether Senate  Bill 21                                                               
fulfilled  the requirement  of support  for a  healthy, long-term                                                               
oil business.                                                                                                                   
MR.  VAN  TUYL answered  that  Senate  Bill  21 provides  a  good                                                               
framework  for additional  investment,  and BP  looks forward  to                                                               
continued investment in oil development.                                                                                        
MR. MCMAHON  concurred, adding  that Senate  Bill 21  has spurred                                                               
renewed investment  on the  North Slope, which  is evidence  of a                                                               
healthy oil business.                                                                                                           
MR.  FLOOD said  yes, "  ...  that appears  to be  a healthy  oil                                                               
REPRESENTATIVE  TARR  then  directed attention  to  paragraph  c.                                                               
which read [original punctuation provided]:                                                                                     
     c.  Appropriations and  permitting for the construction                                                                    
     of  necessary  in-state  infrastructure  (e.g.,  roads,                                                                    
     bridges),    including   drafting,    introducing   and                                                                    
     supporting legislation;                                                                                                    
REPRESENTATIVE   TARR  recalled   that  previous   estimates  for                                                               
transportation  infrastructure improvements,  roads, and  bridges                                                               
for an earlier  gas pipeline project were up to  $2 billion.  She                                                               
pointed  out that  there  has not  been  an updated  presentation                                                               
describing these  costs for the  Alaska LNG Project,  except that                                                               
the HOA  directs that all  of these costs  would be borne  by the                                                               
3:05:29 PM                                                                                                                    
MR. MCMAHON  said there has  been no discussion on  this subject,                                                               
but during pre-FEED  the producers will determine  what is needed                                                               
in infrastructure development,  and will work with  the state and                                                               
federal government on implementation.                                                                                           
MR. VAN  TUYL acknowledged the  language does relate  to "support                                                               
for" which  needs to come  in a variety  of forms in  addition to                                                               
funding, such  as support  during the  permitting phase  and from                                                               
the Department  of Transportation  & Public  Facilities (DOT&PF).                                                               
He agreed this discussion would arise during pre-FEED.                                                                          
REPRESENTATIVE  TARR cautioned  that a  $2 billion  investment in                                                               
infrastructure  is 50  percent more  than  the state's  estimated                                                               
low-end  total investment  of $4  billion,  and that  possibility                                                               
should be part of the legislature's deliberations.                                                                              
CO-CHAIR  FEIGE  observed   "to  some  degree,  a   lot  of  that                                                               
infrastructure improvement  has already occurred ...  we have one                                                               
more bridge to go on the Richardson Highway, then we're ready."                                                                 
REPRESENTATIVE  JOHNSON   reminded  the  committee   of  previous                                                               
testimony  from the  commissioner of  DOT&PF that  the department                                                               
has  been working  diligently in  the last  few years,  thus "the                                                               
numbers are considerably different."   He said the commissioner's                                                               
comments  are  on  the record  before  the  House  Transportation                                                               
Standing  Committee  in  2014,  and  opined  that  "we're  almost                                                               
pipeline ready in terms of transportation."                                                                                     
REPRESENTATIVE  HAWKER  stated  that   moving  forward  with  the                                                               
project  under  the  HOA  is   predicated  upon  the  passage  of                                                               
satisfactory enabling legislation, which  would be [CSSB 138(FIN)                                                               
AM].   In  addition, under  the conditions  of the  MOU, TC  must                                                               
agree   that  [CSSB   138(FIN)  AM]   is  satisfactory   enabling                                                               
legislation.  He  asked whether the enabling  legislation must be                                                               
satisfactory  to  all of  the  parties  unilaterally, or  if  the                                                               
Alaska  LNG   Project  could   advance  without   an  established                                                               
partnership between the state and TC as directed by the MOU.                                                                    
3:09:43 PM                                                                                                                    
MR. VAN TUYL  restated that BP's objective is to  find a solution                                                               
to any problem that affects  reaching a decision for the project.                                                               
Although it is  possible to proceed through  a stage-gate without                                                               
one  of  the  original  parties,  the  best  way  forward  is  as                                                               
identified  in  the HOA:    the  producers,  the state,  and  the                                                               
state's choice of TC for its business partner in the midstream.                                                                 
MR.  MCMAHON concurred,  adding that  ExxonMobil is  committed to                                                               
work with the  state, the other producers, TC, and  AGDC to reach                                                               
the pre-FEED stage following the  directives of the HOA and [CSSB                                                               
138(FIN) AM].                                                                                                                   
3:11:41 PM                                                                                                                    
MR. FLOOD  stressed that ConocoPhillips believes  the key concept                                                               
of  the HOA  is state  participation, percentage,  and process  -                                                               
while recognizing  that the administration  will make  choices on                                                               
its share  of the  project -  and will work  to keep  the project                                                               
[CSSB 138(FIN) am was held over.]                                                                                               

Document Name Date/Time Subjects
HRES 3.28.14 TC Capital Project Performance.pdf HRES 3/28/2014 1:00:00 PM
SB 138