Legislature(2013 - 2014)BARNES 124

04/02/2014 01:00 PM RESOURCES

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01:04:47 PM Start
01:05:04 PM SB138
03:06:31 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
+ Presentation: "Gas Pipeline Issues" by: TELECONFERENCED
- Dept. of Natural Resources, Dept. of Revenue, &
Dept. of Law - Response to Committee Questions
- Dept. of Transportation & Public Facilities -
Update on Infrastructure Preparation for Gas
+ Bills Previously Heard/Scheduled TELECONFERENCED
         SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                     
1:05:04 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,  in  relation   to  CSSB  138(FIN)  am,  invited                                                               
representatives  of the  Department  of  Transportation &  Public                                                               
Facilities  (DOT&PF) to  make a  presentation on  improvements to                                                               
infrastructure that have  been made - or need to  be made - prior                                                               
to the construction of a gas pipeline.                                                                                          
1:05:35 PM                                                                                                                    
JEFF   OTTESON,  Director,   Division   of  Program   Development                                                               
(DOT&PF),  informed the  committee  that  during former  Governor                                                               
Frank  Murkowski's  administration   [2002-2006],  focus  was  on                                                               
TransCanada's   large-diameter  gas   pipeline  project   through                                                               
Canada, which was  very different from the  current project under                                                               
discussion.    The  biggest  difference  was  the  route  of  the                                                               
pipeline,  which followed  the  Richardson  and Alaska  Highways,                                                               
utilizing the Haines  Highway as the main port of  entry for pipe                                                               
and materials.   Elements of the project were  also compared with                                                               
the  construction of  the  Trans-Alaska  Pipeline System  (TAPS).                                                               
Prior to  the construction  of TAPS,  the state's  population and                                                               
vehicle traffic  were one-third that  of today; in  fact, highway                                                               
fatalities doubled  during the  construction of  TAPS due  to the                                                               
increase in  truck traffic.   Another difference is  that modules                                                               
are now  used for many activities  on the North Slope,  and it is                                                               
expected that  modules will be  used for construction of  the gas                                                               
treatment  plant  (GTP)  and  other  elements  of  the  liquefied                                                               
natural gas (LNG)  pipeline.  Modules weigh  about 400,000 pounds                                                               
and when  one is underway  becomes "a  moving traffic jam."   The                                                               
third difference is  that the gas pipeline will  be buried rather                                                               
than  built in  the elevated  position of  the oil  pipeline, and                                                               
thus  will require  many more  truckloads  of soil  and rock  for                                                               
construction.   Finally,  during  the construction  of TAPS,  the                                                               
North  Slope Haul  Road [now  known  as the  Dalton Highway]  was                                                               
closed to the public.                                                                                                           
1:09:26 PM                                                                                                                    
MR. OTTESON continued  to explain that although  the previous gas                                                               
pipeline project  was shelved,  DOT&PF recognized  the importance                                                               
of upgrading  the Dalton  Highway and  other related  routes with                                                               
new  bridges   and  passing  lanes   in  order  to   prepare  for                                                               
construction of  the gas pipeline.   Now, however, there  are two                                                               
proposed gas pipeline projects:   one large-diameter pipeline and                                                               
one  medium-diameter pipeline,  both of  which follow  all-Alaska                                                               
routes so  that the roles  of the Richardson, Alaska,  and Haines                                                               
Highways and their  ports become insignificant, and  the ports of                                                               
Southcentral,  Seward, Whittier,  Anchorage,  and Port  MacKenzie                                                               
become prominent.   The Alaska Railroad  Corporation, (ARRC) also                                                               
gains importance  as it  follows the  Parks Highway  corridor and                                                               
could be utilized to carry pipe  and earth materials.  During the                                                               
construction  season of  2014,  eight or  nine  projects will  be                                                               
underway  on  the Parks  Highway  in  order  to prepare  for  the                                                               
pipeline  project.   Mr. Otteson  said the  construction projects                                                               
can   be  viewed   at   www.AlaskaNavigator.org,  Parks   Highway                                                               
Construction Overview  2014.  The Parks  Highway projects address                                                               
congestion,  safety,   and  pavement  condition,   separates  the                                                               
highway from  the railroad at  one location, and will  build many                                                               
new  passing  lanes to  help  separate  slow-moving traffic  from                                                               
higher-speed  traffic.    The  ability of  DOT&PF  to  react  and                                                               
respond  to  needs  in  the  highway system  has  been  aided  by                                                               
flexible federal  highway funding;  however, the state  will need                                                               
to  fund upgrades  to  airports,  the railroad,  and  ports.   In                                                               
addition, highway maintenance and  operation (M&O) facilities are                                                               
not eligible for federal funds.                                                                                                 
MR.  OTTESON  advised  there  is increased  air  traffic  at  the                                                               
Deadhorse Airport  resulting from Senate  Bill 21 [passed  in the                                                               
28th Alaska  State Legislature].   He noted  that DOT&PF  has not                                                               
learned much  about the logistical  plans of the  Alaska pipeline                                                               
1:12:34 PM                                                                                                                    
DAVE  BLOOM,  Gasline Liaison,  Division  of  Statewide Design  &                                                               
Engineering Services (DOT&PF), informed  the committee DOT&PF has                                                               
had  very  little involvement  or  contact  with the  Alaska  LNG                                                               
Project sponsors.  On February  27, 2014, he attended a right-of-                                                               
way planning meeting  which was a broad overview  of the project,                                                               
and there have  been two meetings on the permitting  needs of the                                                               
project; however, further  meetings have not been  scheduled.  He                                                               
said  DOT&PF intends  a commonsense  approach  to addressing  the                                                               
impacts  of  the  pipeline  project on  the  highway  system,  by                                                               
exploring  access and  egress points,  safety improvements,  turn                                                               
lanes,  the use  of bridges,  the use  of material  sites on  the                                                               
Dalton  Highway, and  the  level of  service  needed at  airports                                                               
along the Dalton Highway.  Mr.  Bloom cautioned that all of these                                                               
logistics will  need to be  better defined.  A  DOT&PF consultant                                                               
is performing  a pavement  evaluation and  analysis of  the Parks                                                               
Highway from Willow  to Fairbanks, a draft of which  is due April                                                               
30,  2014.   He  advised  that  before  DOT&PF can  quantify  the                                                               
impacts of  pipeline construction,  many factors  have yet  to be                                                               
determined  such as  the type  of  haul vehicle,  port of  entry,                                                               
alignment, and the material needs.                                                                                              
1:16:20 PM                                                                                                                    
REPRESENTATIVE  TARR  recalled  DOT&PF estimated  $2  billion  of                                                               
improvements  were needed  for  the  previous pipeline  proposal.                                                               
She asked  whether the  state should expect  that level  of costs                                                               
for the current proposal.                                                                                                       
MR. BLOOM said  he did not expect another estimate  of $2 billion                                                               
because the improvements to the  Parks Highway have been ongoing,                                                               
and  many of  the projects  listed in  2008 have  been completed.                                                               
Additionally, the Haines, Alaska,  and Richardson Highways are no                                                               
longer  relevant to  the  project.   Also,  many  of the  ongoing                                                               
projects  on the  Dalton  and Parks  Highways  will be  completed                                                               
under the State Transportation Improvement Program (STIP).                                                                      
REPRESENTATIVE  TARR expressed  her hope  that the  upgrades have                                                               
benefits outside of  the project, and are generally  needed.  She                                                               
questioned whether the  state should assume all of  the costs for                                                               
the transportation  system upgrades for the  project, in addition                                                               
to  ongoing  maintenance.    Representative  Tarr  asked  if  the                                                               
upgrades will be funded by  the state's annual DOT&PF maintenance                                                               
request and if so, the impact on other projects.                                                                                
MR. OTTESON responded that many of  the upgrades are for the good                                                               
of commerce and the traveling public.   This is also true for the                                                               
projects that have already been  completed such as rebuilding the                                                               
bridge over the Tanana River near  Tok.  He opined these projects                                                               
are not  "something we're doing  that takes away from  the state.                                                               
It may  change the  timing a  little bit,  but it  ultimately ...                                                               
it's all for the good of all."                                                                                                  
1:20:24 PM                                                                                                                    
CO-CHAIR   SADDLER  inquired   as  to   whether  there   are  any                                                               
transportation needs  specific to the  pipeline but that  are not                                                               
generally beneficial to the traveling public.                                                                                   
MR.  OTTESON  acknowledged  that  the  movement  of  modules  may                                                               
require turnouts so  that traffic can pass;  in addition, turning                                                               
and  acceleration lanes  will be  needed  near materials  storage                                                               
sites  and  at  employee  camps.   However,  under  the  previous                                                               
proposal, it  was well  understood by the  oil and  gas companies                                                               
and TransCanada that they would have pay those costs.  He said:                                                                 
      When an activity is really directed at the pipeline                                                                       
       alone, I think that's kind of where the line gets                                                                        
     drawn as to whose ledger it goes to be paid by.                                                                            
CO-CHAIR  SADDLER asked  whether it  is anticipated  that special                                                               
accommodations, such  as acceleration lanes and  turn-outs, would                                                               
be funded by the project.                                                                                                       
MR. OTTESON  stated DOT&PF  has not  negotiated these  costs, but                                                               
based upon precedent, "I would  expect that would be our starting                                                               
CO-CHAIR FEIGE  turned to the  current operating capacity  of the                                                               
state's  ports and  their current  percentage of  total capacity.                                                               
The state's major  port is Anchorage, and he  asked whether there                                                               
is  spare capacity  in the  port system  to accept  extra traffic                                                               
because  of pipeline  construction  materials, and  if there  are                                                               
plans for  expansion at any of  the state's ports in  addition to                                                               
the work underway at Port MacKenzie and the Port of Anchorage.                                                                  
MR. OTTESON  recalled under the  previous proposal  the principal                                                               
port of entry  would have been Haines, where a  large shipment of                                                               
pipe was planned  every two and one-half weeks  with 30-40 trucks                                                               
per day  leaving Haines.   In Southcentral there are  four ports,                                                               
all of  which will be  connected to  the railroad after  the Port                                                               
MacKenzie extension is completed.                                                                                               
1:23:53 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI asked  how  DOT&PF handles  municipally-                                                               
owned  ports; for  example, will  the municipalities  perform due                                                               
diligence for the pipeline project,  or will DOT&PF negotiate for                                                               
the municipalities.                                                                                                             
MR.  OTTESON  explained for  the  previous  project there  was  a                                                               
substantial  joint  effort  with the  municipalities,  ARRC,  the                                                               
ports, and DOT&PF.   This was in place about  eight or nine years                                                               
ago, and  at that time  the department  had been provided  with a                                                               
logistics plan  prepared by the  industry.  If  necessary, DOT&PF                                                               
will  organize similar  opportunities  to  share information  and                                                               
identify needs.                                                                                                                 
REPRESENTATIVE KAWASAKI  observed that the logistics  planning is                                                               
"far behind" and asked whether that causes concern for DOT&PF.                                                                  
MR. OTTESON  assured the committee  that the public  highway side                                                               
is "well along,"  but other needs, such as  aviation, are unknown                                                               
and without funding.  For  example, the airports along the Dalton                                                               
Highway  are  not for  general  public  use.   Additionally,  the                                                               
federal  government   will  not  participate  in   the  cost  for                                                               
improvements to ARRC and the ports.   He cautioned that the state                                                               
or industry will have to  provide [financial] resources for these                                                               
REPRESENTATIVE KAWASAKI asked whether  the state provided general                                                               
funds (GF) for the improvements to the Deadhorse Airport.                                                                       
MR. OTTESON said  yes.  A combination of state  and federal funds                                                               
has been requested;  the state provided funds  primarily to build                                                               
additional employee housing for the fly-in camp.                                                                                
1:26:56 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI  asked  whether  future  M&O  costs  are                                                               
included in the construction of new buildings.                                                                                  
MR. OTTESON responded:                                                                                                          
     There's a pretty  good effort to try  to identify those                                                                    
     costs.  I  can't tell you there's a  pretty good effort                                                                    
     to actually  attach additional  dollars to  those costs                                                                    
     when they come  onto our ledger.  It's  just the budget                                                                    
REPRESENTATIVE SEATON assumed  most of the facilities  will be on                                                               
the North Slope.   He inquired as to whether  any facilities will                                                               
be built  along the pipeline route  that the state might  want to                                                               
maintain, rather than require them to be removed.                                                                               
MR.   OTTESON  related   that  some   maintenance  stations   are                                                               
inefficient due to their age.    Also needed is a new facility on                                                               
the Parks Highway to replace one that was removed.                                                                              
1:29:24 PM                                                                                                                    
REPRESENTATIVE SEATON  observed that  industry may  build private                                                               
airports to  support the  project, and  asked whether  DOT&PF may                                                               
negotiate to  assume ownership.   Especially  in the  North Slope                                                               
area,  there are  roads slated  for  removal and  rehabilitation;                                                               
however,  there  are now  municipalities  there  and perhaps  the                                                               
state should  not require roads to  be removed.  He  urged DOT&PF                                                               
to plan for the future use of industrial facilities.                                                                            
MR. OTTESON agreed.  In fact,  an airport in the Brooks Range was                                                               
funded by the state and  industry to avoid the 20-year obligation                                                               
for M&O that attaches to federal funding.                                                                                       
CO-CHAIR  SADDLER  requested  more  details  on  ARRC's  possible                                                               
participation in the project.                                                                                                   
MR. OTTESON stated  that DOT&PF does not  have enough information                                                               
on  the  logistics  of  the  project,  except  to  say  that  the                                                               
department  has undertaken  a statewide  rail plan.   In  further                                                               
response, he said the draft of the plan is overdue.                                                                             
CO-CHAIR SADDLER  then asked  whether ARRC's  bonding authorities                                                               
for industrial  development could be  used in any way  to support                                                               
the project.                                                                                                                    
MR.  OTTESON advised  that the  railroad can  carry so  much more                                                               
weight without  damage to the  public highway  system - and  at a                                                               
lower cost  - it is  to the  industry's advantage to  utilize the                                                               
railroad system for longer distances.                                                                                           
CO-CHAIR SADDLER  noted rail and  truck transportation  both have                                                               
MR. OTTESON indicated his agreement.                                                                                            
1:33:19 PM                                                                                                                    
REPRESENTATIVE  TARR related  that the  Heads of  Agreement (HOA)                                                               
indicates the state will assume  the financial responsibility for                                                               
additional  infrastructure upgrades.   She  recommended that  the                                                               
intent  should be  clear, suggesting  that the  cost of  upgrades                                                               
should  be  split   based  on  the  proportion   of  an  entity's                                                               
involvement, and asked whether DOT&PF  would be able to determine                                                               
the proportion  of the upgrade  that is for the  state's benefit,                                                               
and the proportion that is for another party's benefit.                                                                         
MR. OTTESON  advised that DOT&PF  routinely apportions  costs for                                                               
access   points  into   shopping  malls   to  determine   who  is                                                               
responsible  for the  costs of  traffic lights,  turn lanes,  and                                                               
other features; in fact, this  is an example of apportioned cost-                                                               
sharing between the state and  industry, thus the same principles                                                               
would apply to the pipeline.                                                                                                    
REPRESENTATIVE TARR  pointed out the  HOA directs that  the state                                                               
will fund the cost of the upgrades.                                                                                             
CO-CHAIR SADDLER  said there is  proposed legislation  creating a                                                               
transportation infrastructure  fund.   He asked  how such  a fund                                                               
would help or hinder the funding for the pipeline project.                                                                      
MR. OTTESON  expressed his understanding that  the transportation                                                               
infrastructure fund establishes a  scoring process with criteria.                                                               
To   the  extent   that  the   criterion  includes   an  economic                                                               
development value, the project would score highly.                                                                              
CO-CHAIR FEIGE invited the committee  to address questions to the                                                               
commissioners  of  the  Department   of  Revenue  (DOR)  and  the                                                               
Department of Natural Resources (DNR).                                                                                          
1:38:08 PM                                                                                                                    
REPRESENTATIVE HAWKER  directed attention  to the  bill beginning                                                               
at Section 10 which read:                                                                                                       
     * Sec. 10. AS 31.25.120 is amended to read:                                                                              
      Sec.   31.25.120.   Creation  of   subsidiaries.   The                                                                  
     corporation may create  subsidiary corporations for the                                                                    
     purpose  of  developing, constructing,  operating,  and                                                                    
     financing  in-state natural  gas  pipeline projects  or                                                                    
     other  transportation mechanisms;  for  the purpose  of                                                                    
     aiding  in  the development,  construction,  operation,                                                                    
     and   financing  of   in-state  natural   gas  pipeline                                                                    
     projects; or for the purpose  of acquiring [THE STATE'S                                                                    
     ROYALTY  SHARE OF  NATURAL GAS,]  natural gas  from the                                                                    
     North Slope, and natural gas  from other regions of the                                                                    
     state, including  the state's outer  continental shelf,                                                                    
     and  making that  natural gas  available to  markets in                                                                    
     the  state,  including  the delivery  of  natural  gas,                                                                    
     including  propane  and other  hydrocarbons  associated                                                                    
     with   natural  gas   other   than   oil,  to   coastal                                                                    
     communities in  the state, or  for export.   Subject to                                                                  
     the limitations  for the use  of money  appropriated to                                                                  
     the in-state  natural gas pipeline fund  (AS 31.25.100)                                                                  
     and the Alaska liquefied natural gas project fund                                                                        
     (AS 31.25.110),  the [A SUBSIDIARY  CORPORATION CREATED                                                                  
     UNDER  THIS  SECTION  MAY   BE  INCORPORATED  UNDER  AS                                                                    
     10.20.146  - 10.20.166.  THE] corporation  may transfer                                                                    
     assets  of  the  corporation to  a  subsidiary  created                                                                    
     under this  section.  A  subsidiary created  under this                                                                    
     section may  borrow money and  issue bonds  as evidence                                                                    
     of  that  borrowing  and  has all  the  powers  of  the                                                                    
     corporation that the corporation  grants to it.  Unless                                                                    
     otherwise  provided  by  the  corporation,  the  debts,                                                                    
     liabilities,   and   obligations    of   a   subsidiary                                                                    
     corporation  created under  this  section  are not  the                                                                    
     debts, liabilities, or obligations of the corporation.                                                                     
REPRESENTATIVE HAWKER asked:                                                                                                    
     How does  the Department  of Law read  and how  do they                                                                    
     understand what's being  accomplished with the language                                                                    
     in this bill in Section 10 on page 9.                                                                                      
1:38:36 PM                                                                                                                    
SUSAN  POLLARD, Assistant  Attorney  General, Oil,  Gas &  Mining                                                               
Section, Civil Division (Juneau),  Department of Law (DOL), asked                                                               
whether Representative  Hawker was referring to  deleted language                                                               
of the bill beginning on page 9, line 17 which read:                                                                            
     [A  SUBSIDIARY CORPORATION  CREATED UNDER  THIS SECTION                                                                    
     MAY  BE INCORPORATED  UNDER AS  10.20.146 -  10.20.166.                                                                    
REPRESENTATIVE HAWKER said yes.                                                                                                 
MS. POLLARD explained the reason for  that change is that DOL had                                                               
interpreted the  deleted language as limiting  the Alaska Gasline                                                               
Development  Corporation  (AGDC)  to  only  being  able  to  form                                                               
subsidiaries under  Alaska Statutes -  Title 10.  The  purpose of                                                               
the  change is  to make  clear that  AGDC has  existing authority                                                               
under  AS 31.25.120,  and the  change is  intended to  expand the                                                               
subsidiary-creating power  so that AGDC  can choose  to structure                                                               
any type of subsidiary.                                                                                                         
REPRESENTATIVE   SEATON   asked    the   commissioners   if   the                                                               
subsidiaries have  been eliminated,  and whether the  language is                                                               
still needed.                                                                                                                   
1:41:19 PM                                                                                                                    
MIKE PAWLOWSKI, Deputy Commissioner,  Office of the Commissioner,                                                               
Department of  Revenue (DOR),  stated that  the power  granted to                                                               
AGDC to create subsidiaries is an  important tool so it can carry                                                               
out its  business purposes.  In  CSSB 138(FIN) am, AGDC  is given                                                               
the  power to  use  any corporate  mechanism  through the  powers                                                               
granted  in  House  Bill  4  [passed in  the  28th  Alaska  State                                                               
Legislature] to  carry out its  tasks.   He opined this  power is                                                               
necessary because the  ultimate role of AGDC may  entail not only                                                               
the LNG  plant, but  also in  separate subsidiaries  utilized for                                                               
other purposes such as operating  gathering lines, and AGDC needs                                                               
the maximum flexibility to carry out its purposes for the state.                                                                
REPRESENTATIVE  SEATON  inquired  as  to  whether  the  state  is                                                               
required to  approve the  subsidiaries.  He  posed a  scenario in                                                               
which  subsidiaries  are  formed  using a  structure  that  could                                                               
inadvertently threaten the state's tax-free status.                                                                             
MR. PAWLOWSKI answered  that the nature of  a specific subsidiary                                                               
and  the circumstances  of its  tax status  will depend  upon its                                                               
structure and  its development.   The relationship  between state                                                               
agencies and  AGDC is similar  to that of  TransCanada Pipelines,                                                               
Limited (TC), in that AGDC will  be providing services to DNR and                                                               
DOR  - providing  liquefaction services  for  the gas  - and  the                                                               
contract between DNR  and AGDC will come back  to the legislature                                                               
for approval.  At that time  there will be a better understanding                                                               
of the  tax issues with AGDC;  however, he pointed out  that AGDC                                                               
has  a board  of  directors,  staff, and  legal  counsel for  its                                                               
proper management.                                                                                                              
1:45:05 PM                                                                                                                    
REPRESENTATIVE  SEATON  asked  that the  departments  advise  the                                                               
legislature if further provisions are needed on this topic.                                                                     
REPRESENTATIVE  HAWKER referred  to previous  testimony regarding                                                               
unclear  language in  the Memorandum  of Understanding  (MOU) and                                                               
asked for comments from the  administration on the [unidentified]                                                               
1:46:50 PM                                                                                                                    
JOE  BALASH,  Commissioner,   Department  of  Natural  Resources,                                                               
informed  the  committee  he  contacted  Mr.  Tony  Palmer,  Vice                                                               
President, TC,  to confirm the intent  of the MOU.    He directed                                                               
attention to a  document found in the  committee packet entitled,                                                               
"Preliminary   Agreements  to   be  Negotiated   Should  Enabling                                                               
Legislation  Pass," which  outlines  the  various agreements  and                                                               
actions that  will take place  following the passage  of enabling                                                               
legislation.   The Alaska Gasline  Inducement Act  (AGIA) [passed                                                               
in  the  25th Alaska  State  Legislature]  termination notice  is                                                               
expected  to take  place in  the second  quarter of  2014 shortly                                                               
after the  execution of  the Precedent  Agreement and  the Equity                                                               
Option  Agreements.     Commissioner   Balash  said   Mr.  Palmer                                                               
concurred [with the  foregoing statement], and he  and Mr. Palmer                                                               
further  discussed drafting  a memorandum  to  the committee  "on                                                               
this question."                                                                                                                 
REPRESENTATIVE HAWKER  appreciated the  data points found  in the                                                               
document  provided  to  the committee.    However,  the  document                                                               
contains  who,   what,  where  and  when,   but  no  interpretive                                                               
information  as  to  what  each  event  is  or  clarification  on                                                               
"exactly where you're headed with that MOU."                                                                                    
COMMISSIONER BALASH agreed.                                                                                                     
CO-CHAIR SADDLER  also appreciated  the information  contained in                                                               
the aforementioned  document.  He recalled  previous testimony by                                                               
Mr.  Roger Marks  [petroleum  economist,  contract consultant  to                                                               
Legislative Budget and Audit Committee]  related to the extent of                                                               
regulatory  enforcement  of the  project  either  by the  Federal                                                               
Energy  Regulatory   Commission  (FERC)  or  by   the  Regulatory                                                               
Commission  of Alaska  (RCA).   He questioned  whether regulatory                                                               
enforcement by  FERC or RCA applies  to the project, or  if there                                                               
is the right balance with regulation by contract.                                                                               
1:49:53 PM                                                                                                                    
COMMISSIONER  BALASH explained  that  the regulation  of the  oil                                                               
industry has  been relied upon by  the state for years  to ensure                                                               
that the tariffs  charged for the transport of  oil are accounted                                                               
for,  and charged  appropriately to  protect the  state's netback                                                               
values.   He  characterized  the history  of  that regulation  as                                                               
"mixed."    Regulation is  not  necessarily  an answer;  however,                                                               
because the state's  focus turned from an overland  project to an                                                               
LNG  project,   the  lack  of  regulation   on  the  liquefaction                                                               
facility,  the terminal,  access, and  rates became  an issue  of                                                               
concern for the administration.   If the liquefaction facility is                                                               
the  major  access  point  to   markets  outside  of  the  state,                                                               
regulation on  pipeline terms  will not  be helpful.   Therefore,                                                               
there was an effort to address  this topic in the HOA, Appendix A                                                               
Pro-Expansion  Principles.   Regarding the  pipeline itself,  the                                                               
state  "ha[s]   no  decision-making  on"  the   pipeline  due  to                                                               
questions of jurisdiction; for example,  the pipeline is integral                                                               
to and  part of the  liquefaction facility, and  the liquefaction                                                               
facility is not subject to regulation.   If the entire project is                                                               
regulated  pursuant to  [Section 3  of  the Natural  Gas Act,  15                                                               
U.S.C.  § 717b  (NGA  Section 3)]  the state  needs  to focus  on                                                               
access,  terms,  and  the  provisions  in  the  HOA,  ARTICLE  6:                                                               
REGULATORY FRAMEWORK,  ACCESS, and on  key terms in the  MOU with                                                               
TC,  related  to  the  provision of  third-party  services.    He                                                               
observed  that the  state has  committed -  with the  producers -                                                               
under NGA Section  3 to ascertain whether NGA  Section 3 provides                                                               
sufficient  assurance, and  if so,  the question  remains whether                                                               
FERC  agrees that  "they" have  NGA  Section 3  authority on  the                                                               
CO-CHAIR SADDLER  requested an  explanation and  the implications                                                               
of NGA Section 3.                                                                                                               
1:54:24 PM                                                                                                                    
COMMISSIONER  BALASH  advised NGA  is  the  federal body  of  law                                                               
governing  natural   gas  facilities,  including   pipelines  and                                                               
liquefaction  terminals.   Of NGA,  Section 7  governs interstate                                                               
pipelines, and Section 3 governs  liquefaction facilities.  A key                                                               
difference between the  two sections is that  Section 7 regulates                                                               
pipelines  for environmental,  health, and  safety purposes,  and                                                               
also regarding access to the pipeline  and rates.  Section 3 does                                                               
not   include  economic   regulation,  leaving   a  question   of                                                               
jurisdiction, which will be decided by  FERC.  The state seeks to                                                               
establish fundamental principles to  apply to the pipeline should                                                               
FERC decide that the regulatory framework will be Section 3.                                                                    
MR.  PAWLOWSKI,   in  response  to  Co-Chair   Saddler,  directed                                                               
attention to the HOA, ARTICLE  6.4 that included a sentence which                                                               
read [original punctuation provided]:                                                                                           
     Each Party must be satisfied with commercial terms and                                                                     
       regulatory framework prior to the execution of the                                                                       
     FEED Agreement for the Alaska LNG Project.                                                                                 
MR.  PAWLOWSKI informed  the committee  that the  parties to  the                                                               
agreement include  the state,  AGDC, the  producers, and  TC, and                                                               
the   aforementioned  sentence   indicates  that   jurisdictional                                                               
clarifications must be settled prior  to the FEED stage scheduled                                                               
for early 2016.                                                                                                                 
1:57:45 PM                                                                                                                    
COMMISSIONER BALASH,  in response  to Co-Chair Saddler,  said the                                                               
process to  establish jurisdiction  will begin  with a  series of                                                               
informal conversations  with FERC staff; subsequently,  there may                                                               
be  a request  for a  petition for  declaratory order  (PDO) that                                                               
would be  formally filed with  FERC, and responded to  during the                                                               
pre-FEED phase.                                                                                                                 
REPRESENTATIVE   TARR  expressed   her  understanding   that  the                                                               
pipeline would  be under RCA  jurisdiction and  only jurisdiction                                                               
over the liquefaction facility is in question.                                                                                  
COMMISSIONER  BALASH pointed  out  that  FERC jurisdiction  would                                                               
preempt  state  jurisdiction,  thus  if  Section  3  governs  the                                                               
pipeline, the outcome  is unclear at this time.   Again, the pre-                                                               
FEED phase is the time to clarify the process.                                                                                  
2:00:20 PM                                                                                                                    
REPRESENTATIVE  HAWKER directed  attention to  section 49  of the                                                               
bill which read:                                                                                                                
     * Sec. 49. AS 43.55.160(g) is amended to read:                                                                           
      (g) On and  after January 1, 2014, in  addition to the                                                                    
     reduction   under  (f)   of   this   section,  in   the                                                                    
     calculation  of an  annual production  tax  value of  a                                                                    
     producer  under (a)(1)(A)  or (h)(1)  [(a)(1)] of  this                                                                  
     section, the gross value at  the point of production of                                                                    
     oil or gas  produced from a lease or  property north of                                                                  
     68  degrees  North latitude  that  does  not contain  a                                                                  
     lease that  was within  a unit on  January 1,  2003, is                                                                    
     reduced by  10 percent  if the oil  or gas  is produced                                                                    
     from  a unit  made  up  solely of  leases  that have  a                                                                    
     royalty share  of more than  12.5 percent in  amount or                                                                    
     value of the production removed  or sold from the lease                                                                    
     as  determined under  AS 38.05.180(f).  This subsection                                                                    
     does not  apply if  the royalty  obligation for  one or                                                                    
     more  of the  leases in  the unit  has been  reduced to                                                                    
     12.5 percent or  less under AS 38.05.180(j)  for all or                                                                    
     part  of  the  calendar   year  for  which  the  annual                                                                    
     production  tax value  is  calculated. This  subsection                                                                    
     does  not apply  to gas  produced before  2022 that  is                                                                    
     used  in the  state or  to  gas produced  on and  after                                                                
     January 1, 2022. A reduction  under this subsection may                                                                  
     not reduce the  gross value at the  point of production                                                                    
     below zero.                                                                                                                
REPRESENTATIVE  HAWKER observed  this  is the  part  of the  bill                                                               
recognizing conforming changes  to the gas tax  regime.  However,                                                               
adding "north of 68 degrees  North latitude" within section 49 is                                                               
a substantive change, and he asked for clarification.                                                                           
2:01:31 PM                                                                                                                    
MR. PAWLOWSKI directed attention to  section 48 of the bill which                                                               
     Sec. 48. AS 43.55.160(f) is amended to read:                                                                             
     (f) On  and after January  1, 2014, in  the calculation                                                                    
     of an annual  production tax value of  a producer under                                                                    
     (a)(1)(A)  or  (h)(1)  [(a)(1)] of  this  section,  the                                                                  
     gross value  at the point  of production of oil  or gas                                                                    
     produced from  a lease or  property north  of 68degrees                                                                    
     North  latitude meeting  one or  more of  the following                                                                    
     criteria is  reduced by 20percent:  (1) the oil  or gas                                                                    
     is  produced from  a lease  or property  that does  not                                                                    
     contain a  lease that was  within a unit on  January 1,                                                                    
     2003;  (2)   the  oil  or   gas  is  produced   from  a                                                                    
     participating  area  established   after  December  31,                                                                    
     2011,   that  is   within  a   unit  formed   under  AS                                                                    
     38.05.180(p)   before   January   1,   2003,   if   the                                                                    
     participating area  does not  contain a  reservoir that                                                                    
     had   previously   been   in   a   participating   area                                                                    
     established before  December 31,  2011; (3) the  oil or                                                                    
     gas  is produced  from  acreage that  was  added to  an                                                                    
     existing  participating  area   by  the  Department  of                                                                    
     Natural  Resources on  and after  January 1,  2014, and                                                                    
     the producer  demonstrates to  the department  that the                                                                    
     volume of oil or gas  produced is from acreage added to                                                                    
     an  existing participating  area. This  subsection does                                                                    
     not apply to  gas produced before 2022 that  is used in                                                                    
     the state  or to gas  produced on and after  January 1,                                                                  
     2022. A reduction under this  subsection may not reduce                                                                  
     the gross value at the  point of production below zero.                                                                    
     In  this  subsection,   "participating  area"  means  a                                                                    
     reservoir  or  portion  of  a  reservoir  producing  or                                                                    
     contributing   to  production   as   approved  by   the                                                                    
     Department of Natural Resources.                                                                                           
MR.  PAWLOWSKI  explained the  sequence  of  statutes enacted  in                                                               
Senate  Bill 21  begins in  section 48.   The  primary intent  in                                                               
amending these sections is to  remove the gross value reduction -                                                               
enabled in Senate Bill 21 -  from gas produced after 1/1/22 which                                                               
is specified  in sections  49 and 50.   The  relationship between                                                               
the gross value  reductions in section 49,  subsection (g) refers                                                               
back  to subsection  (f),  thus the  qualification  [north of  68                                                               
degrees  North  latitude]  is  not   a  substantive  change,  but                                                               
provides clarity to taxpayers.                                                                                                  
REPRESENTATIVE HAWKER remarked:                                                                                                 
     In  the (f),  I already  had the  geographic isolation,                                                                    
     when  I  look at  that  [subsection]  (g), it  prefaced                                                                    
     what,  in  addition to  the  reduction  under (f).    I                                                                    
     understand  is  really  we're just  making  very,  very                                                                    
     certain  that  we  were talking  about  applying  these                                                                    
     provisions  to  the  same  geographical  areas  of  the                                                                    
     state. ... In that this  second call it ring-fencing of                                                                    
     that area  north of 68 was  not in or discussed  in the                                                                    
     development of  the original S[B] 21  language, does it                                                                    
     have  any  material  change  to  industry  or  the  way                                                                    
     regulations have been developed?                                                                                           
2:03:44 PM                                                                                                                    
MR.  PAWLOWSKI answered  that the  regulations as  developed, and                                                               
the implementation of Senate Bill 21, are unchanged.                                                                            
REPRESENTATIVE HAWKER  restated his question as  to whether there                                                               
is  a material  change to  the application  of tax  provisions to                                                               
MR. PAWLOWSKI said to his knowledge, no.                                                                                        
REPRESENTATIVE SEATON  recalled testimony on April  1, 2014, from                                                               
several  mayors  across  the  state -  based  on  their  previous                                                               
experience  -  that  there  is   the  possibility  that  proposed                                                               
property  tax  changes  could  be  implemented  even  though  the                                                               
project fails.   He asked  if there is a  way to avoid  a similar                                                               
2:05:17 PM                                                                                                                    
MR. PAWLOWSKI  assured the committee  that if a project  does not                                                               
get built  the appropriate property tax  statutes are irrelevant.                                                               
In  addition,  he  referred to  the  Alaska  State  Constitution,                                                               
Article 9  ~ Finance and Taxation,  section 4 which read  in part                                                               
[original punctuation provided]:                                                                                                
     The  real and  personal property  of the  State or  its                                                                    
     political  subdivisions shall  be exempt  from taxation                                                                    
     under conditions  and exceptions which may  be provided                                                                    
     by law.                                                                                                                    
MR. PAWLOWSKI explained that there  must be a statutory change to                                                               
enable the  type of payment  in lieu  of taxes (PILT)  and impact                                                               
payment  arrangements  that  are   highlighted  in  the  document                                                               
provided in the  committee packet.  On that document  it is shown                                                               
that  Impact  Payment  &  PILT  Proposal/Recommendations  require                                                               
consultations  with communities,  need  to be  authorized by  the                                                               
fourth  quarter  of  2014,   and  require  legislative  statutory                                                               
approval.   The timing of  this process indicates  the importance                                                               
of engaging  with advisory groups  now, and  bringing legislation                                                               
back before  the legislature to further  contractual development,                                                               
although  the  effective dates  depend  on  the future  statutory                                                               
change, and  how the  contracts are  written.   Conceptually, the                                                               
effective date for  production tax after 1/1/22,  having a future                                                               
application of the tax is open for discussion.                                                                                  
REPRESENTATIVE  SEATON  noted   the  bill  includes  implementing                                                               
language on  what can be  negotiated at this  point in time.   He                                                               
asked whether  there is a disadvantage  to the state of  having a                                                               
provision that says an agreed-upon  renegotiation or property tax                                                               
negotiation will only  apply if the project proceeds,  due to the                                                               
concern that the  negotiations on this project  may include other                                                               
portions  of oil  and gas  property.   A provision  such as  this                                                               
would ensure that unless the  project advances to completion, the                                                               
property tax relationship will not change.                                                                                      
2:08:49 PM                                                                                                                    
MR.  PAWLOWSKI apologized  for  misunderstanding  the premise  of                                                               
Representative  Seaton's question.    He  further explained  that                                                               
property  tax is  applicable  to  the Alaska  LNG  Project.   Mr.                                                               
Pawlowski continued:                                                                                                            
     The  question of  whether changes  to the  property tax                                                                    
     would   be   recommended   for   existing   and   other                                                                    
     infrastructure   is   again,    going   back   to   the                                                                    
     constitution, a question of  statutory changes that are                                                                    
     brought back out of the  recommendations of this impact                                                                    
     advisory group,  for consideration by  the legislature.                                                                    
     I know  there are other  pieces of legislation  in this                                                                    
     building  being considered  today  that  deal with  the                                                                    
     property  tax.   How  those  issues  get discussed  are                                                                    
     relevant,  and I  would worry  about placing  limits on                                                                    
     something that  needs a statutory change  even prior to                                                                    
     the contracts  being fully fleshed out  or executed, so                                                                    
     I  guess the  concern of  expanding the  development of                                                                    
     these agreements beyond the scope  of the AKLNG project                                                                    
     would again ... depend on  a statutory change that this                                                                    
     legislature would consider before  they even consider a                                                                    
REPRESENTATIVE SEATON  restated his  concern about  negotiating a                                                               
"big block" of terms all  at one time, and subsequently modifying                                                               
certain  terms  later.    He   suggested  having  the  terms  not                                                               
applicable  unless   the  project   is  successful,   instead  of                                                               
returning to the legislature for a statutory change.                                                                            
2:11:09 PM                                                                                                                    
CO-CHAIR SADDLER  asked what calculations the  administration has                                                               
made  to justify  its decision  that it  is in  the state's  best                                                               
interest  to  include TC  in  the  project, rather  than  seeking                                                               
alternative  financing arrangements  or acting  alone.   He asked                                                               
what assurance can be given  to Alaskans that this structure will                                                               
produce the best deal.                                                                                                          
COMMISSIONER  BALASH  acknowledged   that  multiple  factors  are                                                               
weighed  in   a  project  as   complicated  as  this.     In  its                                                               
calculations  and  analyses,  the administration  considered  the                                                               
impact to the  state's revenues, its debt  capacity, its ultimate                                                               
ability  to assume  a  position  in the  project,  and cash  flow                                                               
analyses   such   as   present   value,   opportunity/cost,   and                                                               
undiscounted cash, as has been  presented to the committee by the                                                               
administration's consultants.   He  opined the question of "best"                                                               
comes down to  the bidding process when  further comparisons will                                                               
be made.   Clearly, at  the point that  bids are made  public and                                                               
the results of  bids are made public, the  commercial behavior of                                                               
the companies  disclosing their bids  changes; in fact,  there is                                                               
an opportunity  cost and  impact cost  to transparency  after the                                                               
loss  of  confidentiality.   The  administration  worked hard  to                                                               
achieve  advantageous  terms  -  especially with  regard  to  the                                                               
capital  structure  -  with  TC when  compared  to  other  recent                                                               
pipeline  projects  in  North  America.     He  pointed  out  the                                                               
alternative to  having TC as  a partner  is to proceed  alone, or                                                               
find another  partner that meets  the minimum  qualification (MQ)                                                               
standard for the  project, of which there are few.   He concluded                                                               
that it is  in the interest of the state  to pursue a partnership                                                               
with TC.                                                                                                                        
2:17:17 PM                                                                                                                    
REPRESENTATIVE OLSON referred to a  TC document that indicated TC                                                               
has undertaken one  megaproject - defined as one in  excess of $1                                                               
billion  - the  Keystone Pipeline  System Phases  l and  ll.   He                                                               
assumed  that of  the producers  on the  North Slope,  ExxonMobil                                                               
Pipeline (XOM) has  probably built pipelines at a  cost in excess                                                               
of  $6 billion,  and BP  and ConocoPhillips  have built  projects                                                               
larger  than  the  Alaska  LNG  Project.    Representative  Olson                                                               
suggested that the partners have  the capability to complete this                                                               
MR.  PAWLOWSKI  stated that  from  DOR's  perspective, there  are                                                               
encouraging facets  to all of  the parties  in the project.   The                                                               
level of  expertise ExxonMobil, BP, ConocoPhillips,  and TC offer                                                               
is the reason  the state is also participating.   In addition, TC                                                               
has expertise  in project management,  and the  business interest                                                               
of the state has directly aligned  with TC in seeking the maximum                                                               
throughput  from the  North  Slope.   The  department values  the                                                               
expertise of all of the companies involved.                                                                                     
REPRESENTATIVE OLSON offered  his opinion that the  main thing TC                                                               
brings to the project is AGIA.                                                                                                  
2:20:25 PM                                                                                                                    
MR.  PAWLOWSKI  said  that  is   a  fair  point  considering  the                                                               
unreimbursed work,  support for  the work done  between Livengood                                                               
and  the North  Slope,  and the  expertise and  data  on the  gas                                                               
treatment plant  (GTP) and  pipe that  is directly  applicable to                                                               
the project, in  addition to TC's commitments in the  MOU to exit                                                               
from AGIA and move to a commercial relationship.                                                                                
REPRESENTATIVE   HAWKER  directed   attention   to  section   31,                                                               
paragraph (17) of the bill which read:                                                                                          
     (17) direct  the disposition  of revenue  received from                                                                  
     gas  delivered to  the state  under AS  43.55.014(b) by                                                                  
     entering  into  agreements  with  the  commissioner  of                                                                  
     natural  resources related  to  the  management of  the                                                                  
     custody and  disposition of gas delivered  to the state                                                                  
     under AS 43.55.014(b).                                                                                                   
REPRESENTATIVE HAWKER  said this  amendment adds another  duty to                                                               
those of the  commissioner of DNR:  to direct  the disposition of                                                               
revenue received  from gas delivered  to the state,  basically in                                                               
the  "tax  as  gas,  gas   as  tax  provisions."    He  suggested                                                               
strengthening the  state's position by directing  the disposition                                                               
into an appropriate fund of the state.                                                                                          
MR. PAWLOWSKI agreed to review the language.                                                                                    
REPRESENTATIVE TARR  recalled that Mr. Marks  suggested the state                                                               
is "using [TC] as a  bank," and traditional financing may produce                                                               
better terms.   She asked  whether the  administration considered                                                               
simply contracting with  TC on its portion of  the project rather                                                               
than entering into a partnership.                                                                                               
2:23:56 PM                                                                                                                    
MR. PAWLOWSKI responded that the  state's participation is in one                                                               
portion of  the pipeline, and  all of the partners  together will                                                               
decide how  the project  will be  built and  managed.   The state                                                               
could hire TC as a consultant  but unlike TC, consultants are not                                                               
investing for equity.  Furthermore,  a bank would not provide the                                                               
state  with expertise  on the  location  of compressor  stations,                                                               
logistics, gas throughput, third-party  participation, and all of                                                               
the nuances of  an LNG pipeline.  He reminded  the committee that                                                               
the  state is  wholly aligned  with the  producers on  wanting to                                                               
achieve the  highest possible price for  its LNG in Asia,  and is                                                               
also  aligned with  TC  on wanting  maximum  production from  the                                                               
North Slope.   The interest that  TC holds in the  project is not                                                               
possible with any  bank, and is one of the  reasons DNR considers                                                               
TC a partner and a co-investor.                                                                                                 
COMMISSIONER  BALASH supported  Mr. Pawlowski's  comments, saying                                                               
the characterization  of TC  as a  bank is  silly.   Although the                                                               
terms  offered  by  TC  could  be  bested  or  matched  by  other                                                               
institutions, the  service and expertise provided  by TC benefits                                                               
the state.   Many levels of participation  were considered during                                                               
negotiations;  however, TC  needs a  certain level  of return  in                                                               
order  to allocate  personnel and  provide expertise.   Regarding                                                               
whether  the  state  could   purchase  engineering  services  and                                                               
consultancy, he said  those services do not come  cheaply and are                                                               
limited in depth.                                                                                                               
2:30:29 PM                                                                                                                    
REPRESENTATIVE  HAWKER  asked   Commissioner  Balash  to  further                                                               
define  AGDC's role  - as  stated  in the  HOA, the  MOU and  the                                                               
legislation  -  in  the  natural  gas  pipeline  portion  of  the                                                               
COMMISSIONER BALASH explained over the  next two years during the                                                               
pre-FEED phase,  AGDC will be  focused on the Alaska  Stand Alone                                                               
Pipeline  (ASAP)  project; in  fact,  that  role is  specifically                                                               
described in  the HOA.   In  the longer term,  AGCD would  be the                                                               
state government  agency assigned  through a  separate memorandum                                                               
of understanding to  exercise the equity option with  TC and hold                                                               
40 percent interest.   Furthermore,  in the event TC or the state                                                               
terminates  the  Precedent Agreement,  the  equity  stake in  the                                                               
midstream most likely would be transferred to AGDC.                                                                             
MR. PAWLOWSKI directed  attention to section 1,  paragraph (1) of                                                               
the bill which read:                                                                                                            
     Sec.  31.25.005. Purpose.  The  corporation shall,  for                                                                  
     the  benefit  of  the  state,  to  the  fullest  extent                                                                    
          (1) develop and have primary responsibility for                                                                     
     developing natural  gas pipelines, an  Alaska liquefied                                                                  
     natural   gas   project,   and   other   transportation                                                                  
     mechanisms  to deliver  natural  gas  in-state for  the                                                                  
     maximum benefit of the people of the state;                                                                              
MR.  PAWLOWSKI  advised  the Senate  made  the  above  referenced                                                               
amendment to put  AGDC in a position "to receive  the interest in                                                               
the midstream."                                                                                                                 
2:34:19 PM                                                                                                                    
REPRESENTATIVE HAWKER  stated he  was hearing a  conflict between                                                               
statute  and  intent:    Section  1  clearly  places  AGDC  in  a                                                               
participatory  position  in the  development  of  the Alaska  LNG                                                               
Project and other pipelines, and  Commissioner Balash related the                                                               
intent  that AGDC  would work  on  ASAP, yet  execute the  equity                                                               
option agreement  and potentially hold  40 percent interest.   He                                                               
questioned how AGDC  could receive interest on  an informed basis                                                               
if it is not involved in the underlying details of the process.                                                                 
COMMISSIONER BALASH  clarified that  the equity  option agreement                                                               
will be signed by  DNR and DOR and then assigned  to AGDC, all of                                                               
which  the  AGDC   board  of  directors  is   aware.    Regarding                                                               
agreements  to  which AGDC  is  a  direct  party, AGDC  has  been                                                               
involved in multiple meetings and discussions.  He said:                                                                        
     With  regard to  the  specific  agreements between  the                                                                    
     agencies  and  TransCanada,  there   has  been  a  very                                                                    
     careful  bit of  consideration given  to the  authority                                                                    
     that AGDC  has today versus  what they will  have going                                                                    
     forward.   And so  the law  of the  land today  is that                                                                    
     AGDC is ...  looking at an in-state  pipeline only [and                                                                    
     is]  not involved  in a  big  export project.   And  so                                                                    
     there's been  a very  delicate set  of steps  that have                                                                    
     been  taken over  the  course of  the  last six,  seven                                                                    
     months, and the development of this legislation.                                                                           
2:37:55 PM                                                                                                                    
REPRESENTATIVE  HAWKER then  turned  attention to  [Exhibit B  to                                                               
Memorandum  of Understanding,  Alaska LNG  Project Equity  Option                                                               
Term Sheet] point 1 which read:                                                                                                 
     1.   Upon execution of the  Transition Agreements, TADI                                                                    
          or its Affiliate would grant the State an                                                                             
          exclusive and irrevocable right to acquire                                                                            
          ("Option"), either for its own account or through                                                                     
          a State Affiliate designated by the State acting                                                                      
          through the Commissioners (the "Optionee"), up to                                                                     
          40% (see point 2 below) of the limited                                                                                
          partnership interests in one or more limited                                                                          
          partnerships (or similar entities; see point 10                                                                       
          below) (the "Limited Partnership") that would                                                                         
          hold an equity participation interest (see point                                                                      
          2 below) in the PTU Gas Transmission Line, PBU                                                                        
          Gas Transmission Line, GTP, and Gas Pipeline                                                                          
          (collectively, the "Midstream Component").                                                                            
REPRESENTATIVE HAWKER asked  whether AGDC is a useful  tool or is                                                               
it involved in any of the decision-making.                                                                                      
2:38:47 PM                                                                                                                    
COMMISSIONER BALASH  advised that AGDC  has been identified  as a                                                               
useful tool; in  fact, it is the instrument to  carry the state's                                                               
interest in  the Alaska  LNG Project.   He  pointed out  that the                                                               
role of the agencies after the  project is past the FEED gate, is                                                               
going to  "dial back considerably," and  the role of AGDC  as one                                                               
of the  equity parties is going  to increase.  At  that point the                                                               
biggest  role  [the  administration]  will  play  is  to  develop                                                               
marketing instruments  for the  sale of  the gas:  sales purchase                                                               
agreements (SPAs).                                                                                                              
REPRESENTATIVE HAWKER  observed that  the language  as originally                                                               
drafted  created  a  statutory  subsidiary within  AGDC  for  the                                                               
purpose  of  its  immediate  participation   in  the  Alaska  LNG                                                               
Project.   He said it  was sensible to have  AGDC take a  role in                                                               
this and  "the backstop project"  from the beginning so  it would                                                               
be prepared by  its early involvement in  the business management                                                               
development  process.    He  asked,  "Are  you  compromising  our                                                               
ability to  put our state's  best foot forward by  excluding AGDC                                                               
from that front-end participation?"                                                                                             
COMMISSIONER BALASH said he does not believe that is the case.                                                                  
REPRESENTATIVE  P.  WILSON warned  that  care  must be  taken  to                                                               
ensure  that the  agreements in  AGIA are  not jeopardized.   She                                                               
inquired whether that  is a factor in how provisions  in the bill                                                               
are now written.                                                                                                                
2:44:04 PM                                                                                                                    
COMMISSIONER  BALASH  recalled  at  the time  of  AGDC's  origin,                                                               
[Committee Substitute for House Bill  369(FIN) passed in the 26th                                                               
Alaska  State Legislature],  it  was accepted  that  the bulk  of                                                               
North Slope gas  would flow through a pipeline  across Canada and                                                               
North America.  The main pipeline  was not expected to reach into                                                               
Southcentral to  respond to  the shortage  of Cook  Inlet natural                                                               
gas, thus there was a high priority  to build a spur line off the                                                               
main  pipeline   or  to  build   a  "stand  alone   pipeline"  to                                                               
Southcentral.    Currently, with  a  large  pipeline planned  for                                                               
Southcentral,  there  is an  overlap  with  AGDC's interest;  the                                                               
mission that  AGDC was given last  year to "get gas  to Alaskans"                                                               
remains  intact.   He  assured  the  committee  that one  of  the                                                               
parallel  projects  will fall  away,  or  the two  projects  will                                                               
merge.  The HOA ensures that  AGDC remains focused on its mission                                                               
until  it is  assured that  the Alaska  LNG Project  will deliver                                                               
North Slope gas to Alaskans.                                                                                                    
REPRESENTATIVE  P.  WILSON  said   her  question  was  indirectly                                                               
2:48:14 PM                                                                                                                    
COMMISSIONER BALASH  continued to  explain that  the relationship                                                               
between  the  state  and  TC  is a  commercial  one  intended  to                                                               
facilitate the efficient and  economic transmission and marketing                                                               
of gas.   This mission differs with getting gas  to Alaskans, and                                                               
after the  passage of  House Bill  4 there was  an effort  not to                                                               
provide inducements to  a competing project.   However, the state                                                               
and TC have reached a point  of understanding that allows AGDC to                                                               
pursue ASAP, subject  to the status of the Alaska  LNG Project at                                                               
the end of 2015.                                                                                                                
REPRESENTATIVE  SEATON  recalled  previous  testimony  advocating                                                               
that the state  guarantee to make its investment at  the point of                                                               
project  sanction, instead  of at  pre-FEED.   He has  heard that                                                               
earlier involvement  assures the  state can  influence compressor                                                               
spacing, and asked, "What would  be the downsides and the losses,                                                               
and  what [are]  the  gains in  avoiding the  risk  of ...  going                                                               
through a $600-$800 million investment ...?"                                                                                    
2:52:57 PM                                                                                                                    
COMMISSIONER  BALASH  shared  a  lesson  learned  from  the  AGIA                                                               
experience:  The  state  was   entitled  to  information  through                                                               
monitoring visits but  its rights to the assets  generated by the                                                               
project were contained in an option  to buy out the assets - such                                                               
as  information,  reports,  and  engineering  studies  -  if  the                                                               
license were  abandoned.   This was  a costly  and unsatisfactory                                                               
position.  The  state's position in the Alaska LNG  Project is as                                                               
an equity participant  from the beginning, and  thereby will have                                                               
an ownership  stake in the  assets should  the project fail.   He                                                               
cautioned that renegotiating the  state's position in the current                                                               
project has  not been broached  with the other parties;  in fact,                                                               
the  administration  is  committed  to pursuing  the  Alaska  LNG                                                               
REPRESENTATIVE SEATON  asked for  confirmation that  ownership in                                                               
the project  is by  tenants in  the entirety:   The state  has 25                                                               
percent interest  and if  the project fails,  the state  owns 100                                                               
percent of the information without  further cost, and can proceed                                                               
with or without the other parties in a future project.                                                                          
2:56:22 PM                                                                                                                    
COMMISSIONER  BALASH clarified  that  in the  AGIA framework  the                                                               
state was paying  90 percent of the cost after  the completion of                                                               
open season,  and in  the current  project the  state will  pay a                                                               
much smaller percentage.  Although,  through the partnership with                                                               
TC, the state has deferred its  costs imposed by AGIA, the nature                                                               
of  the  access  to,  and  the  use  of  information  and  assets                                                               
generated, will be the material terms of the equity agreements.                                                                 
REPRESENTATIVE SEATON  opined it is important  to clarify whether                                                               
all four parties  are tenants in the entirely  of the information                                                               
and  engineering, and  if the  project does  not go  to sanction,                                                               
whether the state can use  the information without buying out the                                                               
interest of the other parties.   For example, if the state elects                                                               
to  pursue  ASAP, he  asked,  "...  Do we  have  to  go back  and                                                               
purchase the producers' portion of the information?"                                                                            
COMMISSIONER BALASH affirmed that the  ASAP effort and the Alaska                                                               
LNG  Project effort  are  going to  be  working cooperatively  to                                                               
share  as much  information as  they can,  subject to  commercial                                                               
agreements.    He expressed  his  understanding  that the  equity                                                               
agreements will  not direct  that parties would  have to  buy out                                                               
other parties with  regard to assets and information  that can be                                                               
duplicated.  For non-divisible assets,  future agreements will be                                                               
negotiated  by  the  project  parties,  including  AGDC  and  TC,                                                               
operating on the state's behalf.                                                                                                
REPRESENTATIVE  SEATON  stated  he  is  very  hopeful  that  this                                                               
project  succeeds; however,  the  state must  also  plan for  the                                                               
possibility that  it does not.   Because  the state is  making an                                                               
early investment, he  urged for the administration  to ensure the                                                               
state's access to the information for a future effort.                                                                          
3:00:47 PM                                                                                                                    
REPRESENTATIVE   HAWKER  directed   attention   to  section   17,                                                               
paragraph (3) of the bill which read:                                                                                           
          (3) modify net profit shares for oil and gas and                                                                      
     sliding  scale royalty  rates for  gas by  establishing                                                                    
     fixed royalty  rates that  yield a  value to  the state                                                                    
     that the  commissioner determines  to be not  less than                                                                    
     the  value  the state  would  have  received under  the                                                                    
     terms  of the  lease before  a modification  under this                                                                    
REPRESENTATIVE HAWKER said the above  paragraph addresses the net                                                               
profit  shares for  oil and  gas  leases, and  asked whether  net                                                               
profit share  leases (NPSLs) are expected  to be a source  of gas                                                               
for the Alaska LNG Project and  if so, how the commissioner would                                                               
determine their value.                                                                                                          
COMMISSIONER BALASH  confirmed that  NPSLs will be  supplying gas                                                               
to the  project.  For accounting,  there is a system  that tracks                                                               
investments made on behalf of the  lease, which must be paid back                                                               
before  additional  payments are  made.    The payments  will  be                                                               
determined by  an economic analysis  and a  written determination                                                               
based on a  reasonable set of forecasts and  pricing, followed by                                                               
conversion into an  equivalent fixed royalty that  would be added                                                               
to the base royalty amount.   He further described the accounting                                                               
procedure,  noting that  all of  the parties  have agreed  to the                                                               
3:04:29 PM                                                                                                                    
REPRESENTATIVE HAWKER acknowledged  "the [accounting] mechanism,"                                                               
but restated his  question as to whether there  are a significant                                                               
number of  NPSLs affecting the  project.  He also  questioned how                                                               
the above-described task will be accomplished.                                                                                  
COMMISSIONER BALASH answered that  the determination will require                                                               
judgments on  the part of DNR  as to the costs,  and the expected                                                               
revenue  associated with  the project,  because the  lease itself                                                               
contributes to the project.   He offered to provide the committee                                                               
with specific  information on the  number of NPSLs  affecting the                                                               
project, adding that "there are  far more net profit share leases                                                               
in  the Point  Thomson Unit  then there  are in  the Prudhoe  Bay                                                               
Unit, but those are relative counts ...."                                                                                       
CO-CHAIR   SADDLER  related   there  has   been  public   concern                                                               
throughout  the  AGIA process  about  what  the state  gained  in                                                               
return for its reimbursements to TC.   He suggested adding to the                                                               
bill a  requirement for  regular updates to  the public  from the                                                               
legislature   regarding   the   reimbursable  expenses   TC   has                                                               
undertaken on the state's behalf.                                                                                               
COMMISSIONER  BALASH responded  that  the  HOA describes  regular                                                               
updates  that  are   to  be  provided  by  the   project  to  the                                                               
legislature and the public, including cost information.                                                                         
[CSSB 138(FIN) am was held over.]                                                                                               

Document Name Date/Time Subjects
HRES 4.2.14 DOTPF Infrastructure Update.pdf HRES 4/2/2014 1:00:00 PM
SB 138
Corrected HRES 4.2.14 Agreements Matrix REVISED.pdf HRES 4/2/2014 1:00:00 PM
SB 138