Legislature(2013 - 2014)BARNES 124

04/03/2014 04:30 PM RESOURCES

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04:36:26 PM Start
04:36:59 PM SB138
06:06:23 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 Enalytica TELECONFERENCED
& Black & Veatch
+ Bills Previously Heard/Scheduled TELECONFERENCED
         SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                     
4:36:59 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."                                                                               
The committee took a brief at-ease from 4:37 p.m. to 4:39 p.m.                                                                  
4:39:33 PM                                                                                                                    
CO-CHAIR FEIGE  noted the committee had  previously discussed the                                                               
terms  of the  bill related  to the  Memorandum of  Understanding                                                               
(MOU) and the  Heads of Agreement (HOA).  He  referred to the end                                                               
of the initial contract term  and asked for information regarding                                                               
the  state's options  at that  time,  and how  the options  would                                                               
affect decisions made by the state.                                                                                             
4:40:15 PM                                                                                                                    
DEEPA  PODUVAL, Principal,  Natural  Gas and  Power Fuels  Group,                                                               
Management Consulting  Division, Black & Veatch  Corporation, and                                                               
consultant to  the Department of Natural  Resources, advised that                                                               
at the  end of the  initial 25-year  time period, the  state's 25                                                               
percent equity position  in the Alaska LNG Project  - in whatever                                                               
part of  the project chosen  - will  continue.  The  25-year time                                                               
limit pertains  to the state's  agreements with  TransCanada (TC)                                                               
to  the  extent  that  TC  assumes a  portion  of  the  midstream                                                               
components of  the project.  If  so, the state and  TC would have                                                               
executed  a  25-year   [firm]  transportation  service  agreement                                                               
(FTSA).   When  the FTSA  has expired,  the state  will have  the                                                               
option  of purchasing  the equity  in  the midstream  from TC  or                                                               
renewing the FTSA with TC  for an additional negotiated period of                                                               
time.  The  purchase price would be based on  the remaining value                                                               
of  the asset,  after full  depreciation except  for maintenance,                                                               
capital,  and ongoing  investments  made by  TC  in the  project.                                                               
Also  contributing to  the undepreciated  capital  value and  the                                                               
purchase price would be any expansion of the project.                                                                           
REPRESENTATIVE HAWKER  surmised that  after 25 years  the buy-out                                                               
value of TransCanada's share would be small due to depreciation.                                                                
MS. PODUVAL  said yes, the purchase  price would be based  on the                                                               
book  value,   which  should  be   nominal  after  25   years  of                                                               
REPRESENTATIVE HAWKER  asked whether  it was stipulated  that the                                                               
purchase price was based on the net value.                                                                                      
4:43:12 PM                                                                                                                    
JANEK MAYER,  Partner, Energy Consultant, enalytica,  speaking as                                                               
a consultant to  the Alaska State Legislature,  said the buy-back                                                               
right is based  on purchase price equal to the  net book value of                                                               
the  transporter's   [TC]  equity  interest  in   the  underlying                                                               
facilities used  to provide gas treatment  plant (GTP) processing                                                               
and pipeline  transportation services at  the end of  the initial                                                               
contract term.   In  response to Co-Chair  Feige, he  pointed out                                                               
this  is found  at the  beginning  on page  5, [Key  Item 6,  Key                                                               
Processing  and  Transportation   Commercial  Terms,  Alaska  LNG                                                               
Midstream Services Term Sheet] clause 20, Exhibit "C".                                                                          
REPRESENTATIVE SEATON asked for  clarification that this excluded                                                               
the taxable  value, as the  TAPS pipeline,  although depreciated,                                                               
maintained a fairly high value.                                                                                                 
MR. MAYER replied that the MOU  based this on the net book value,                                                               
and, in  principal, this should  mean the initial  investment was                                                               
fully  depreciated  over a  25  year  term.    There would  be  a                                                               
residual  value from  maintenance  and  other investment  capital                                                               
made  into the  project.   He explained  that, although  net book                                                               
value for  rate making purposes implied  that it was zero  at the                                                               
end of the  initial contract term, he would prefer  to review the                                                               
language  in the  firm transportation  services  agreement as  it                                                               
would calculate the value.                                                                                                      
REPRESENTATIVE  SEATON asked  if the  enabling legislation  would                                                               
clarify the intention of the legislature.                                                                                       
MS. PODUVAL  offered her belief  that the intent was  captured as                                                               
it stated  that the rate was  based on book value.   She deferred                                                               
to the Department of Law for  determination of a need for further                                                               
4:46:36 PM                                                                                                                    
REPRESENTATIVE HAWKER declared that,  although it sounded simple,                                                               
testimony had proven  that it was undetermined for  who would own                                                               
what parts of  the project.  He referenced the  buy back position                                                               
and the  1 percent general  partner interest, which  was directed                                                               
toward  buying  out  the  larger interest  of  TransCanada.    He                                                               
referred to  the net book  value and the underlying  asset value,                                                               
and suggested  that if  it did  not include the  buyout of  the 1                                                               
percent general  partner interest, it could  ascribe a completely                                                               
separate  transaction and  a huge  value to  the general  partner                                                               
interest   which  controlled   the  entire   operation  and   its                                                               
distribution  rights which,  in  turn, offered  a  great deal  of                                                               
intangible  book value  in the  project.   This value  could mean                                                               
total control in the project.                                                                                                   
MR. MAYER  concurred with Ms.  Poduval that the intent  was clear                                                               
to base  the purchase price on  the net book value  of the equity                                                               
interest in the underlying facilities.   He noted that these were                                                               
only a list of terms  to guide the subsequent firm transportation                                                               
services agreement which the state  would design.  He suggested a                                                               
much  closer review  once the  process was  being negotiated  for                                                               
approval, and he declared that the concern was appropriate.                                                                     
4:49:22 PM                                                                                                                    
CO-CHAIR  FEIGE  directed attention  to  Exhibit  C of  the  MOU,                                                               
Alaska LNG  Midstream Services  Term Sheet,  page 6,  Section 21,                                                               
[Included in  members' packets] and  asked for an  explanation to                                                               
the Put Option.                                                                                                                 
MR. MAYER explained  that there were two terms for  options:  the                                                               
call option  was the right to  buy something, and the  put option                                                               
was the right to sell something.   He stated that the call option                                                               
was  referred  to  in  this  term sheet  as  the  buy-back  right                                                               
[Section 20,  page 5] as  the state had  that right if  there was                                                               
not a  renewal to  buy back  the asset.   He  noted that  the put                                                               
option  could obligate  that the  state buy  back the  asset from                                                               
TransCanada, based on the same terms for net book equity.                                                                       
CO-CHAIR FEIGE  asked what the  state should consider at  the end                                                               
of the contract to determine whether to exercise the buy-back.                                                                  
MS. PODUVAL replied  that if, after 25 years, there  was more gas                                                               
and a viable  LNG project capable of continuing,  the asset would                                                               
be  very valuable.    As  the asset  would  be fully  depreciated                                                               
through the  initial firm  transportation services  agreement, it                                                               
would be a  low-cost asset, and the state would  want to exercise                                                               
its buy-back and purchase it.   This would allow the state to own                                                               
a  valuable asset,  monetize the  gas,  and look  for a  pipeline                                                               
operator.  She  suggested that it might also make  more sense for                                                               
the state to have someone else  operate it.  She said that should                                                               
the gas be gone and the  asset was underutilized, the state would                                                               
not renew  its agreement with TransCanada,  and TransCanada would                                                               
want to put the asset back to the state.                                                                                        
4:53:39 PM                                                                                                                    
REPRESENTATIVE  HAWKER reflected  on the  unique position  of the                                                               
general   partners  in   this  project,   and  asked   about  the                                                               
preferential  distribution rights  of a  general partner  with an                                                               
equity interest  of less  than 1  percent, while  maintaining 100                                                               
percent control and exercising all  the management authority.  He                                                               
asked  if any  value had  been attributed  to these  preferential                                                               
distribution   rights   for   the  general   partner   over   the                                                               
distribution  of  equity  to  other   partners,  as  it  was  not                                                               
proportionate to the equity ownership.                                                                                          
NIKOS TSAFOS, Partner, Energy  Consultant, enalytica, shared that                                                               
the correct terminology was incentive distribution rights (IDR).                                                                
MS. PODUVAL replied that this  value had not been incorporated in                                                               
the Black & Veatch analysis.                                                                                                    
MR. MAYER  said that the  enalytica analysis did  not incorporate                                                               
this, either.   He  explained that the  revenue which  accrued to                                                               
the entity holding  equity would be determined by  the tariff set                                                               
under  the terms.   He  added that  the enalytica  model did  not                                                               
reflect any  additional revenue to  TransCanada by virtue  of its                                                               
general partnership.                                                                                                            
4:56:34 PM                                                                                                                    
REPRESENTATIVE HAWKER asked if the  IDRs in a partnership between                                                               
a  state agency  and  TransCanada would  have  the potential  for                                                               
being material to the analysis.                                                                                                 
MR. MAYER  replied that a firm  transportation services agreement                                                               
or an equity  option agreement could determine  whether there was                                                               
a  significant  component  for  distribution  of  revenues  to  a                                                               
preferential class  of shares that received  additional shares of                                                               
REPRESENTATIVE  SEATON asked  whether anything  was necessary  in                                                               
the  enabling legislation  to outline  a limit  to the  incentive                                                               
distribution  rights,   or  would  that  be   negotiated  by  the                                                               
4:58:08 PM                                                                                                                    
MR.  MAYER  explained  that  the  significance  of  those  rights                                                               
depended on  whether the  buy-back option was  exercised.   If it                                                               
was not  exercised, then TransCanada  had the full rights  to all                                                               
the  cash flows  from the  entire tariff.   He  replied that  the                                                               
question for  preferential treatment  to the general  partner was                                                               
determined  by  the exercise  of  the  buy-back option,  and  was                                                               
relative  to  the  cash  flow.   He  said  that  this  becomes  a                                                               
secondary  matter when  the state  negotiates  the equity  option                                                               
agreement and  then decides if  it wants to exercise  its option.                                                               
He pointed out that there  were an endless number of complexities                                                               
that must  be thought through  and negotiated  during contractual                                                               
arrangements.    He  suggested   that  the  appropriate  time  to                                                               
understand these was during the  negotiation, as it was difficult                                                               
to anticipate many of them in advance.                                                                                          
REPRESENTATIVE SEATON  asked whether  the legislature  would have                                                               
any input in the pre-agreement  between AGDC and TransCanada, and                                                               
should AGDC make this determination in an equity option.                                                                        
MR.    MAYER   suggested    seeking   clarification    from   the                                                               
administration, and he offered his  belief that the equity option                                                               
agreements would be set out  in fundamental terms for negotiation                                                               
by the Department of Natural Resources (DNR).                                                                                   
REPRESENTATIVE  SEATON  offered  his  belief  that  there  was  a                                                               
correction on the spreadsheet to now name AGDC.                                                                                 
CO-CHAIR  FEIGE explained  that the  equity option  agreement was                                                               
signed by  whoever was  designated on  the spreadsheet,  but that                                                               
the actual exercise of the equity option was determined by AGDC.                                                                
REPRESENTATIVE  SEATON asked  for clarification  that the  equity                                                               
option  agreement  was  signed  by   DNR,  but  exercise  of  the                                                               
agreement option was by AGDC.                                                                                                   
CO-CHAIR  FEIGE explained  that the  equity option  agreement was                                                               
signed by  DNR, TransCanada, and  AGDC; however, the  exercise of                                                               
the equity option was by AGDC with TransCanada.                                                                                 
5:02:11 PM                                                                                                                    
CO-CHAIR  FEIGE directed  attention  to the  end  of the  initial                                                               
contract term,  and asked how  important was the relative  mix of                                                               
royalty  shares  of  gas  as   exploration  progressed  into  the                                                               
National  Petroleum Reserve-Alaska  (NPR-A).   He noted  that the                                                               
royalty shares  on that gas  was different  as it was  on federal                                                               
leases.  He pointed to the  possibility of gas from the northwest                                                               
Arctic coast,  which was all  federal royalty and not  split with                                                               
the state, and  asked about any effect on the  buy-back of equity                                                               
MS.  PODUVAL replied  that the  State  of Alaska  would have  the                                                               
option as a mid-stream owner,  assuming the extreme case that the                                                               
state  would  not  have  any  royalty or  tax  call  on  the  new                                                               
production when  it came  on line.   At that  point in  time, the                                                               
state would have the option to  either own the asset and help the                                                               
producers  monetize  the  production,   or  to  be  a  mid-stream                                                               
operator and earn mid-stream  revenues by offering transportation                                                               
services through the pipeline and LNG plant.                                                                                    
MR. TSAFOS  projected that a  crucial issue could be  the state's                                                               
expectation for  its own gas.   The state would be  both an owner                                                               
and an  interested party for  access to  the gas, and  could also                                                               
subcontract some of its capacity to  a third party.  He explained                                                               
that the state  would need to balance its interest  as a business                                                               
owner and  an as  an infrastructure  owner.  He  said this  was a                                                               
common issue as LNG projects matured.                                                                                           
MS.  PODUVAL added  that this  also presented  an opportunity  to                                                               
expand since  there was open  access without having  to sacrifice                                                               
transport of your own gas.                                                                                                      
CO-CHAIR  FEIGE  opined  that   the  other  partners  could  sell                                                               
capacity to someone else.                                                                                                       
MS. PODUVAL  expressed her  agreement that  they would  be highly                                                               
motivated to sell  gas if they were not able  to fill capacity on                                                               
their own.                                                                                                                      
REPRESENTATIVE  SEATON  asked  for clarification  that  the  only                                                               
revenue from that  gas would be if the state  was a partial owner                                                               
of the mid-stream and had bought back the equity investment.                                                                    
MS. PODUVAL replied  that this would depend on the  origin of the                                                               
REPRESENTATIVE SEATON  asked about  the option  for the  state to                                                               
carry the  project sanction, and  if there was any  potential for                                                               
loss should  the project  go forward and  meet the  general terms                                                               
for size and off-take.                                                                                                          
5:09:25 PM                                                                                                                    
MR. TSAFOS  replied that  the challenge for  that option  was the                                                               
appearance of  wanting alignment in  theory but not  in practice.                                                               
He offered  his belief  that this  set the  state on  a different                                                               
footing than  the other  partners.   He pointed  out that  at the                                                               
final investment  decision, the producers would  have spent about                                                               
$700  - $800  million  more  than the  state,  so  the state  was                                                               
looking at different  numbers and from a different  point of view                                                               
than the  producers.   At this point,  the state  was determining                                                               
whether  to  pay  in  this amount,  whereas  the  producers  were                                                               
looking  at receiving  this  amount.   He  declared  that a  more                                                               
important danger  was for  the state  to be  viewed by  the other                                                               
partners as not having an  equal drive to accelerate the project,                                                               
as  the state  would not  have  invested any  of the  development                                                               
REPRESENTATIVE SEATON  stated that, although there  was alignment                                                               
in a project that was moving  forward, the state would not invest                                                               
$800 million to receive a no-go  decision by any one of the other                                                               
partners.  He  referenced the $500 million  investment into AGIA,                                                               
and  questioned whether  the  state wanted  to  follow a  similar                                                               
5:12:52 PM                                                                                                                    
MR.  MAYER offered  his belief  that the  state should  negotiate                                                               
something  to  enable  this  option,  if  it  was  an  overriding                                                               
objectivity.   He  suggested  that this  deal  and the  resulting                                                               
process would  look very different  than the one  currently under                                                               
discussion.  As  there was a substantial investment  for the pre-                                                               
feasibility  work,  the  producers  would  either  agree  with  a                                                               
finalization of  these terms,  or they  would suggest  waiting on                                                               
many  of  the  decisions,  in order  to  make  them  concurrently                                                               
throughout the feasibility  work, so that all  the partners would                                                               
be investing equally.   He declared that the  producers would not                                                               
carry  the  state  without  "nailing  down  a  lot  of  what  the                                                               
commitments and responsibilities are that  go with that upfront."                                                               
He  suggested that  continuation of  the feasibility  work, while                                                               
there   were  other   negotiations,   would  require   concurrent                                                               
escalating  commitments,  rather  than waiting  for  negotiations                                                               
before  having the  feasibility work.   He  declared that  it was                                                               
necessary to have everyone in the project together.                                                                             
MS. PODUVAL expressed  her agreement, and added  that early state                                                               
participation  on the  project was  an  opportunity, even  though                                                               
there  was  a  risk.    She  opined  that,  as  the  project  was                                                               
significant  to   Alaska's  long   term  economic   success,  the                                                               
opportunity  with early  participation was  far greater  than the                                                               
potential for  loss.   She stated  that participation  during the                                                               
pre-FEED and  the FEED process would  offer the state a  "seat at                                                               
the  table"  and  valuable information  and  input  into  various                                                               
factors.  She reported that  open access, influence on the design                                                               
of the project, and location  of the compressor stations were all                                                               
important  decisions for  the state  participation and  were more                                                               
valuable than $500 million.   She agreed that, although there was                                                               
a possibility for  cancellation of the project,  the alignment of                                                               
the parties  was somewhat unprecedented,  and all of  the parties                                                               
were heavily incentivized to have a successful project.                                                                         
5:17:42 PM                                                                                                                    
REPRESENTATIVE  SEATON reflected  on the  multiple worldwide  LNG                                                               
projects  that the  producers were  reviewing and  suggested that                                                               
this project  had to be  economical for  them.  He  declared that                                                               
the state was not aligned  with the producers for having multiple                                                               
project options to  compare for relative economics.   He stressed                                                               
that there was an important  misalignment for the differences and                                                               
considerations for decision  making.  He asked if  this should be                                                               
MS. PODUVAL  replied that it  should be considered, but  that, as                                                               
this  decision  will involve  billions  of  dollars, the  state's                                                               
early  investment   was  relatively  low  while   the  value  was                                                               
significant enough for participation.                                                                                           
CO-CHAIR FEIGE asked for clarification  that the project was more                                                               
likely to succeed if the state participated from the beginning.                                                                 
MS. PODUVAL  expressed her disagreement,  however, she  did point                                                               
out that it  was one thing to say everyone  was in this together,                                                               
but it  was "another thing to  be in this together."   She opined                                                               
that the producers  would feel more strongly  about the prospects                                                               
of  the project  if there  was early  alignment of  the partners.                                                               
Given  the amount  of  investment  early in  the  project to  get                                                               
through the feasibility stages and  its value for information and                                                               
participation in the early phase  versus the overall value to the                                                               
state,  it  was  a  trade-off  for  which  the  state  should  be                                                               
5:21:32 PM                                                                                                                    
MR. TSAFOS  added that any  LNG project  had a better  chance for                                                               
success with an engaged, interested  sovereign that supported the                                                               
project, rather than a distant,  less interested sovereign.  More                                                               
generally,  although  a  partner  may have  other  interests  and                                                               
investments  and  this  project  would be  just  one,  there  was                                                               
nothing the  state can  do to  change this.   Although  the other                                                               
partners would  review this project,  the state could  affect the                                                               
attractiveness  of the  project  by participating  and giving  it                                                               
support.  He stated that there  was nothing the state could do if                                                               
the project proved to not be economic.                                                                                          
5:24:14 PM                                                                                                                    
MR. MAYER said  that an important thing to remember  was that the                                                               
nature  of the  process was  characterized by  a series  of stage                                                               
gates for  expenditures each  based on  the results  of findings,                                                               
which allowed  that the project risk  falls as time goes  on.  He                                                               
noted that spending would increase  and the risk for cancellation                                                               
at  FID would  decrease  as  time progressed.    He  said it  was                                                               
entirely possible  to spend the  required money on  pre-FEED, and                                                               
then have  a good  idea of the  economics and  attractiveness for                                                               
the  project to  the producers.   After  this point,  the biggest                                                               
expenditures  would be  for detailed,  front-end engineering  and                                                               
design of  the final  project blue prints  for construction.   He                                                               
said the pre-FEED  would cost a smaller portion  and should allow                                                               
the state  more comfort in understanding  the potential economics                                                               
of the project before it embarks on the next stage.                                                                             
MR. TSAFOS  shared the  possibility that a  partner did  not like                                                               
the project prospect  at FID.  He shared an  anecdote that he was                                                               
not aware of  an LNG project with four partners  where one pulled                                                               
out at FID.   He said that, more often, there is  an offer to buy                                                               
out  the partner  without the  enthusiasm  for the  project.   He                                                               
opined that,  if this was  a solid project  and all the  risk had                                                               
been mitigated prior  to FID, it was more likely  for a change in                                                               
ownership for  the partner lagging  in enthusiasm, rather  than a                                                               
prolonged stalling of the project.                                                                                              
5:28:29 PM                                                                                                                    
REPRESENTATIVE SEATON  expressed his concern that  decisions were                                                               
made  from a  different basis.   He  reported that  the State  of                                                               
Alaska  had a  different cost  basis  for its  decision than  the                                                               
other  parties, as  they  would assess  relative  to their  other                                                               
projects.   He reiterated  that the  decision making  process was                                                               
different for  the state  compared to  the other  investors, even                                                               
though the investment  was the same.  He  expressed his agreement                                                               
with full  monetary alignment through the  front-end studies, but                                                               
he questioned the  value unless the state money  was necessary to                                                               
subsidize the project and keep it moving forward.                                                                               
MR.  TSAFOS  questioned this  interpretation  for  how the  state                                                               
would make  its decision,  noting that although  it was  the only                                                               
LNG  project in  the  state, it  was  not the  only  call on  the                                                               
state's  money.   He pointed  out  that the  state compared  this                                                               
against other  needs and priorities  for state funds.   He opined                                                               
that this  investment today  would affect  the trajectory  of the                                                               
project and would keep options  open.  By agreeing to participate                                                               
in advance, it  would show a serious approach to  the project and                                                               
allow for the option to develop.                                                                                                
5:33:09 PM                                                                                                                    
MS. PODUVAL  questioned the  assumption by  Representative Seaton                                                               
that  the  producers would  design  a  project with  key  factors                                                               
important to the state.   She referenced the five off-take points                                                               
and expansion,  both requested as  a condition by the  state, and                                                               
questioned  whether  these  key   provisions  would  be  achieved                                                               
without early state participation.                                                                                              
REPRESENTATIVE TARR  asked if there  would be changes in  the HOA                                                               
or  the MOU  in  order to  meet the  conditions  as presented  by                                                               
Representative Seaton.                                                                                                          
MR. MAYER offered his belief that  it would be necessary to start                                                               
over  and  tear up  the  HOA  and the  MOU.    It would  then  be                                                               
necessary to take  the next several years to  negotiate upfront a                                                               
full  package for  determining the  project structure  and firmer                                                               
contractual  commitments before  any of  the pre-Feed  work.   He                                                               
opined that the administration was  taking a more gradual process                                                               
of  steadily   increasing  commitments   as  more   details  were                                                               
understood.   He  questioned  the ability  to  achieve this  goal                                                               
without being an equal partner in the whole process.                                                                            
REPRESENTATIVE TARR asked  if was really an option  for one party                                                               
to sell  out within this arrangement,  as it was prefaced  on the                                                               
idea of alignment and balance.                                                                                                  
MR. TSAFOS  replied that a  company could buy whatever  it wanted                                                               
from another company, and with  that they would take ownership of                                                               
the  original agreements  to monetize  the gas.   He  offered his                                                               
belief that  this was not  any more complicated than  others with                                                               
changes of ownership.                                                                                                           
REPRESENTATIVE TARR asked if it would involve buying the leases.                                                                
MR. TSAFOS replied that it would  depend on the situation and the                                                               
reason for  withdrawal.  He  relayed that all sorts  of ownership                                                               
changes had occurred in LNG projects.                                                                                           
REPRESENTATIVE TARR  asked whether  the royalty in-kind  could be                                                               
maintained, but the taxes could  be limited in order to guarantee                                                               
a return of  at least 3-5 percent, in order  to protect the state                                                               
in  less favorable  circumstances for  no  return or  loss.   She                                                               
asked if  this option  had been  considered as  a means  of state                                                               
MS. PODUVAL  replied that  there had  been analysis  of scenarios                                                               
which  revealed that  the state  was  better off  with an  equity                                                               
participation in the project under  low prices than without.  She                                                               
said the  revenues would  be lower  to the state  if it  left the                                                               
production  tax  regime unchanged  and  did  not take  an  equity                                                               
stake.    She stated  that  during  a  low price  environment,  a                                                               
portion of the project as royalty  in value would bring the state                                                               
lower revenues than if it left  the royalty in-kind, and took gas                                                               
as an  equity share.  From  a practical stand point,  the concept                                                               
of each party  having equivalent shares of gas  and project would                                                               
eliminate any need  of negotiation for deductions  and would make                                                               
the investment more attractive.                                                                                                 
5:42:07 PM                                                                                                                    
REPRESENTATIVE  TARR  asked  for clarification  for  the  state's                                                               
requirement to  pay transportation  fees, even  if there  was not                                                               
the capacity to  meet this, and thereby not  receive any revenue.                                                               
She asked whether the aforementioned  suggestion for return would                                                               
guarantee some income.                                                                                                          
MS.  PODUVAL,  in  response,  offered her  belief  that  any  un-                                                               
utilized capacity by  the state from a lack of  sufficient gas to                                                               
liquefy and  sell was  a resource  risk, and  the loss  would not                                                               
necessarily be offset by a small percentage of production tax.                                                                  
MR.  MAYER  expressed  his  agreement  and  restated  the  reward                                                               
relationship   for  active   equity  investment,   as  the   risk                                                               
decreased.    He  restated  the importance  of  being  an  equity                                                               
participant when the  prices go down, as everyone  would rise and                                                               
fall together.                                                                                                                  
5:44:49 PM                                                                                                                    
REPRESENTATIVE  TARR  asked  whether  the  timeline  for  signing                                                               
agreements was too aggressive.                                                                                                  
MR. TSAFOS  replied that these timelines  were aspirational, and,                                                               
with  the exception  of the  equity  option, not  deadlines.   He                                                               
referenced the  financial and  marketing agreements,  noting that                                                               
these were either  preliminary dates or still to be  decided.  He                                                               
allowed that  the dates could  be aggressive, although  each date                                                               
was doable,  and "the devil's  in the  details."  He  pointed out                                                               
that  some dates  could be  adjusted and  still meet  the overall                                                               
deadline.   He  noted that  the equity  option agreement  was the                                                               
only agreement  that hinged  on a deadline,  and the  MOU allowed                                                               
for  this to  be  extended  by both  parties  if  requested.   He                                                               
expressed  agreement that  some were  more complicated  and could                                                               
take longer than planned.                                                                                                       
5:47:54 PM                                                                                                                    
REPRESENTATIVE  TARR expressed  specific concern  for the  equity                                                               
option  agreement,  and  whether  it  was  reasonable  to  expect                                                               
readiness by the end of 2015.   She pointed to the amount of work                                                               
still to be  done prior to this.   She suggested that  a delay to                                                               
2016 was more reasonable, and  that the proposed bill would allow                                                               
the opportunity to amend.                                                                                                       
MR. TSAFOS  suggested a review  for extension of the  date during                                                               
the  discussion   for  the  equity  option   agreement  with  the                                                               
MS. PODUVAL expressed her agreement  that the dates were what the                                                               
administration was  "shooting for,"  although they were  not hard                                                               
dates for  negotiation.  She  pointed to the staged  approach for                                                               
many of  the agreements, which  she declared as reasonable.   She                                                               
agreed that some of the dates  could change, although she did not                                                               
believe the timeline was overly aggressive.                                                                                     
5:50:05 PM                                                                                                                    
REPRESENTATIVE SEATON  asked what was necessary  prior to signing                                                               
the firm  transportation shipping  agreements and  if it  was too                                                               
aggressive for this to be signed by December 2015.                                                                              
MS.  PODUVAL,   in  response,   said  that   firm  transportation                                                               
agreements  were normally  signed  after there  was project  cost                                                               
information available.   She said  that this was a  bit different                                                               
as the  firm transportation shipping agreement  was not effective                                                               
unless the project reached FID, and  it was not the only point in                                                               
time for  the state to make  a commitment that it  could not take                                                               
back.  She opined that the  December 2015 deadline was not overly                                                               
MR.  TSAFOS explained  that many  agreements were  interdependent                                                               
and  contingent on  other factors,  hence  there could  not be  a                                                               
pipeline agreement if  the LNG project did not move  forward.  He                                                               
declared that  this was the nature  of an LNG project,  as it was                                                               
necessary for many  pieces to be determined in  parallel, and not                                                               
in sequence, in order to become active at the same time.                                                                        
5:53:40 PM                                                                                                                    
REPRESENTATIVE  SEATON offered  an  assumption  that the  project                                                               
reached FID and was determined not  to be economic and it was not                                                               
sanctioned.   Assuming  that the  investment had  been made,  the                                                               
information  collected, and  the  designs approved,  he asked  if                                                               
each party owned  the information in its entirety or  would it be                                                               
necessary  to buy  out the  interest  of the  other investors  in                                                               
order for further use of the materials.                                                                                         
MS. PODUVAL deferred to the Department of Law for clarification.                                                                
REPRESENTATIVE SEATON  asked if something should  be written into                                                               
the proposed enabling legislation.                                                                                              
MR. MAYER said that equal  co-investors should have equal rights,                                                               
and that  it would be in  the state's best interest  to know that                                                               
it had  the rights  to this  information.   He suggested  that it                                                               
would  be  up  to  legal   advisors  to  determine  whether  more                                                               
information was necessary in the proposed bill.                                                                                 
MR.  TSAFOS offered  his belief  that the  relationships of  each                                                               
party  would be  defined in  the  joint venture  agreements.   He                                                               
noted  that this  ownership rights  agreement should  include the                                                               
permits.   He  offered  his  belief that  few  LNG projects  were                                                               
cancelled,  but  instead, more  work  was  devoted to  develop  a                                                               
project, which made  it necessary to define  the ownership rights                                                               
of the information.                                                                                                             
5:59:33 PM                                                                                                                    
REPRESENTATIVE SEATON opined that it  was necessary for the state                                                               
to  have  full access  to  the  information gathered,  given  its                                                               
investment  of $600  million.   He pointed  out that  legislative                                                               
direction for  the rights  to information  should be  included in                                                               
the proposed  legislation before  moving into the  joint venture,                                                               
so  the  state  would  have  the option  to  pursue  another  LNG                                                               
MR. TSAFOS,  in response, said  that, regardless of  intent, this                                                               
would need to be worked  out through the joint venture agreement.                                                               
He pointed  out that  there was an  underlying tension  with that                                                               
agreement, as it was necessary  to have all parties participating                                                               
without the  thought that  one party  would take  the information                                                               
and start another project.   He suggested that the translation of                                                               
the intent was  important, and had to include the  rights for all                                                               
the partners.                                                                                                                   
6:02:28 PM                                                                                                                    
REPRESENTATIVE SADDLER asked for  a scenario should this proposed                                                               
large LNG plan  fail, and the Alaska Stand  Alone Pipeline (ASAP)                                                               
takes over.   He asked  if the ASAP  project could expand  to the                                                               
same size capacity market as  the currently proposed LNG project,                                                               
and if  so, how  far could  it grow  before it  triggered similar                                                               
provisions, and be subject to the buy-back in from TransCanada.                                                                 
MS.  PODUVAL surmised  that it  was not  clear for  substantially                                                               
similar  and  that,  should the  Alaska  Gasline  Inducement  Act                                                               
(AGIA) go  away, the ASAP  project would  need to expand  into an                                                               
LNG market, as  the in-state market was not big  enough to absorb                                                               
a  project  larger  than  what  was  currently  discussed.    She                                                               
expressed  her agreement  that the  ASAP project  could grow  and                                                               
morph into an LNG export  project which would also serve in-state                                                               
MR. TSAFOS  pointed out that,  after spending years  to determine                                                               
that a  large scale project  was not  economic, it was  not clear                                                               
why the ASAP  line would be expanded into an  export project.  He                                                               
said the reason  for the ASAP line  was to have a  project if the                                                               
export project  was not  viable.   He reflected  that it  did not                                                               
make sense to return to that  same path after determining that it                                                               
did not work.                                                                                                                   
6:05:07 PM                                                                                                                    
[CSSB 138(FIN) am was held over.]                                                                                               

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