Legislature(2007 - 2008)TERRY MILLER GYM
07/12/2008 09:00 AM Senate SENATE SPECIAL COMMITTEE ON ENERGY
| Audio | Topic |
|---|---|
| Start | |
| SB3001|| HB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| = | SB3001 | ||
SB3001-APPROVING AGIA LICENSE
HB3001-APPROVING AGIA LICENSE
CHAIR HUGGINS brought SB 3001 and HB 3001 before the committees
for a roundtable discussion.
9:06:18 AM
SENATOR FRENCH asked: All else being equal, given a pipeline
that offers the 10 years of statutory fiscal stability and one
that doesn't, to which would the companies nominate gas?
9:07:46 AM
DAVE VAN TUYL, Manager, Alaska Gas Commercialization, BP,
answered that as a shipper, BP would look at the fiscal regimes
offered. As for whether the Alaska Gasline Inducement Act
(AGIA) provides 10 years of statutory fiscal stability, BP
believes it offers none. He recalled that "contractual by
nature" in the original AGIA version last year was specifically
removed, so fiscal terms are subject to legislative review each
session, as for any other project. Also, the stability was
limited to the gas production tax.
MR. VAN TUYL said AGIA doesn't provide certainty on regulations
for the tax regime, how switching between royalty in kind (RIK)
and royalty in value (RIV) would be resolved, how valuation
would work, and so on; those have yet to be determined. He
emphasized how critical the stability and the fiscal regime are
for a shipper to consider.
MR. VAN TUYL gave his understanding that TransCanada's
application said it would rely on the state to reach a mutually
agreeable solution to Alaska's fiscal regime in order to make an
open season a success; he agreed this would increase the
likelihood of success. This is work to be done, he said, noting
BP doesn't see AGIA as providing any particular advantage.
9:10:24 AM
MARTY MASSEY, Manager, U.S. Joint Venture, ExxonMobil, responded
that ExxonMobil would look at projects offered at the time to
see which would be commercially viable. That would determine
whether to commit gas at an open season. He agreed with Mr. Van
Tuyl in terms of describing the need and so forth.
9:11:10 AM
JOHN ZAGER, General Manager, Chevron - Alaska Area, highlighted
the caveat of "all else being equal." He said some statement of
intent of fiscal stability would be slightly better than none.
Chevron would look at that to determine its level of confidence.
9:11:55 AM
WENDY KING, Vice President, External Affairs, ConocoPhillips,
responded to Senator French that if ConocoPhillips is asked to
sign up for a 20- or 25-year firm transportation (FT) commitment
at the open season, it will have a responsibility to predict the
revenue stream for its shareholders and to communicate what the
taxes will be. The 10-year statutory provision could be changed
every year.
SENATOR FRENCH said from the legislature's perspective, that
10 years is taken seriously, although he could see how the
companies could view it differently.
9:13:14 AM
SENATOR FRENCH referenced the commissioners' written findings
and asked whether the companies agree a tax change 10 or so
years after gas shipment begins would only affect their net
present value (NPV) a small amount because of how money works.
MR. VAN TUYL answered that he agrees with how the mathematics of
discounting works; any future change when calculating NPV will
have relatively less value when discounted than if it had
occurred earlier in time. While NPV is one measure of value
that is important to a shipper, he said it isn't the only one or
necessarily the paramount measure.
MR. VAN TUYL said one thing that distinguishes this project from
many others that BP considers is its ability to generate cash
for decades. This will require a binding commitment of billions
of dollars for 25-35 years. Facing a significant tax change
every legislative session will have a huge impact; BP won't know
how to run its economics.
MR. VAN TUYL interpreted testimony from the administration to
mean AGIA may prevent the state from even entertaining a broad-
based tax change that applies to every shipper and owner of the
resource; it would be subject to the review of TransCanada,
which might view it as assisting another project and therefore
subject to a claim for treble damages. He said that also causes
BP concern. He opined that it benefits all shippers if the
fiscal regime is defined in a manner that enables making FT
commitments. Roadblocks may prevent those in the first place.
MR. ZAGER replied to Senator French as well, saying when one
looks to years 15-25, discounting on an NPV basis will have the
impact that the math dictates. But Chevron also needs to ensure
cash flow to cover its obligations. Asking rhetorically whether
the state should offer tax certainty for years 10-25 because it
would have a low impact to the state's NPV, he also indicated
discounting isn't the only thing that has an effect.
9:18:08 AM
DAN DICKINSON, Consultant to the Legislative Budget & Audit
Committee (LB&A), responded to Mr. Zager. He gave his
understanding that in the current documents including the Black
& Veatch analysis, the mathematics of discounting is such that
delay helps the state, a billion dollars in additional NPV for
every year of delay.
MR. DICKINSON explained that the state is discounted at
5 percent, but the producers at 10 or 15 percent. Thus the
mathematics won't follow the outlines of what Mr. Zager
suggested; a dollar further out is discounted more for the
producers and less for the state. He cautioned that discounting
for one purpose cannot be applied to all.
9:19:30 AM
SCOTT SMITH, Senior Vice President, Black & Veatch Corporation,
Consultant to the Administration, explained that given the base-
case assumptions, the analysis showed some increase in the
state's NPV relative to two factors: 1) progressivity in the
ACES tax structure - from the Act known as Alaska's Clear and
Equitable Share - such that as one goes further out in time,
with higher prices, there is a higher state share; and 2) a
price assumption that had a growth factor slightly higher than
the discount rate. Although assumptions using other price
scenarios would give different results, those two factors create
a favorable impact under the base case.
MR. MASSEY emphasized that ExxonMobil doesn't want to delay the
project and wants to get the benefit from the gas as soon as
possible. He suggested this highlights that just looking at one
measure can give a wrong answer. He said what's really
important for this project, as mentioned by Mr. Van Tuyl and
Mr. Zager, is long-term cash flow and profitability.
SENATOR FRENCH suggested the state shouldn't offer tax certainty
beyond 10 years because the state isn't a commercial player and
has gone to the very limit of what it can do constitutionally.
Saying the state made a fair promise and has a good record of
keeping its promises, at least as good as the producers' record,
he requested that it be valued a little more highly.
9:21:52 AM
SENATOR FRENCH asked: Are the potential shippers seeking fiscal
stability just for the natural gas taxes or more like the
comprehensive fiscal stability seen previously in the proposed
Stranded Gas Development Act (SGDA) contract?
MR. ZAGER replied that he couldn't answer directly, since
Chevron hadn't done all the analysis, though certainly the gas
tax would be a first step to look at. Noting the ACES tax was a
big change since the SGDA was enacted, he expressed hope that
oil taxes won't go beyond that.
MR. MASSEY responded that the contract, which addressed both oil
and gas, obviously wasn't acceptable. Whether the next
situation has to include oil depends on the total deal.
ExxonMobil would look at a comprehensive solution, whether there
is comfort in being able to predict its share of the revenue as
well as the state's share, and would analyze whether that split
delivers a commercially viable project. He said ExxonMobil is
ready to work together to see how that can be put in place.
MR. VAN TUYL concurred, saying there are lots of ways to solve
the fiscal issue and he doesn't know the state's needs. All
parties need to come together to talk about it. Recalling that
the administration said it wouldn't be time to discuss fiscal
issues on gas until there is an updated cost estimate on the
pipeline, he said that was one of BP's motivations to form
Denali with ConocoPhillips and try to get more definition on the
project and costs. He added that BP would be happy to engage
with the state any time regarding gas and whatever else folks
want to discuss in trying to find a mutually agreeable solution.
9:25:19 AM
MS. KING responded that in November through February, when
ConocoPhillips offered a proposal to the state, ConocoPhillips
clarified that it was willing to make significant changes from
the previous deal, including the scope and depth of oil taxes;
she said ConocoPhillips was focusing on gas taxes. However, the
administration specifically requested that ConocoPhillips wait
until there is an updated cost estimate, at which time the
appropriate fiscal terms could be reassessed.
MS. KING said ConocoPhillips, as a shipper, is therefore
watching to see what Denali does and what an updated cost
estimate becomes. At that point, it'll be willing to discuss
with the administration what an appropriate tax structure would
be for the project. If asked to sign up for a 20- or 25-year FT
commitment, ConocoPhillips will look for some predictability in
the tax structure during that period.
MS. KING clarified that while ConocoPhillips recognizes there
might be a need for some change over time, the company is
seeking something robust and predictable, that if the cash flow
streams turn out to be a certain way, ConocoPhillips will know
what the State of Alaska's revenue stream and its own would be -
not necessarily a fixed dollar amount for the taxes.
9:27:41 AM
CHAIR HUGGINS recalled that during the AGIA debate it was
described as a process to bring competition, and that Mr. Palmer
had testified that TransCanada proposed some things it wouldn't
have proposed without competition. He asked: Is it true that
the fiscal regime won't be offered equally to both competitors,
Denali and TransCanada's proposed AGIA project?
9:28:54 AM
PATRICK GALVIN, Commissioner, Department of Revenue (DOR),
answered that as these two projects go forward, competition
remains. The question is what is received for what is given.
If fiscal certainty is given, will the state receive a pipeline
that meets its long-term needs? Under AGIA, that is spelled
out. If Denali approaches the state at some point, the state
will similarly have to ask whether, in return for what it gives,
it receives a pipeline that meets the state's long-term needs.
COMMISSIONER GALVIN noted if the state decides the Denali
project provides the better balance and outcome, AGIA doesn't
preclude choosing that, although there'd be a price to satisfy
the state's obligations to the licensee. However, the
administration believes AGIA provides significant long-term
value and thus it is to the state's advantage to emphasize
attracting gas to that AGIA project and to focus on the fiscal-
certainty "gives" for it.
9:31:12 AM
CHAIR HUGGINS asked: If the offers from both projects were
equal, would the state make an equal offer to both? And how do
the treble damages fit in?
COMMISSIONER GALVIN replied that he wasn't saying whether
there'd be equal offers to either; they are different projects.
Rather, the state's choice is what to give either, with the
decision based upon the package of "gets" and "gives." If it
chooses to give something to Denali, the state likely will be
liable for treble damages to TransCanada. That is the nature of
what was set up in order to have competition.
CHAIR HUGGINS conveyed his understanding that the federal
pipeline coordinator is available for any project coming out of
Alaska. He asked whether the Alaska pipeline coordinator is
available up front for any pipeline project in the competitive
process.
COMMISSIONER GALVIN answered that the AGIA pipeline coordinator
is only for the AGIA-licensed project. But this service is
available to the Denali project. Discussions are underway to
reach a reimbursable services agreement (RSA), as is done for
other large projects to establish a coordinator position, which
is paid for by the applicant.
CHAIR HUGGINS asked: Do you envision a coordinator for both
projects at some point?
COMMISSIONER GALVIN replied he assumes so, since he believes the
Denali project, if serious about moving forward, would do what
other large project applicants do - set up an RSA to establish
that coordinator position to expedite the permitting process.
In further response, he said it would happen as soon as Denali
sets up the RSA with the state.
9:34:00 AM
MR. DICKINSON offered his understanding that the tax regime in
place at the time of a successful open season is the one that
gets 10 years of stability. The question is whether the
legislature would look at other tax regimes and make changes
that apply to anybody. He asked whether others read it as he
does, that this wouldn't trigger damages or payments under that
clause.
COMMISSIONER GALVIN said the issue is whether there is a
preferential tax treatment provided with the purpose of
advancing a competing project. If a tax is passed - even if
it's stated as being equal to everyone, but everybody knows the
purpose is to advance a competing project - folks shouldn't fool
themselves into thinking that somehow will avoid the liability.
If it's passed for no advantage for a competing project,
however, it doesn't apply to the treble damages issue.
9:35:46 AM
MR. VAN TUYL clarified that fiscal stability from the state
won't be sought by Denali. Rather, it is the shippers that will
seek fiscal stability, as for any pipeline project, seeking to
understand the rules before entering into such a commitment. He
said that is the case whether BP is considering an open-season
offer by Denali or any other party.
COMMISSIONER GALVIN concurred with that distinction, adding that
he believes the context of the discussion is a matter of whether
the state will provide a fiscal-certainty package for Denali or
TransCanada that is directed to the shippers.
CHAIR HUGGINS noted some constituents see competition between
two projects and want one to be successful so Alaska has a
project. Mentioning equal opportunity, he expressed concern
that a regime set for TransCanada wouldn't be available for the
other project in order to have a successful pipeline, since it
would have the same shippers and gas.
COMMISSIONER GALVIN responded by referring to Mr. Zager's
rhetorical question about why the state should perhaps offer
fiscal certainty for year 10 and beyond. He said there is a
reason for the offers being made. The administration wants a
reaction, a decision by shippers to commit their gas to a
project. The administration doesn't want to offer something
that won't effect that. The state is giving something to get
something in return.
COMMISSIONER GALVIN said discussions about fiscal certainty will
be highly specific to get this result, focusing on a particular
project. In separate discussions, shippers will come forward
with their expectations of whether it will be in the direction
of the TransCanada project or the Denali project. Rather than
just laying out a level playing field, which he said isn't
realistic, the administration will choose which benefits it
wants to give to which project. That will be brought before the
legislature. It inherently will be a competition.
9:40:33 AM
TONY PALMER, Vice President, Alaska Business Development,
TransCanada, noted he'd committed not to comment on the fiscal
regime, but said when talking about a level playing field and
equal opportunity, one should consider both the obligations and
opportunities of the parties. If granted the license,
TransCanada will have certain obligations to the state. That
must be considered relative to any competitor that doesn't hold
those same obligations. As for a level playing field, he
suggested the need to consider both what the state is giving and
is obtaining.
MS. KING said this conversation was causing her concern. As a
shipper, she wants a gas pipeline to happen. If any project can
do so, she'd like to see it advanced, though not at any cost.
She voiced concern that awarding the license potentially limits
the ability of one project to compete against another. She said
she's hearing that the desire isn't for a competitive process,
but to have one project win.
MS. KING specified that the foremost concern is the treble
damages clause. She gave her understanding that the
administration interprets it to mean that if there is even a
general tax change in Alaska, the state could be liable for
treble damages. She surmised that will be a deterrent for the
state to be able to sit down and talk with another project.
MS. KING suggested the need to talk about how to enable this
project to proceed from a shipper perspective. In the end, she
said, the shippers carry the risk. She emphasized that this
pipeline depends on getting FT commitments from the companies
represented at this table. That is where the financial
obligation comes, she said. That is why Denali and TransCanada
will be seeking FT commitments.
9:43:24 AM
COMMISSIONER GALVIN reiterated the opportunity for shippers to
express their preferences for one pipeline or the other,
including what they'd like from the state and would offer in
return. He said the state has the option throughout to choose
whatever is to its advantage, and nothing precludes a separate
project from being the one that provides the best package.
COMMISSIONER GALVIN opined that the shippers' concern is the
combination of the current tax system and whether taxes will be
predictable in the long term. Whether there can be a change to
the tax system today isn't the issue and isn't how AGIA is set
up. Without an AGIA project moving forward, there'll be no
competition. The question is whether it is better for the state
to issue the license and have the TransCanada project progress,
recognizing that the competition also will move forward and that
the state's options remain.
MS. KING emphasized that nothing in federal or state law
prohibits another pipeline company including TransCanada from
starting a project and doing what Denali is doing. She
disagreed with any notion that there isn't an open and
competitive process already. But through AGIA, she said the
state is tying itself to one project. She expressed concern
that the treble damages clause could deter the state from being
able to provide support to any other project, not just Denali.
9:47:32 AM
MR. VAN TUYL concurred, saying the statement that there is no
competition without a licensed project troubles him, since
nothing prevents TransCanada or any pipeline company or set of
sponsors from advancing a project. That is the process in the
U.S. and Canada - under the Federal Energy Regulatory Commission
(FERC) and Canada's National Energy Board (NEB) - that fosters
open competition in the marketplace.
MR. VAN TUYL also voiced concern with Commissioner Galvin's
comment that having a level playing field isn't realistic but
that inherently there'll be competition. Citing reasons
discussed yesterday and over the past year, he specified that BP
has concerns about facing an open-season commitment to an AGIA
licensee under the terms talked about yesterday, as well as
TransCanada's historic liabilities on this project.
MR. VAN TUYL said tilting the playing field in that direction
creates impediments that may or may not be solvable. As a
shipper, BP wants to get its gas to market and thus wants a
successful open season. Creating barriers may prevent realizing
that goal, which he suggested isn't in BP's interests or even
the state's interests as a resource owner also wanting to get
the resource to market.
COMMISSIONER GALVIN highlighted the context, saying it's
interesting to him when the three major North Slope producers
talk about wanting a level playing field. On the issue of a gas
pipeline, there is no level playing field right now when the
producers clearly are able to decide how this project will
advance when they decide where to put their gas commitments.
COMMISSIONER GALVIN said the matching contribution in AGIA
partly recognized that to induce participation in this process,
the state needed to be a catalyst to create that competition.
Of course, those with the advantage don't want anyone else in
and want the playing field kept free for the existing structure
to play out. However, this package will come about through
discussion with the players and some form of agreement that will
be brought forward as a proposal. He surmised inevitably it
will be connected to one of the projects now moving forward.
COMMISSIONER GALVIN added that AGIA provides the opportunity for
either project to be the one that reaches that point. If the
state abandoned that opportunity, yes, someone else could spend
hundreds of millions of dollars to try to advance a project to
an open season, recognizing there'd still be a question of
necessary shipping commitments. Also, while the treble damages
will factor into the state's decision, that isn't a brick wall
preventing the state from considering other options.
9:53:13 AM
REPRESENTATIVE DOOGAN asked the producers: Having been against
the AGIA legislation and having chosen not to participate in the
AGIA competition, why would you expect that the state would now
offer you the same benefits that TransCanada would get because
it is offering what the state wants?
MS. KING replied that as an owner in Denali, ConocoPhillips
isn't asking for the $500 million, but hopes the state will
provide equal access to the statutory authority that was
provided, the AGIA coordinator. Citing AS 38.05, she expressed
hope that if something in there expedites permitting for one
project over another, the state will be willing to provide an
equivalent expedited permitting process for any project.
MS. KING added that Denali is saying it will go forward to an
open season, one thing the state wanted to see, and will hold
the nonbinding open seasons, provide the offtake points within
the state, and have distance-sensitive rates within the state;
she mentioned going forward within a three-year timeframe. But
Denali hasn't asked for the same things that TransCanada has
under AGIA, the $500 million or treble damages, and she said
there is associated risk.
REPRESENTATIVE DOOGAN replied he was happy to hear that because
he'd recalled hearing something different.
9:56:43 AM
REPRESENTATIVE DOOGAN told Mr. Van Tuyl and Ms. King, as
representatives of the companies that founded Denali, that he'd
understood that they didn't agree with the NPV analysis by the
Black & Veatch team. He asked whether they were willing to
share whatever financial calculations had convinced them it was
a good idea to go forward with a gas pipeline proposal.
MR. VAN TUYL responded that he didn't necessarily take umbrage
with the NPV analysis, but had referenced the mathematical
impact of discounting on the current valuation of future cash
flows and that any future event will have less impact the more
it is discounted. It isn't saying the analysis is wrong, but it
doesn't tell the whole story.
MR. VAN TUYL turned to the decision to go forward with Denali,
saying BP's main reason is wanting to ensure it can offer
prospective shippers the best possible terms to encourage those
commitments required at an open season. Of concern to BP is
that AGIA makes it difficult, if not impossible. One important
aspect, already commented on, is how AGIA shifts the balance.
MR. VAN TUYL explained that in the Alaska Natural Gas Pipeline
Act (ANGPA) of 2004, Congress recognized that an important
balance needed to be struck between 1) getting a gas pipeline
built and 2) stimulating exploration and development and having
future expansions available. Congress instructed FERC to pass
open-season rules to sort out that balance, resulting in FERC
Orders 2005 and 2005-A. However, AGIA shifts the balance,
dissuading initial shippers by saying their rates might rise as
the pipeline is expanded. That creates additional risk.
MR. VAN TUYL voiced concern that a shipper might decide to sit
out the initial open season and be the second shipper in, to get
preferred treatment. Without initial FT commitments, a pipeline
might never get built; this was an important consideration for
BP in looking at Denali. Also, BP wants to be able to offer
terms consistent with the balance Congress struck and FERC's
2000 order, which offers negotiated rates that are open and
therefore enables sitting down with customers to find something
that works. He said that's what Denali has committed to do.
MS. KING said as a Denali owner, ConocoPhillips doesn't have a
joint economic model yet. The organization is still being
staffed and existing economic models are individual, proprietary
models. She offered to sit down to discuss economic
methodologies and provide more detail on the decision to invest
$600 million to advance to an open season, saying ConocoPhillips
has been willing to do that with the state in the past and has
shared its views, but cannot share its views on prices.
REPRESENTATIVE DOOGAN replied that the state has had access to a
couple of feet of documents, and an offer to sit in his office
doesn't help. He again asked about providing everyone with the
financial basis of the decision.
MS. KING answered that the full economic models are proprietary.
10:02:57 AM
MR. PALMER remarked that it appears Denali proposes to meet some
conditions under AGIA, but besides access to the pipeline
coordinator and expedited permitting, also wants the same fiscal
terms, with the same degree of fiscal certainty for shippers on
the Denali project as may occur on the TransCanada project. He
noted when TransCanada decided to participate, it looked at the
entire statute, including its obligations and the benefits. He
surmised every party did so in deciding whether to participate.
MR. PALMER referred to FERC and rolled-in tolls. He recalled
that the potential shippers here today said over the last year
or so that they opposed the AGIA provision requiring rolled-in
tolls up to 115 percent. He said that will make it more
difficult for TransCanada to attract them as customers.
MR. PALMER added that from his understanding of the statute,
however, it is critical to the state, an integral component. If
TransCanada takes on that obligation, it expects some benefits
in return and has no reason to believe the state will provide
equivalent benefits to a third party that hasn't taken on the
same obligations.
10:05:40 AM
MR. DICKINSON asked whether the producers concur with what
Mr. Massey said a few days ago during ExxonMobil's presentation,
that one way to mitigate risk is to have producer ownership
equal the FT commitment.
MR. ZAGER affirmed that on behalf of Chevron.
MS. KING replied that ConocoPhillips normally seeks to align its
ownership interest in a pipeline with its shipping commitments
for many economic reasons already addressed, primarily
yesterday. However, it is possible that value could be added by
being slightly off in that alignment or by looking at a
different structure in that context. So that isn't ruled out.
MS. KING also clarified that the withdrawn-partner liability
that exists with TransCanada remains a concern. She indicated
it has been put on the record a number of times that
ConocoPhillips provided communications to the state, in December
through February, about these concerns, which relate to the
company's ability to partner on this particular project.
10:08:03 AM
MR. VAN TUYL said generally BP also seeks as a shipper to match
its ownership with its FT commitments as a way to hedge the
risk. However, there are a number of ways to commercially
structure FT commitments and arrangements with third parties.
As said before and since forming Denali, the company would
welcome the participation of third parties, potentially
including pipeline companies, which usually don't own gas.
MR. VAN TUYL suggested a wellhead sale could be arranged, for
instance, which it would be willing to do under commercially
reasonable terms. Or an arrangement could be made with a third
party that doesn't currently own gas in Alaska. The state is a
royalty owner. If the state didn't choose to be a direct equity
participant in the project, that's another avenue. As an
example, the Alliance Pipeline was originally owned by some
producers that came together; over time, their interests were
diluted and deals were packaged to bring in others, and today
there is no producer interest.
MR. VAN TUYL said the key difference between the projects is
that Denali isn't seeking a contractual commitment or license
from the state. He reiterated that it isn't Denali that is
seeking the fiscal terms; it will be the shippers, whether they
ship on the Denali project or any other.
10:10:52 AM
COMMISSIONER GALVIN interpreted Van Tuyl's comment about how
AGIA shifts the balance to mean FERC might end up doing
something different than it would otherwise. He suggested it
means if the state, through AGIA, is getting an applicant to
present an application to FERC that meets the state's interests,
the result may be closer to the state's interests.
COMMISSIONER GALVIN offered a clarification to yesterday's
discussion. He recalled that Ms. King said if the shippers take
up the state's upstream AGIA offer and make a shipping
commitment in the initial open season, they'll be precluded from
contesting FERC provisions including rolled-in rates. He said
that was modified during the legislative process; now the
prohibition only kicks in if FERC has dropped the presumption of
rolled-in rates. So the shippers can oppose rolled-in rates at
FERC if there is a presumption of rolled-in rates.
The committees took an at-ease from 10:13:27 AM to 10:34:18 AM.
CHAIR HUGGINS noted on members' desks was page 6, "Key Take-
Aways," from ExxonMobil's previous presentation.
REPRESENTATIVE GATTO began by pointing out that no one - neither
the producers nor TransCanada - asked the state for the
$500 million; it was an offer in return for specific things. As
for treble damages, he highlighted the upper limit. He also
said no one can guarantee a revenue stream over 20-25 years.
REPRESENTATIVE GATTO referred to tornado diagrams shown
previously. Noting that the price of gas was the most important
part of the project costs and revenue and that the bar depicting
the tax portion was relatively narrow, he asked the producers:
Why concentrate on fiscal certainty and ignore the price?
10:37:56 AM
MR. MASSEY agreed that price risk is a big variable. He said it
is important for ExxonMobil to work on what it can control.
With respect to fiscal predictability, it is important to
understand the range of outcomes to better predict its revenue
share and the state's share over the life of this project.
Until that point, ExxonMobil cannot analyze the returns and
economics. This will be evaluated under a range of prices to
determine whether it's viable to go forward.
MR. ZAGER said tornado charts are interesting, with lots of
assumptions including the range around variables. Price is
certainly the top one; the bars for taxes and so forth are a
function of the assumptions. As to why Chevron would focus on
that, some things are controllable and some aren't. In a big
project like this, while that bar may be narrow, the absolute
dollars are large. Chevron must try to control what it can.
For gas prices, however, it can only analyze scenarios for
expected results.
MS. KING concurred with the other producers, saying certainly
natural gas price is the big risk, something each company will
look at independently. One critical uncertainty is the cost
estimate, and Denali will be getting an updated cost estimate
and studying the fields with respect to reserves and
deliverability for this long-term shipping commitment. The tax
structure, a continuing variable, and the associated fiscal
predictability will continue to be looked at as a risk.
MR. VAN TUYL agreed, noting price predictions five or ten years
ago all turned out wrong. The company wants to manage what it
can control such as finance risk and project costs; those go
into the toll, and the desire is to have those be low to
maximize upstream returns. Some things can be done to manage
volume and deliverability risks as well. While the company
can't do anything directly about fiscal risk, the state can. If
this important risk to future cash flows isn't defined, he said
it's yet another variable to consider.
10:43:27 AM
COMMISSIONER GALVIN offered the state's view on managing its
risks. He said the first area is associated with cash flow.
The state has changed the tax system over the past few years so
that now it accepts more of the same risks the companies
described, including price and cost risk associated with
operations of these companies.
COMMISSIONER GALVIN said the second area is the risk of having
to provide significant financial concessions. He pointed out
that the full gamut of what will be on the table wasn't
mentioned today. He recalled that the proposed contract under
the SGDA had included gas taxes; oil taxes; taking the state's
judiciary off the table as a risk factor that the producers no
longer wanted to deal with; and constraining the state's
administration of the leases because the companies wanted to
manage that risk factor.
COMMISSIONER GALVIN said the state continues to face the risk
that those will be put back on the table as items it must
provide for a project to proceed. One way to manage that risk
is to avoid having only one option. Through the AGIA license
and bringing TransCanada into the equation, the state manages
the risk relating to what the concessions may be, which he
suggested is important in managing the state's resources.
REPRESENTATIVE GATTO said he'd wait to follow up because he is
looking for more information. He emphasized that every business
has risks, especially the oil business. At least with AGIA the
risks are somewhat mitigated, since it clarifies what is given
and received in return.
REPRESENTATIVE GATTO indicated U.S. Senator Ted Stevens had said
the federal government is concerned and expects this gas to be
available somewhere in the country; there is a risk that the
federal government will take this project over. Representative
Gatto voiced the need for the producers to have conversations
with the licensee and the administration.
10:49:14 AM
REPRESENTATIVE GARA addressed Mr. Massey, saying he wants to get
a sense of how rocky the road may be as this project proceeds.
While the other producers say they'd like to own part of the
pipeline, ExxonMobil seems to take it a step further. He
referred to page 6, "Key Take-Aways," from ExxonMobil's
presentation a few days ago, which had these points:
Successful gas pipeline project requires:
- 4.5 BCFD initial gas sales with low cost expansions
- Point Thomson gas available
- Ownership equal to FT
- Fiscal and tariff predictability
Agreement on the above will maximize value to State
EM committed to the development of Alaska's gas
resources
EM ready to work with the State, TransCanada,
ConocoPhillips, BP
REPRESENTATIVE GARA questioned whether the items in the first
paragraph are actual requirements. Noting each company has a
different corporate culture, he said ExxonMobil's seems to be
this: If it doesn't get its way, it digs in its heels.
REPRESENTATIVE GARA cited 20 years for the Exxon Valdez
litigation and delays over a decade for Canada's Mackenzie
Valley pipeline, where ExxonMobil is a majority owner and where
he's heard ExxonMobil has refused to cut a favorable or fair
deal with the Native organizations that own land there, so it
has gone from a $2 billion project to about $10 billion now.
REPRESENTATIVE GARA related his understanding that ExxonMobil is
the only producer that hasn't tried to get in on the pipeline
deal either under AGIA or Denali, and yet ExxonMobil is saying
if it has 30 percent of the gas in the pipe, it wants 30 percent
ownership and that is a requirement. If every company got an
amount equal to its FT commitment, TransCanada could own zero
and there could be no independent companies. He asked
Mr. Massey whether that statement on page 6 really is a
negotiating position or is actually a nonnegotiable requirement.
10:52:23 AM
MR. MASSEY responded that every word was carefully chosen. He
said ExxonMobil's responsibility here is to describe what it
believes is necessary for a commercially viable project to go
forward. ExxonMobil would make an FT commitment equal to its
gas throughput and believes ownership equal to FT is necessary
for a project to be commercially viable for the company. As to
whether there could be a situation without ownership equal to FT
commitments, he said there could be, but ExxonMobil's analysis
is that it would be highly difficult for that to occur.
MR. MASSEY explained that it might occur, for instance, if
another company offered to come up and buy ExxonMobil's gas at
the North Slope and transport it. The mostly likely outcome in
that case, however, is that the other company would want a
significant discount of the wellhead value of the gas, to where
it would be more valuable for ExxonMobil to make the FT
commitment and transport it itself. So it could happen if a
company were willing to take that risk, but the practicality is
that nobody will be willing to make that sort of commitment.
10:53:58 AM
REPRESENTATIVE GARA responded that if every company took the
same strong stance, no independent company could own a pipeline.
Once all the producers got ownership equal to their FT
commitments, that would be 100 percent.
MR. MASSEY recalled that issue arose yesterday. He agreed if
all the producers required ownership equal to their FT
commitments, there wouldn't be much of an ownership percentage
for a third-party pipeline. Noting some situation might dictate
a different result, he said if the state elected to take some of
its royalty gas and sold it to a third party as a pipeline
owner, for instance, that might be a percentage that a third-
party pipeline owner could have.
10:55:07 AM
REPRESENTATIVE GARA gave his understanding that ExxonMobil owns
9.5 percent of the Maritimes & Northeast Pipeline project, but
produces 40 percent of the gas. Asking why ExxonMobil hadn't
insisted on an equal ratio there, he again surmised ExxonMobil
is taking a negotiating position on the AGIA project.
MR. MASSEY answered that he wasn't too familiar with that other
project, but it is supported by the FT commitments made by
ExxonMobil. Today that pipeline isn't full. It's an excellent
example of why FT commitments need to equal throughput.
MR. MASSEY, in further response, said ExxonMobil is very willing
to sell its gas to a pipeline on commercially reasonable terms
and conditions, which means getting a fair price and
understanding the sales terms including the tariff and fiscal
regime under which the gas is being sold.
REPRESENTATIVE GARA asked how likely it is that ExxonMobil will
sell its gas if the deal doesn't include an ownership percentage
of the pipeline equal to the FT commitment.
MR. MASSEY replied it's unlikely. The company prefers to put
its own gas in the pipeline and own it equal to the FT
commitment. However, it doesn't mean it won't happen, and
ExxonMobil would entertain offers to buy gas at the wellhead.
10:57:47 AM
REPRESENTATIVE GARA noted the state is trying to get ExxonMobil
to produce gas at Point Thomson and there are various opinions
about who is at fault for the current logjam. He asked: Is
ExxonMobil's position that it won't likely sell gas from Point
Thomson unless it gets an ownership share of the pipeline equal
to its Point Thomson production?
MR. MASSEY replied it is the same situation at Point Thomson or
Prudhoe Bay.
REPRESENTATIVE GARA said if ExxonMobil is requiring the
aforementioned as a negotiating condition, and since no one has
negotiated this with ExxonMobil, it seems an agreement to sell
its gas from Point Thomson isn't close.
MR. MASSEY reiterated that if someone is willing to buy its gas
from Point Thomson, ExxonMobil will entertain those offers.
[Technical difficulties caused the loss of about three minutes
of audio starting at 10:59:11 a.m. The committee secretary
reconstructed the following using audio from other sources.]
REPRESENTATIVE GARA noted passage of AGIA last year provided
conditions that must be met for someone to receive an AGIA
license. He said BP had a level playing field as of last
November and could have applied, but chose not to, and now wants
the state to equally favor the Denali project. He gave his view
that this won't happen and asked why Denali should get treatment
equal to the project that chose to comply.
MR. VAN TUYL replied that interstate gas transmission is
regulated by FERC, and BP believes some terms under AGIA are
inconsistent with FERC policy. Thus BP had provided a list of
concerns and said it would like to be able to bid under AGIA,
but some terms prevented doing that. He indicated there'd been
previous testimony on these concerns including a complete markup
of the bill. [End of reconstructed section]
11:02:43 AM
MR. VAN TUYL voiced concern that AGIA would require the company
to offer terms to its shippers that it didn't feel were
commercially reasonable and therefore would put advancing a
pipeline project at risk; that wouldn't be in its commercial
interests as a pipeline company or a shipper wanting to get its
gas to market.
MR. VAN TUYL mentioned a level playing field and asked
hypothetically: If the Denali project continues as planned and
a completed state right-of-way (ROW) application is submitted
and afterwards TransCanada applies for the same ROW, under AGIA
could the state approve Denali's ROW before TransCanada's?
COMMISSIONER GALVIN affirmed that if Denali had the materials
and answers to the questions that generally arise in a ROW
adjudication process ahead of TransCanada, then the state could
advance the Denali ROW ahead of TransCanada's.
REPRESENTATIVE GARA surmised many legislators would favor the
project that follows AGIA. He relayed his opinion that someone
who doesn't comply with that law doesn't get to demand a level
playing field.
MS. KING responded that the law doesn't require bidding under
AGIA to advance a gas pipeline. This is a federally regulated
pipeline. While state law says someone must apply under AGIA to
get AGIA's inducements, she recalled discussions that nothing in
this statute precludes advancing a pipeline through another
mechanism that doesn't require a $500 million incentive.
REPRESENTATIVE GARA agreed that the law allows going forward,
but surmised the state won't list conditions to protect the
public and then equally favor a project that doesn't follow
those. He suggested that if the Denali project wants the state
to champion it, Denali should have applied under AGIA.
MS. KING maintained that everyone wants to see a pipeline
happen.
11:06:34 AM
REPRESENTATIVE OLSON asked Mr. Palmer to comment on an Edmonton
Journal article six days ago that said if the Alaskan pipeline
comes on line first, it will kill or delay Canada's Mackenzie
Valley project because there isn't enough labor, steel, or
equipment to build both at the same time.
MR. PALMER agreed that it would be extremely challenging to
build both on a simultaneous time schedule.
REPRESENTATIVE OLSON asked Mr. Palmer about a statement by Joe
Handley of the Northwest Territories; as he recalled,
Mr. Handley blamed the Mackenzie project's delays on the
Canadian government's lack of forthrightness on royalties,
taxes, and infrastructure.
MR. PALMER suggested also asking ExxonMobil and ConocoPhillips,
much larger participants in the Mackenzie Valley project. He
opined that a number of factors have delayed it. A significant
one is the NEB regulatory process established over the last
several years that has a joint review panel and involves several
parties in the Northwest Territories. Those parties, the
Mackenzie Valley sponsors, applied in 2004 and hope for a
decision from NEB and the joint review panel in 2009. This is
for an unopposed project, he noted.
MR. PALMER gave his view that other factors include lack of a
single-window regulatory agency to advance the project; the
land-claims structure and that the project crosses aboriginal-
owned land; and that the Mackenzie Valley project sponsors have
asked the Canadian government to provide certain assistance that
hasn't been forthcoming to date. He highlighted how small
TransCanada's participation is, perhaps 3-5 percent.
CHAIR HUGGINS asked: Should Alaskans be concerned with the
escalating cost assessments of the Mackenzie project? And what
is the length of that pipeline?
MR. PALMER answered that ExxonMobil, Shell, and ConocoPhillips
are the bigger partners and can better speak to escalating costs
over time. It is about 1,220 kilometers long, 800 or so miles.
To his understanding, the application four years ago had an
original expected volume just over 0.8 billion cubic feet a day
(Bcf/d). Proven reserves are about 6-9 trillion cubic feet
(Tcf), approximately 50 percent of the contractual commitments.
COMMISSIONER GALVIN called on Bill Sparger, who as a member of
the administration's technical team had looked somewhat at
Mackenzie Valley project costs.
11:12:07 AM
BILL SPARGER, Energy Project Consultants, LLC, Consultant to the
Administration, said this is a high-level look from information
from the Internet and other sources. He opined that part of the
problem with the Mackenzie Valley article is that the estimates
are apples and oranges.
MR. SPARGER gave examples. He indicated the $16.2 billion
includes facilities not in the $7 billion number. The
$4 billion may be preliminary, whereas the $7 billion was filed.
Also, the $16.2 billion includes $5 billion for production-
related facilities in the field and $3.5 billion for gathering
and natural gas liquids (NGL) pipelines. The gas pipeline
itself had that $16.2 billion as being about $7.8 billion.
MR. SPARGER explained that while all numbers have escalated over
time, the escalation isn't the same for each component. The
pipeline-component escalation is in round numbers, 30 percent in
that timeframe, mostly attributable to massive increases in
labor and materials. While the aforementioned article isn't
inaccurate, he said it fails to specify what is included in each
number, and it isn't an apples-to-apples comparison.
CHAIR HUGGINS asked that Mr. Sparger come back with a response
to this question: If the $16.2 billion and other elements
weren't correctly accounted for, what is the right answer?
MR. SPARGER agreed to that.
11:14:25 AM
REPRESENTATIVE ROSES returned to happens if both Denali and
TransCanada apply for permits, noting Commissioner Galvin had
said the state could issue a permit, but not whether it would.
COMMISSIONER GALVIN responded that the state would issue the
permits when the application information is complete. The state
wouldn't hold up either project for any purpose, and the
projects would be advanced as expeditiously as possible.
REPRESENTATIVE ROSES surmised the commissioner didn't envision
that it would trigger treble damages.
COMMISSIONER GALVIN replied no; it's clear in the statute.
REPRESENTATIVE ROSES reported there were processes by which the
House Resources Standing Committee had moved forward with
amendments to AGIA that the administration agreed to at the
time; however, when it came time to vote, the administration
spoke against those. He recalled that when he'd asked what had
changed overnight, the response was that there'd been
conversations with some of the pipeline people about impacts.
REPRESENTATIVE ROSES asked the producers: When we were
considering AGIA, did you ever have discussions with the
administration about whether you did or didn't like the
amendments being offered?
MS. KING indicated she didn't remember discussions with
Commissioners Galvin and Irwin when those were being addressed
in the House Resources Standing Committee.
CHAIR HUGGINS suggested asking Commissioner Galvin, who'd
synchronized those efforts.
COMMISSIONER GALVIN responded that regarding particular
amendments, it would be difficult to recall who talked to whom
at that moment. A series of conversations occurred with
ConocoPhillips and BP; this was through different parties
including Deputy Commissioner Marcia Davis, not necessarily just
him or Commissioner Irwin. Discussed throughout the process
were the implications of both the bill and what was proposed.
As Mr. Van Tuyl indicated, a number of proposals came from the
producers, both publicly and internally.
REPRESENTATIVE ROSES opined that many legislators believed
there'd be several bidders and so voted "yes" on AGIA. However,
those companies either didn't bid or were eliminated because
they didn't meet the so-called must haves. So one company
remains. If a "no" vote on this license makes the must haves
disappear, he surmised those companies might wish to come back
and partner with Denali, for instance.
REPRESENTATIVE ROSES also noted that TransCanada said it would
have bid differently if it had known it would be the only
bidder. He asked whether it's fair to say TransCanada,
Enbridge, BG Gas, or MidAmerican might show up again.
11:20:22 AM
COMMISSIONER GALVIN suggested there is much more significant
competition by advancing the license than by not. While
theoretically anyone could propose to advance a project, from a
practical standpoint there'll be no competition if this license
is voted down.
COMMISSIONER GALVIN asked: Who would jump in and put up
hundreds of millions of dollars to get to a point of securing
the expectation of going forward? He said it isn't likely,
although nothing about approving the license prevents those
other companies from coming in either.
REPRESENTATIVE ROSES replied that if those other companies came
in, some legislators would see it as an attempt to advance a
project outside AGIA, as Denali is doing. One shouldn't be
treated differently than the other.
REPRESENTATIVE ROSES said, however, it goes to the likelihood of
partnering with TransCanada and having to live with the so-
called must haves that those other companies didn't like or else
partnering with Denali. He opined that there are plenty of
opportunities for competition, whether the vote is yes or no.
COMMISSIONER GALVIN responded that competition between viable
projects provides options to the state. If there's only one
choice, that won't change if these companies join with Denali.
11:24:50 AM
MR. PALMER agreed it goes to the likelihood of competition. If
TransCanada is granted a license, there'll be competition
between Denali and TransCanada. Highlighting the project's
history and TransCanada's 30 years' involvement, he said while
others talked about a project, under SGDA the parties that put
forward a proposal and actually followed through were the three
producers and TransCanada; others participated short term or not
at all. He opined that without an AGIA license being granted,
the likelihood of competition would be much less.
CHAIR HUGGINS remarked that he assumes TransCanada's board
wasn't happy to hear about the Denali competition.
MR. PALMER responded that TransCanada isn't surprised there's
competition and has faced similar competition on just about
every project it has pursued around the world.
11:27:09 AM
REPRESENTATIVE LeDOUX asked Commissioner Galvin: If the
administration was reasonably certain that the Denali project
would proceed, would you still encourage the legislature to
approve a license to TransCanada?
COMMISSIONER GALVIN replied that if Denali announced today that
BP and ConocoPhillips were putting in writing that they were
committing their gas to the project and ExxonMobil had joined
on, so that the project was a definite go and there was a list
of what Denali would provide to the state, then competition
wouldn't be needed. If the state didn't need to give anything
and Denali guaranteed a pipeline, there'd be nothing left to
talk about, including this license.
COMMISSIONER GALVIN said, however, that the state doesn't know
what will be requested or given in return, including open-access
provisions or the lowest possible tariff. Until that point, the
state is in the position of advancing this license.
REPRESENTATIVE LeDOUX asked: What if the administration knew
Denali would proceed to an open season?
COMMISSIONER GALVIN answered that it doesn't get the state
anywhere. While Denali says it will go to an open season, it is
the shippers that decide whether to commit their gas; the
question is the cost to the state, the terms under which the
shippers will agree to do so. Until that point, the state must
advance the TransCanada project to provide options and thus have
some control over the value exchange.
11:30:44 AM
REPRESENTATIVE LeDOUX asked whether her understanding from
yesterday was correct, that under TransCanada's proposal, if it
decides against constructing the pipeline and the producers had
committed gas to an open season, the producers would still have
to pay TransCanada something for its costs.
MR. PALMER clarified that between the time when a precedent
agreement is executed and the point of sanctioning the project
to go forward, the customer is at risk of having to repay
TransCanada for TransCanada's share of the development costs to
date, but not the state's share of those costs.
REPRESENTATIVE LeDOUX asked whether this is a common scenario.
MR. PALMER answered that how this risk is shared is often
negotiated between the customers and the pipeline company.
MR. VAN TUYL gave his understanding from talking with BP folks
internally that this isn't something BP has done. It is another
risk to consider.
MS. KING concurred, adding that when this was reviewed
internally, it raised flags as being atypical from a shipper
perspective.
MR. ZAGER said he had nothing to add.
MR. MASSEY noted his company's review was similar.
11:33:36 AM
COMMISSIONER GALVIN pointed out that negotiations between the
shippers and the pipeline company will determine whether this is
actually expected of the shippers. What's in the application is
TransCanada's opening offer. No individual aspect of that set
of shipping conditions should be seen as indicating where it
will end up. He recalled that Mr. Palmer said it is
unprecedented in his experience to have to put these items out
publicly far ahead of actual discussions with shippers.
The meeting was recessed from 11:35:04 AM to 1:20:07 PM.
CHAIR HUGGINS called the meeting back to order.
REPRESENTATIVE KERTTULA highlighted the pipeline structure and
longstanding disagreements relating to the tax tariff. She
asked Mr. Porter and Commissioner Galvin: Don't we run the same
risks with producers controlling the fields, possibly the
pipeline, and the markets? Won't there be some of the same
structural problems include access, tariff costs, and, perhaps
most importantly, the flow of information? She compared this to
a classic antitrust problem.
COMMISSIONER GALVIN referenced the findings and agreed those
concerns influenced the decision. He deferred to Mr. Porter.
1:22:33 PM
STEVEN B. PORTER, Consultant to the Legislative Budget and Audit
Committee, indicated Commissioner Galvin had partly addressed
one issue before the resources committee, the FERC decision-
making process for TAPS versus a gas pipeline. That aside,
Mr. Porter opined that the two best ways to address such a
concern are: 1) ensure access to as much of the accounting data
as possible and 2) own a piece of the pipeline, which allows
being at the table and understanding the details.
MR. VAN TUYL responded that FERC regulation for gas is far more
intensive than for oil. Specific affiliate rules impose
substantial penalties if information flow is inappropriate or
affiliates are found to be favored.
MR. VAN TUYL turned to the question of an overlying antitrust
concern about producer ownership. He said in the state's
findings, one of the state's consultants referenced an attorney
general's opinion, a decision made in the 1970s, when access
regulations for gas were different and there weren't affiliate
rules and so on. In the 1980s, that limitation was overruled by
Congress.
MR. VAN TUYL said now there is an entirely different commercial
structure and environment. Passed in 2004, ANGPA specifically
provides for producer-owned pipelines. There also are State of
Alaska opinions issued regarding producer ownership in this gas
pipeline project. He noted in 2005 Wilson Condon said, based on
what was known then, there was no reasonable likelihood that
FERC would deny certification of a producer-owned pipeline. On
competition grounds, Mr. Van Tuyl said FERC has ample remedies.
MR. VAN TUYL also noted the state's legal counsel said in 2006
that producer ownership of this project doesn't raise
significant competitive concerns; that's because of FERC rules
for affiliates and so forth. Reporting that Denali recently
applied for a National Environmental Policy Act of 1969 (NEPA)
prefiling with FERC, which FERC approved, Mr. Van Tuyl opined
that this indicates FERC has accepted the prospect of a
producer-owned pipeline.
1:26:57 PM
REPRESENTATIVE KERTTULA asked that tomorrow Mr. Shepler or the
commissioner respond. Recalling that the state hadn't done too
well going before FERC for TAPS, a common carrier for oil, she
said she and Representative Holmes might be the only current
legislators who, as attorneys, have practiced before FERC. She
said there have been a lot of concerns about trusting a federal
agency, and she has even more heightened concerns about gas.
REPRESENTATIVE KERTTULA also recalled an allusion yesterday that
somehow the state's requirement of 115 percent might contradict
federal law. She said she doesn't know any reason it would. As
in many cases relating to TAPS, she'd think Alaska would be much
better off going in to FERC with an agreement, rather than
nothing. She asked whether Commissioner Galvin had anything
specific on this issue.
1:28:08 PM
COMMISSIONER GALVIN agreed that oil and gas pipelines are
regulated differently by FERC and that a message was received
saying the state should trust federal regulators to protect its
interests. Reminding members that AGIA's "must haves" are to
protect Alaska's interests and that this relates to discussion
yesterday with Representative Hawker, he said the issue with
AGIA is to protect the state by getting the pipeline company to
act independently, even if it's controlled by the producers.
COMMISSIONER GALVIN asserted that for the state, it's critical
that the interests of the pipeline and the shippers be
independent of each other. Otherwise, it will be a different
outcome regardless of who regulates it. From the state's
perspective, trusting the federal regulators isn't the way to
go. Taking responsibility for Alaska's needs is the state's
responsibility and AGIA's intent. As to the 115 percent, he
deferred to Mr. Van Tuyl, who'd made the allusion yesterday.
1:30:15 PM
MR. PORTER responded about the 115 percent, saying he doesn't
believe the contractual obligation to have somebody come forward
to submit something to the federal government violates FERC
regulations. He pointed out that while the state wants the
pipeline company to act independently, it's also trying to get
the pipeline company to support things the state has determined
it values; thus the state is providing the $500 million.
MR. PORTER, with respect to trusting the federal government,
opined that the vast majority of times the state has gone to
FERC, FERC decided in the state's favor and has been the state's
ally over the past few years, including the last decision. He
expressed a fair degree of comfort in this respect.
REPRESENTATIVE KERTTULA replied that she had other cases and it
wasn't always. She explained that she believes, as an Alaskan,
that if the state can make a deal in its best interests, it is
much better to go to the federal regulator with that. It isn't
an aspersion on the federal agency, she clarified. Her concern
is wanting to be in control, rather than turning it completely
over to the federal regulator; this relates to almost every
interaction involving the federal government.
1:32:15 PM
MR. DICKINSON noted the legislature took a big step last year in
protecting some of the state's interests. The state gets four
major cash flows from oil and gas development. For two of the
smaller ones, property tax and income tax, the higher the
tariff, the better the state does. The two larger pieces are
royalties and, at current prices, production taxes, which are
several times the royalties. The legislature has put in place a
remedy for the production taxes.
MR. DICKINSON said under AS 43.55.150, if a producer who pays
the production tax has any interest in the pipeline carrier, the
downstream transportation cost isn't what is paid. Instead, it
is the lower of the actual cost or the reasonable cost. By
regulation, DOR can use any reasonable method to define the
reasonable cost.
MR. DICKINSON gave an example. He said if the state had a major
FERC rate case for any pipeline involving an affiliation between
carriers and shippers, and if the state had said aspects were
reasonable and fair but had lost the case, it would almost be
obligated to come back and put that in regulation for tax
purposes. He noted he hadn't done any work before FERC.
1:34:08 PM
MR. PALMER told members TransCanada is an independent pipeline
company. He believes its interests are inherently aligned with
the state, with the goal of expanding and having additional
customers. However, AGIA specifically requires TransCanada to
sponsor rolled-in tolls before FERC up to 115 percent.
MR. PALMER explained that this is the norm for all of
TransCanada's Canadian system, but without a limit of
115 percent. This is a policy decision the Canadian government
took decades ago and, to his understanding, the State of Alaska
took a year ago. Granting an AGIA license ensures that a
pipeline company at least sponsors that in front of FERC.
MR. PALMER also noted that, because of AGIA, TransCanada is
committing to a certain debt/equity ratio. He indicated that
without AGIA, a number of parties had described that they would
sponsor proposals with a much thicker equity ratio that might be
granted by FERC.
1:36:04 PM
MR. PORTER said there has been substantial energy wrapped around
the rolled-in rates and 115 percent, much more than the
statistical chance of it ever occurring. Rolled-in rates will
happen to approximately 6.5 Bcf/d, which includes a 2 Bcf/d
expansion that is huge
MR. PORTER explained that to commit their gas, companies have to
find enough to even meet their contractual obligations.
Furthermore, the profile for Prudhoe Bay, even if Point Thomson
is included, will tail off in 12-14 years. So the 115 percent
shouldn't be an issue and won't likely ever occur, even though
TransCanada is willing to do it.
MR. PALMER asked whether Mr. Porter had examined every possible
engineering increment between 4.5 up and 7.2 Bcf/d, computing
the hydraulics and understanding the potential timing. He said
TransCanada hadn't done so, although it looked at certain
scenarios.
MR. PALMER said for the scenarios it provided, with an increase
from 4.5 to 5.9 Bcf/d, incremental tolls are actually lower.
However, if individual increments are looked at, moving up by
about 250 million a day, he surmised there could be a
circumstance wherein incremental tolls are higher than rolled-in
tolls before getting to 7.2 Bcf/d. With the 115 percent control
issue, he opined that the state is in very good shape.
MR. PORTER replied that he was using TransCanada's data provided
to LB&A, which showed that rolled-in rates up through 6.5 Bcf/d
basically didn't exceed the original toll.
MR. PALMER pointed out that TransCanada gave two specific
volumes going from 4.5 to 6.5 Bcf/d, not every particular
increment.
1:40:26 PM
MR. DICKINSON took issue with what he interpreted from
Mr. Palmer's comments, that the interests of an independent
pipeline and the state are inherently aligned. He opined that
Mr. Palmer had given a very good analysis of how the state
decided to encourage and protect exploration interests and,
through AGIA, created ways to align with TransCanada in that
respect. But he said the reason that's important is this: The
inherent alignment is between the producers and the state.
MR. DICKINSON referred to discussion by Representative Gatto
this morning and explained that the "price" part of the bar
determines the amount of upstream rents. Those get divided
among the state and the companies, the lessees. How much exists
to be divided is determined by market price and transportation
costs. In that sense, the producers and the state are aligned
in trying to keep transportation costs low.
MR. DICKINSON mentioned the debt/equity ratio. He said he isn't
questioning what TransCanada has done, but directionally that is
moving money from the pockets of the producers/state to a third-
party pipeline. There can be more or less alignment, depending
on how these are structured.
MR. PALMER clarified that TransCanada is aligned with the state
in wanting expansions and fostering upstream competition so
there are many customers over time, not just the initial
customers. He said there is no question that producers as
shippers want the pipeline company to have a low rate of return
and attractive commercial terms, whereas the pipeline company
often wants a higher rate of return. However, the producers as
pipeline owners or corporate entities may have different
interests than shippers.
MR. PALMER noted he has expressed over the past 40 days that it
is also TransCanada's interest to have low tolls. He said
TransCanada has promised to provide attractive commercial terms
under the AGIA application. Highlighting TransCanada's record
of successfully expanding its pipeline systems over time, he
noted it wasn't accomplished through overcharging its customers.
MR. PALMER agreed that on issues like rate of return there is a
difference of opinion between shippers and TransCanada. Any
royalty collector also has that dichotomy in relation to a
pipeline company. But he suggested TransCanada's 50-year
history shows success in balancing those interests, sometimes
with the assistance of a regulator and sometimes through
negotiated rates. He said this success hasn't been through
misalignment with customers or governments.
1:44:45 PM
MR. VAN TUYL said as a shipper, with respect to whether a
rolled-in rate results in a subsidy, BP has two issues. The
provision says initial shippers are charged one rate, while
those wanting to expand or come later get charged a different
rate, which will be lower because subsidization can occur. It
diminishes the likelihood of a successful initial open season,
since shippers will want to come second, not first. As a
shipper, BP wants to get its gas to market and wants that open
season to be successful.
MR. VAN TUYL reported another concern, how AGIA works in
combination with TransCanada's application. Article 130,
paragraph 7, talks about the ratemaking that AGIA requires, and
TransCanada's application says the shippers cannot oppose those
rates before FERC. He expressed concern that this prevents the
very negotiation needed to come up with an agreement.
MR. VAN TUYL turned to the pipeline owner perspective.
Referring to Mr. Palmer's indication that owners would seek a
thicker debt/equity ratio, he cited a structure negotiated with
the state two years ago wherein BP agreed to "seek" but not
actually commit because financing hadn't been arranged yet.
MR. VAN TUYL explained that the desire was to avoid locking in
something up front that couldn't be financed, and the agreement
was to seek an 80/20 ratio that would have resulted in a lower
tariff than AGIA requires. He also specified that, as a
pipeline company, Denali absolutely wants customers, too, and
wants upstream competition and to keep the pipeline full for
decades to come.
1:47:29 PM
COMMISSIONER GALVIN returned to alignment. He said the state is
aligned for tax and royalty purposes with potential shippers in
wanting a wellhead price as high as possible. At the same time,
its interests align with the pipeline to maximize throughput,
whatever producer or new explorer may come along. So its
interests depend on the goal. The pipeline will be motivated or
required to act in a way that is in the interests of the pipe to
expand, which shouldn't be influenced by the ownership.
Referring to Mr. Porter's comments, he said the question is
where the interests align.
COMMISSIONER GALVIN explained that in some cases, the state is
providing a matching contribution to try to attract an
applicant, while for a producer the state's desire is to ensure
it's driven by the motivations of an independent pipeline
company for rolled-in rates, expansions, and so on. He said the
state will be driving the independent pipeline company applicant
towards lower tariffs. It's a balance, having the independence
and potential conflict between those two interests.
CHAIR HUGGINS asked members to hold questions relating to FERC
until Monday if possible.
1:50:01 PM
MR. PORTER pointed out that he didn't know of anything in AGIA
that creates a lower tariff. He asked Commissioner Galvin to
elaborate.
COMMISSIONER GALVIN replied that AGIA required the applicant to
come forward with a particular debt/equity ratio. As the
application came in, there were other provisions regarding
return on equity and other aspects of the potential tariff that
will be part of the negotiation and, ultimately, the
adjudication at FERC. As detailed last year, the debt/equity
ratio is a significant driver of the ultimate tariff. The end
result of the ratio required by AGIA will be a lower tariff.
COMMISSIONER GALVIN acknowledged that other pipelines may come
in and have a 80/20 ratio, but indicated the state was looking
at other pipelines proposed in other locations where the
debt/equity ratios are significantly lower than the 70/30 or
75/25 seen here. He asserted that the state has a much greater
assurance of the debt/equity ratio under AGIA than if going
forward with another pipeline project, given the industry
standards.
1:51:56 PM
SENATOR BUNDE said he understands the producers' concerns about
a 25-year FT commitment, but asked the shippers: If Denali
became a viable pipeline, wouldn't it want a similar commitment?
And if there were a shorter commitment, would it call into
question how arm's length the Denali shippers were from the
ConocoPhillips/BP producers?
MR. ZAGER suggested that this be directed to the owners.
MS. KING responded that she doesn't believe Denali has said
clearly what its FT period would be, though she envisions 20 or
25 years. She expressed confidence that Denali is preserving
its ability to have those conversations with customers to
determine what terms for shipping commitments would attract
customers.
MS. KING explained that if a certain amount of costs need to be
recovered, a shorter timeframe likely will raise the toll; with
a longer timeframe, usually the toll goes down. From a pipeline
perspective, the balance sought is being able to recover costs
appropriately and yet have risks that shippers will accept. She
indicated most companies that have talked about this pipeline
have looked at a 20-year-type shipping commitment.
MR. VAN TUYL added that Denali will consult with all prospective
shippers to find out their needs and structure the tariff
accordingly. That includes folks with no resources currently,
producers exploring for gas today who want to perhaps have it
available at the initial open season or down the road. The
terms of service that are offered will come as a result of those
consultations; the same terms of service will be offered to all
similarly situated shippers, not just affiliated parties, which
he said is the definition of open access.
1:56:15 PM
SENATOR BUNDE noted a concern about the FT commitment has been
that it is listed as debt and impacts the economic viability of
this project. He recalled, however, that Econ One said it
really shouldn't be listed as debt. He asked about this.
COMMISSIONER GALVIN offered to make available Econ One's report
to the legislature from a couple of years ago.
MR. DICKINSON noted he'd also given a presentation a year ago
and had a copy with him. Mentioning disclosure of long-term
obligations, he said what's really at stake isn't the
accounting, which he believes is fairly clear. Rather, it's how
the disclosures in the footnotes are used by financial analysts.
As heard yesterday, credit analysts and equity analysts look at
it differently.
MR. DICKINSON suggested the issue is whether there is a balance
sheet impairment, a cost to a company of making an FT
commitment, or whether it can be written off and the value
doesn't really transfer until years later. To fairly represent
a company's financial position, one must disclose those, and
they are debt-like. As to the critical issue of what it means,
he said there is a reason that finance is an art and not a
science. There are different ways to look at it.
1:59:33 PM
RICH RUGGIERO, Area Manager and Senior Advisor, Gaffney, Cline &
Associates, Consultant to the Administration, focused on the
difference between economic viability and how something ranks
within a company's investment portfolio. Referring to AGIA, the
Black & Veatch analysis, and the base case that ExxonMobil and
its expert didn't disagree with, he said for the cash flows
there is $160 billion in profit allocated to the producers
within that model. It's an internal modeling and investment
decision-making process that says, for ExxonMobil and a number
of other companies, that they must treat FT as debt.
MR. RUGGIERO explained that each company develops criteria for
how it chooses to invest its money. Even though the NPV may be
zero when the economics are run on a discounted basis in that
model, there's still $160 billion of profit, positive cash to
the companies above their expenses and costs in the project.
The economic viability didn't change.
MR. RUGGIERO told members that there isn't a universal treatment
across the industry on FT. In his time working for a major oil
company, he has seen FT treated as unbooked debt; not treated as
unbooked debt, subject to the credibility of the customer to
which the gas ultimately was delivered to; and treated just as a
footnote. Circumstances have changed over time, and in the 20-
plus years he has worked with FT, he has seen the rules and the
treasury departments of the various oil companies treat it
differently under different circumstances.
2:01:49 PM
MR. SMITH of Black & Veatch added to the comments of both
Mr. Ruggiero and Mr. Dickinson, highlighting statements from
Goldman Sachs yesterday. Mr. Smith said there are two issues:
1) economic viability, cash flows, and benefits of those to
various parties, and 2) implications to the balance sheet,
whether it effectively becomes a liability and impairs the
ability to borrow more money and so on.
MR. SMITH said not considered in the discussion was this: If FT
is treated as debt and shows up as a liability, what about the
asset that shows up on the balance sheet as well? That should
be factored into the analysis along with the associated benefit
the producers would have, listing that asset as a liability
associated with reserves. It is complicated, and he indicated
Black & Veatch has seen many opinions about it.
MR. SMITH emphasized the balances and asked: If it is an
obligation and potentially affects the ability to borrow, what
about the associated benefits that the equity holders have, and
that they're now flowing the gas through the pipeline and
realizing those revenues?
2:03:15 PM
COMMISSIONER GALVIN responded that for him that's the important
point. The FT issue is both positive and negative. On the
negative side is committing to make these payments over a long
period. On the positive side is the ability to make a lot of
money. What is heard from the shippers emphasizes the negative.
COMMISSIONER GALVIN recalled that the Econ One report says this
will affect the producers' ability to borrow money. If it is
additional debt, he surmised it would add to the debt load and
reduce the capacity to borrow money. It needs to be discussed
in the full context of the value exchange. Someone who makes an
FT commitment gets to monetize a lot of gas, he said, but takes
on a financial obligation. That balance must be weighed.
2:04:42 PM
MR. DICKINSON concurred, but pointed out that due to what
accountants call the "principle of conservatism" it isn't
symmetrical. Different rules apply when booking things like
assets compared with the timing for booking an obligation or
liability. He gave his understanding that Econ One was saying
an analyst viewing this will look at the disclosed footnotes,
what project it was part of, and whether or not it will likely
strengthen or hinder the company.
MR. DICKINSON relayed his understanding that yesterday Goldman
Sachs said for some companies this might be an impairment, while
for others it might be a benefit as part of the entire project.
He said this is why some folks are good at this kind of
financial analysis and others aren't. It's not simply adding up
numbers. There are different ways of looking at it.
MS. KING said they've been debating this four years and haven't
figured out to succinctly describe what happens with respect to
how the company treats FT. This project is unique. When that
FT commitment is made, it could be eight years before first gas,
so the lead time on this project is a big issue. It is a huge
financial obligation because the project costs and natural gas
prices aren't known. The FT commitment is significant and
clearly is something the company must account for.
MS. KING asserted that in a lease-versus-buy analysis, it cannot
be gotten around by saying it isn't a true cost just because
there is an agreement to pay someone else for that service for a
long time. The timing of when that shipping commitment happens
is a big issue. To offset that, when the company books reserves
there are clear federal Securities and Exchange Commissioner
(SEC) criteria.
MS. KING said one criterion is that it be economic. But the
company won't know whether the reserves are economic for many
years. Highlighting the complexity when booking reserves, she
said the timing for this particular project is different in many
regards from the timing of taking this obligation on.
2:08:45 PM
SENATOR BUNDE said while he has heard concerns from shippers
about rolled-in rates and paying a premium or subsidizing other
folks, those who show up initially will get to ship gas 365 days
a year, for several years, before the new rolled-in rates. He
asked: Isn't there some amortization of that subsidy because of
the NPV and that the company is gaining value long before having
to pay additional rates?
MR. VAN TUYL answered that BP as a shipper will make an FT
commitment if the terms offered in the open season are
commercially reasonable. As stated before, BP is concerned
about the terms required in AGIA and offered in TransCanada's
application, as well as issues such as the withdrawn-partner
liability TransCanada is exposed to.
MR. VAN TUYL said those cause concern in evaluating an open
season under AGIA. However, BP is committed to get its gas to
market and wants to be able to hold an open season that enables
customers to entertain commercially reasonable terms, which he
said is part of the reason BP and ConocoPhillips joined together
to form Denali.
MR. PORTER responded also, saying he was trying to figure out if
and how an explorer would wait. For instance, an explorer might
realize it didn't have to show up to the initial open season,
but could wait for an expansion and thus wait to drill a well.
However, the range of possibilities for a prospect is wider for
a company that drills now rather than later. Drilling later
requires finding enough gas to propose an expansion.
2:12:20 PM
SCOTT HOBBS, Energy Capital Advisors, Consultant to the
Administration, noted he was a pipeline executive in the
Lower 48 for about 25 years and thus has a fair amount of
experience negotiating FT contracts. He said this clearly is a
significant, important commitment. However, the potential
shippers have done an excellent job today in focusing on risks.
MR. HOBBS emphasized that this also can be a highly valuable
asset. It opens up the stranded gas, this incredible resource
that has been sitting there a long time. Noting how
sophisticated the producers are at negotiating a contract like
this, he predicted at an open season they'll negotiate points
along the line as cost estimates are continually refined and so
on. Up to project sanctioning, he proposed that they'll
probably be asking TransCanada to give them an escape hatch if
costs get too high and will work out some way to cover those.
MR. HOBBS told members this is what happens in a negotiating
process. This is a good thing and is what AGIA promotes, the
effort to get the parties moving this project forward. While he
agreed it absolutely is a significant risk to the producers, he
emphasized that this asset also could create tremendous wealth
for those producers. There are two sides to it.
MR. HOBBS added that these same producers took capacity on his
own pipeline and were actually shipping gas, in some cases
without equity gas and in some cases with equity gas, their own
gas flowing through. He said they viewed that transportation
capacity as an asset that allowed them to move less-valuable gas
to a more valuable market.
The committees took an at-ease from 2:15:46 PM to 2:38:28 PM.
2:38:55 PM
COMMISSIONER GALVIN returned to positive and negative aspects of
the FT commitment. He agreed it is worth something; absent
other considerations, he said it is the key to a gas pipeline.
In the next year or so, there'll be discussion with the
producers, the shippers. The key question will be how much the
state must throw into the kitty to get a commitment. The
question isn't whether it has value, but how to put a price on
that. He surmised there won't even be agreement among the
shippers as to the price tag. Thus discussions will be fairly
complicated and perhaps unique to each shipper.
COMMISSIONER GALVIN opined that maybe this process has been
misconstrued as a vote for either the TransCanada or Denali
project. Instead, he asserted, this vote is to establish
competition in order to provide a choice at some point, to allow
an assessment as to whether one is better than the other, what
it will cost, and the possibility of having it work one way or
the other.
2:43:01 PM
MS. KING noted TransCanada's application references that it
expects the state to thoroughly evaluate and seriously consider
the financial and commercial feasibility of dedicating
significant state resources to underwriting an alternative
financing mechanism for the project. She asked the
administration: If the State of Alaska had to take the entire
shipping commitment for this pipeline, how would you treat it?
COMMISSIONER GALVIN referred to the first hearing in Juneau and
said he'd indicated those are things TransCanada has proposed
that it would like the state to perhaps consider doing at some
point. However, the administration hasn't done that analysis or
made that determination.
MS. KING asked: If the state were asked to sign up for hundreds
of billions of dollars of shipping commitment, would it have a
financial impact on the state?
COMMISSIONER GALVIN replied yes; the impact would be both
positive and negative. Referring to testimony from Goldman
Sachs and others, he said one must look at both obligations and
opportunities. If the state took an FT commitment, he surmised
it would go along with some sales contract whereby the state had
the gas as well. As Mr. Ruggiero had indicated, there'd be a
tremendous amount of profit as that went forward. All that
would be taken into consideration.
2:45:34 PM
CHAIR HUGGINS remarked that he'd have assumed because it's a
potential scenario - whether remote or not - and because it's in
the application, the state would have evaluated that somewhat.
MR. PORTER replied that during the stranded gas process the
state evaluated participation in a pipeline and believed it
could handle 20 percent participation. However, the desire was
to not make that choice until the point of project sanctioning
and the financial investment decision.
MR. PORTER explained that at that time, there'd be the best
chance of understanding project costs and so forth. The state
could sell down its interests and receive 100 percent of the
value back for each segment including the gas treatment plant
(GTP), the Alaska portion, and so on, down to the level of risk
that could be handled then. So 20 percent was somewhat high,
but there were several outs. He said that economic analysis is
there and would just need to be updated.
COMMISSIONER GALVIN stressed the numerous possibilities and
indicated the administration had done the analysis necessary to
provide information needed on this decision. There will be
future decisions; the context is yet to be determined or
discovered. For this particular issue, in terms of the state
potentially taking a role it hasn't even contemplated, he said
no analytical time was spent - it wasn't relevant to the current
decision. If it's put on the table at some point, it will be
analyzed based on information presented at that time.
2:48:08 PM
MR. ZAGER said his company doesn't necessarily have a stake in
whether the line is built by TransCanada or Denali. He related
a lesson learned from business: Keeping options open is a very
expensive proposition. In this case, he said, it's not just the
money but also the resources if two projects go forward.
MR. ZAGER noted the object is a successful open season. If an
open season fails, it goes back to square one. He suggested
sitting down and diagramming the two paths, step by step, for
getting to a successful open season, an acceptable position
considering the timeline, even if it means not every desired
detail is included.
2:49:43 PM
MR. PORTER agreed that there are benefits to ongoing competition
but cautioned about duplication. He said the parties plan to
put any costs from this point forward into the tariff. The
longer duplication occurs, the more somebody's cash will
disappear; sunk costs won't show up in the tariff. He gave his
understanding that FERC won't allow two separate projects to do
research on the same information and put that into the tariff.
MR. PORTER posed an example, saying he doesn't expect it to
occur. If TransCanada went through to the FERC certificate and
had spent $160 million, that would be $160 million in
duplication; that cost would have to either be "eaten by the
negotiations" or be a sunk cost. That is an additional burden
on this project, he asserted, expressing hope that somehow this
relationship is fixed soon enough to avoid this scenario.
COMMISSIONER GALVIN agreed generally that keeping options open
has costs, but again spoke about the benefits of continuing
competition and keeping options open. While there potentially
will be duplication if both projects proceed, he said it is
stated within the AGIA process that TransCanada won't put any
costs that are reimbursed by the state into the tariff; there's
no duplication there. He indicated one project is proceeding
under a guarantee, while another is based upon an independent
decision of the owners, with no particular guarantee. From the
state's perspective, costs versus benefits must be analyzed.
2:53:54 PM
REPRESENTATIVE FAIRCLOUGH asked: Has the administration
accepted stipulations from TransCanada inside of the AGIA
licensing application that are different from those reviewed by
the legislators who voted yes on AGIA? She said she'd never
voted on a specific route, a termination point, or tying into a
particular line, for instance. While the administration
accepted an application that complies with AGIA, it is different
from what was voted on by this legislature.
COMMISSIONER GALVIN indicated AGIA created a competitive process
under which different potential outcomes were available, and
TransCanada provided one.
REPRESENTATIVE FAIRCLOUGH said TransCanada has different
stipulations that the state, in approving the license, will
accept. It is a different vote. The legislature isn't voting
again on the 20 so-called must haves; those are included in the
licensing application. But there are different requirements and
trade-offs with respect to risks and success, values within the
new application.
COMMISSIONER GALVIN replied that using the term "stipulations"
gives the impression that it puts obligations on the state that
would be in addition to what's in the AGIA statute. He said
TransCanada has included a description of a project plan that
has a number of different factors that clearly are new and that
the legislature had no knowledge of when they voted on AGIA.
COMMISSIONER GALVIN said while those are clearly relevant to
this discussion, they aren't set in stone. They can be modified
so long as they don't diminish the value to the state or
decrease the likelihood of success, and they may change going
forward. He said that is a point just between the shippers and
the pipeline that is important to today's conversation.
2:57:01 PM
REPRESENTATIVE FAIRCLOUGH made the point that some media people
say because the legislature voted for AGIA, it should also vote
on this application because the administration has negotiated or
accepted a proposal that has a different structure inside of it.
It has been suggested that some items relating to risks and
rewards perhaps could be negotiated.
COMMISSIONER GALVIN agreed with the premise. He clarified,
however, that the administration didn't negotiate or approve,
but evaluated and is bringing forward and recommending.
REPRESENTATIVE FAIRCLOUGH gave her understanding that the
administration did request additional clarification from
TransCanada in the process that the administration used for four
months in evaluating those applications.
COMMISSIONER GALVIN concurred, saying he hadn't meant to
contradict that.
REPRESENTATIVE FAIRCLOUGH gave her understanding that the
legislature is considering something in addition to AGIA that
the administration believes will benefit Alaska.
COMMISSIONER GALVIN agreed.
REPRESENTATIVE FAIRCLOUGH said while constituents have contacted
her in support of both AGIA and the Denali project, before the
legislature is a yes-or-no question on TransCanada's license.
In evaluating the license's likelihood of success, she must
consider the availability of gas.
REPRESENTATIVE FAIRCLOUGH noted it was news to her in June that
Point Thomson is off the table. She recalled that Commissioner
Galvin was asked a question that gives her pause today, relating
to the fact that the cost hadn't been calculated to the state in
terms of NPV, litigation, or time and how it will affect this
project.
REPRESENTATIVE FAIRCLOUGH said Point Thomson has been
characterized as an oil field. She gave her understanding that
this year additional reservoir information was provided to the
Alaska Oil and Gas Conservation Commission (AOGCC) to determine
whether the blowdown will be "a way forward." She asked
Ms. Foerster about a timeline for AOGCC to thoroughly evaluate
the information it has and determine whether it agrees or
disagrees with ExxonMobil's findings.
3:01:13 PM
CATHY FOERSTER, Commissioner, Alaska Oil and Gas Conservation
Commission, Department of Administration, indicated there are
several ways an evaluation could go. One is that DNR and
ExxonMobil could continue their dispute over lease ownership,
and ExxonMobil could decide it's not in its best interests to
continue sharing confidential information and could say it is
done. The timeline would be over, she noted, since AOGCC would
have no ability to evaluate it.
MS. FOERSTER said another way is that the dispute could
continue, but ExxonMobil could choose to continue the study
because it feels that's in its best interests. Should the
dispute continue, AOGCC hopes that'll be the path taken. If
so, AOGCC's target for completing the data exchange is the end
of 2008 or early 2009. Consultants that AOGCC has hired will
probably take an additional three to six months to analyze all
that data. So a completed analysis would be mid-2009.
MS. FOERSTER noted there'd be all kinds of bifurcations here.
She said if, at completion of AOGCC's analysis, it was clear
that ExxonMobil's interpretations were correct, then it would be
up to ExxonMobil to come to AOGCC with a request for pool rules
that allow developing the field as a gas field. Unless
ExxonMobil waited until AOGCC's analysis was complete before
doing that, a timely response from AOGCC would be difficult.
MS. FOERSTER said assuming ExxonMobil waited until mid-2009 and
then requested pool rules, unless AOGCC continued the hearing by
requiring more information and analysis, AOGCC should be able to
respond to the request within a month or so after the hearing.
So AOGCC would have that answer before the end of 2009, which
she believes would be before the open season. That is one
possible path.
3:04:12PM
MS. FOERSTER said another possible path is if AOGCC didn't come
to the same conclusion as ExxonMobil. If disputes continued, it
would stop there. But if ExxonMobil and the state came to some
agreement and ExxonMobil returned to acting on the 23rd plan of
development (POD) it had proposed, then its timeline has first
production from Point Thomson in a small-scale cycling project
and two horizontal wells into the oil rim. This would be needed
to answer remaining AOGCC questions, whether it's really an oil
reservoir and oil rim and whether the gas is in need of cycling.
REPRESENTATIVE FAIRCLOUGH asked whether cycling in those two
wells must be explored to understand the timeline.
MS. FOERSTER replied possibly; AOGCC's analyses with its
consultants might lead it to the same conclusion as ExxonMobil.
If not, and if it's going down the path where ExxonMobil has the
ability to go in and develop, then ExxonMobil's timeline says it
may be 2013 or 2014 before first production.
MS. FOERSTER added for the oil rim, if that's going to be a
failure, AOGCC will know that pretty quickly, perhaps weeks to a
month. If the oil is as viscous as AOGCC believes, the gas will
cone down and the water will cone up, and it won't be an oil
well anymore. As for cycling, it could take up to six months.
In that scenario, AOGCC likely wouldn't have the answer until
late 2013 or 2014.
MS. FOERSTER opined that the only way Point Thomson couldn't be
available for an open season is if ExxonMobil and DNR were still
in dispute. If AOGCC completed its analysis and agreed with
ExxonMobil that it is a gas field and that gas can be nominated,
and with Mr. Massey's confidence, she surmised ExxonMobil could
certainly put its reputation on the table at an open season and
nominate Point Thomson gas, betting on the eventuality that in
2014 "we'll get smart."
3:07:21 PM
MR. PORTER asked: If it is believed that there will be a gas-
cycling project, is there a range of time? And what amount of
reserves is believed to be necessary?
MS. FOERSTER replied that this is where it gets unfortunate for
ExxonMobil and Point Thomson coming into a gas line. The
proposed POD that ExxonMobil has offered has only two wells.
She asked how much condensate would be produced from cycling.
MR. MASSEY answered 10,000 barrels a day.
MS. FOERSTER said if it produced that and didn't start until
2013 or 2014, then by the time it was wanted for the gas line,
less than 5 percent of the condensate would have been produced
with just those two wells. If it became her job to convince
Mr. Massey that she was right, then in order to get Point
Thomson gas into the line in a reasonable amount of time,
ExxonMobil would have to undertake a highly accelerated
development program to get more cycling production.
3:09:11 PM
REPRESENTATIVE FAIRCLOUGH indicated Commissioner Irwin of DNR
wasn't present and said she understood that there was litigation
and that the state needed to protect itself, but also recalled
on May 28 in Anchorage he'd said, "Trust me, this team has done
our homework." Saying she needs verification and is seeking
confidence, she emphasized that her top criterion is whether
there are gas commitments, but she isn't getting clarity on
Point Thomson. She asked: Where's the gas?
COMMISSIONER GALVIN noted the administration hasn't taken the
position that the legislature had passed the AGIA law and
therefore must pass this license. The administration is here to
present information on the license and why it believes this is
the right one, and to answer questions.
COMMISSIONER GALVIN said the administration's position
throughout the AGIA process has consistently been that this
project is economically viable with or without the Point Thomson
gas being available on day one. Noting this has been supported
by the state's analysis and the economic analysis by Black &
Veatch, he indicated legislators could accept that or not.
REPRESENTATIVE FAIRCLOUGH gave her understanding that Point
Thomson was a consideration when the applications were
submitted. She asked: Did TransCanada and the other applicants
believe Point Thomson gas would be available to bid?
COMMISSIONER GALVIN deferred to Mr. Palmer.
3:12:42 PM
MR. PALMER responded that when TransCanada bid last November, it
expected the proven reserves on the North Slope would be
available, not having the depth of understanding of either the
leaseholders or the State of Alaska government.
REPRESENTATIVE FAIRCLOUGH interpreted this as "yes" - proven
reserves would have included Point Thomson. She said she wasn't
trying to be critical, and quotations say it is hugely
economical. But to her, it was always a consideration that
Point Thomson had to be included to fill up the pipe. She said
she could move past this point, however.
COMMISSIONER GALVIN replied that the administration last year,
when testifying on AGIA, expected Point Thomson gas to be
included; the same was true last fall. When it reviewed the
applications, it found TransCanada expected Point Thomson gas to
be available.
COMMISSIONER GALVIN said not until it was amidst its analysis
did information began to come in with respect to 1) technical
information on what Ms. Foerster had just discussed and 2) how
long it was expected to work through those issues. Only then
did the administration recognize the need to be able to tell
legislators whether the project's viability depends on Point
Thomson, regardless of how things work out on the lease dispute.
COMMISSIONER GALVIN noted that analysis of the more conservative
base case, assuming no Point Thomson gas, showed it is fine
economically in terms of providing the commercial opportunity
for the gas shippers. So the administration believes Point
Thomson isn't a critical aspect of this decision.
COMMISSIONER GALVIN suggested a question for Ms. Foerster is
whether the remaining fields can supply sufficient gas to fill
these pipes. He said when it comes to the life of the project,
Point Thomson becomes part of the discussion about a gap between
FT commitments at the beginning and what is known to be
available immediately.
COMMISSIONER GALVIN explained that gas will come from existing
fields, Point Thomson, and yet-to-find (YTF) gas. It's a matter
of timing. The economic question right now is whether there's
sufficient gas expected, absent Point Thomson, to make this
project go. He said the administration believes there is.
3:17:26 PM
REPRESENTATIVE FAIRCLOUGH noted while she's heard that answer
over the last 40 days, the calculated costs for the whole
project don't include the expense of time or money on that
field, Point Thomson. She suggested there is a litigation cost
that isn't in the economic model but is a cost to Alaska as a
whole. It includes employment, time, and attorney fees, though
it might not be an appropriate cost to add to the mix.
REPRESENTATIVE FAIRCLOUGH cited the question of whether the
state would permit an ice road this year to bring in rigs to
look at cycling. She said the answer received in Anchorage was
that it's "squishy" as to whether DNR can say if it will let
those permits be approved if the state is in litigation with
ExxonMobil over Point Thomson; the state is fighting for its
right to take that back. She said she wasn't being derogatory.
3:20:17 PM
COMMISSIONER GALVIN referred to the findings and said in the
analysis, particularly for the conservative base case, various
production charts show where the administration expects the gas
to come from. Primarily due to the state's tax system, the
location significantly affects the economics. If it comes from
existing fields, there'll be a lower cost to invest for
exploration or development, for instance, and thus there'll be a
higher margin economically. With YTF gas, however, the economic
calculations had to include all costs associated with
exploration, development, and production. Then the timing
becomes a question of when it will fill the pipe.
COMMISSIONER GALVIN explained that the economic analysis assumes
flat throughput. For the conservative case, if Point Thomson
comes in, the assumption is it wouldn't happen until existing
production declined to the point where Point Thomson and the
other YTF gas nearly fills it up to the initial throughput. In
that regard, it was pushed out quite a distance. He mentioned
being highly conservative in the economics and saying it won't
come in right away or within the first five years.
COMMISSIONER GALVIN also mentioned the litigation and building
an ice road, indicating the cost would be fairly insignificant
compared with the amounts assumed for exploration and
development associated with these projects; he surmised it
wouldn't sway the economics much and would become a matter of
timing. He opined that the administration had pushed it out so
far, it isn't a driving force in that analysis. If it is
assumed to come in sooner, it is assumed that it will expand and
all the economics will become improved.
3:23:31 PM
MS. FOERSTER emphasized that for three and half years she has
been saying Point Thomson might not be available.
COMMISSIONER GALVIN apologized for the oversight.
MR. PORTER asked whether his understanding from the charts was
correct, that the YTF gas was defined as half coming from the
state and half from onshore federal lands.
MR. SMITH affirmed that.
MR. PORTER asked how Black & Veatch had come to that conclusion.
Referring to federal reports upon which he said most of the
Black & Veatch analysis was based, Mr. Porter said it suggests
about one-sixth of the gas would come from state onshore lands
and the rest of the 50 percent would come from federal onshore
lands, with roughly half coming from federal offshore lands.
MR. SMITH mentioned the uncertainties of where the gas will come
from, indicating similar reports address near-term availability
of supply focused on onshore resources, whereas the longer-term
supply incorporates offshore resources. Given the 25-year
evaluation period that Black & Veatch utilized in the project,
the assumption was a half-and-half split of state and federal
onshore properties.
MR. PORTER suggested that is something to be concerned about
when looking at economics. If exploration follows the money,
the most recent lease sales from onshore state land were
marginal at best; he doubted whether they even paid for the
processing time for the sales.
MR. PORTER cited examples, saying the National Petroleum
Reserve-Alaska hasn't been that aggressive in lease sales as
well, and Shell has been aggressive in spending perhaps billions
of dollars in the federal Outer Continental Shelf (OCS). Those
are examples of concerns he would have with the economic data
that the state is proposing on this project.
3:26:40 PM
MR. SMITH added that one thing Black & Veatch didn't do in
analyzing the conservative case of 4.0 Bcf/d without Point
Thomson was to include Point Thomson over that entire evaluation
period. If it is available at some point down the road, that
gas would be onshore-related production that would roll into the
mix and enhance the economics for the parties.
COMMISSIONER GALVIN noted ConocoPhillips also has invested a
great deal in the OCS.
CHAIR HUGGINS suggested postponing follow-up questions from
Representative Fairclough until after the 4 o'clock break.
3:27:41 PM
REPRESENTATIVE RAMRAS asked if the committees would hear from
DNR about the Point Thomson unit.
CHAIR HUGGINS answered that the commissioner of DNR was present,
but DNR was concerned about the legal ramifications of
testifying on Point Thomson.
COMMISSIONER GALVIN clarified that the Department of Law had
advised DNR not to testify with regard to the litigation.
REPRESENTATIVE RAMRAS asked how long TransCanada Alaska has been
an entity.
MR. PALMER answered it was formed last year in order to make
this application.
REPRESENTATIVE RAMRAS asked: When do you anticipate deciding
whether you'll live in Alaska, and will your residency reflect
where the headquarters or jobs are, for instance?
MR. PALMER replied that determination will be made in due time
if TransCanada is granted the license.
3:30:32 PM
REPRESENTATIVE RAMRAS recalled that during orientation the new
legislators were cautioned against falling in love with their
own legislation. He asked Commissioner Galvin: Do you think
you've fallen in love with this legislation, or is this truly in
the best interests of the State of Alaska?
COMMISSIONER GALVIN answered that he loves his wife and family,
whereas legislation can come and go. The nice thing about AGIA
is that the ultimate question wasn't within its bounds. It went
beyond whether this project provides the most NPV and greatest
likelihood of success; it asked whether this maximizes benefits
for Alaskans. That was freeing in the analysis.
COMMISSIONER GALVIN said there is a different environment now
than when AGIA was passed. The bill allowed the commissioners,
in the analysis, to look at all options available to the state
and choose any path at this point in association with any
project that has come forward or could come forward in the
future. He said the determination, with a great deal of
confidence, was "yes." That wasn't because of falling in love
with AGIA or the process; it was because, in the clear analysis
of all the options available now, this is the best one.
3:34:10 PM
MR. PORTER said the sovereign's responsibility is to provide
legislators and the public with the findings or understandings
of a particular law or bill. That includes both positives and
negatives. One concern about the presentations to date is what
he calls "be wary of the perfect proposal."
MR. PORTER explained that he didn't recall hearing a negative
statement about this proposal from the administration, though he
is sure there are both positives and negatives. When someone
believes in a proposal, there is a tendency to advocate for it,
rather than go through an analytical process.
COMMISSIONER GALVIN agreed that was a valid point. He indicated
he considers the legislature part of the sovereign and also
opined that the findings identify a number of places where there
may be something problematic in the application. He said when
the conclusion was reached that this maximizes benefits for
Alaskans, the administration became an advocate for that
conclusion.
COMMISSIONER GALVIN offered to go through anything in the
analysis that someone considers lacking or incomplete. He said,
however, that he didn't believe there'd been anything
specifically called out with regard to the analysis that was
indicated as lacking.
3:36:49 PM
MR. PORTER pointed out that several minutes ago he'd explained a
specific piece of the analysis that seems incorrect.
COMMISSIONER GALVIN responded that there has been an extensive
discussion of YTF gas, the justification for the assumptions
used within the findings for the breakdown of where the
administration expects the gas to come from and the expected
timeframes. Referring to Mr. Smith's explanation, he said he
believes the administration gave a response to the criticism.
He added he doesn't believe that indicates a bias in the review,
which was based on the best information Black & Veatch had
available.
MR. PORTER contended that it is contrary to the best information
available, the best information in the report during the years
proposed. Unless the administration decides not to follow the
report and the analysis and the decisions in the report, he
opined, they cannot come up with the conclusions that were
reached. He said the report is very clear.
COMMISSIONER GALVIN recalled that Mr. Smith said the report was
only one aspect of the analysis; not everything was based on it.
3:38:24 PM
REPRESENTATIVE RAMRAS told members he thought AGIA would fail.
He recalled a schedule showing maximum state exposure of
$877 million if treble damages are asked for, if it ends up
"flopping over to Denali" as he anticipates.
REPRESENTATIVE RAMRAS asked Commissioner Galvin: Given that the
state through the permanent fund or other entities earns 8.25
percent over a period of time, can you develop a worksheet in a
reasonable time showing the future value of $877 million if it
stays in the state's treasury over the same 25-year period
discussed for FT commitments, invested in the highest-earning
vehicles available?
COMMISSIONER GALVIN answered yes.
3:40:18 PM
REPRESENTATIVE RAMRAS said he was more interested in monetizing
first gas than expansion of the pipeline. He asked the
producers: Which entity is likely to deliver first gas,
TransCanada or the Denali project?
MS. KING replied that with what she knows now, as a prospective
shipper she'd have more confidence that the Denali project would
deliver first gas sooner.
MR. ZAGER answered that he didn't have any particular expertise
on this and is fairly impartial right now. However, since one
key risk is getting to a successful open season, it is important
to weigh the probability of each project getting through a
successful open season. Whichever is more likely to do that
will be the first to get to first gas, to his belief.
MR. MASSEY responded that he didn't know; neither has the
necessary ingredients to result in a successful project. He
suggested that the parties involved - the state, ExxonMobil, BP,
ConocoPhillips, and TransCanada - need to get together and put
in place what's necessary to ensure a successful open season for
one project and to move the project forward, rather than
duplicating efforts on two projects for something this massive
and of this scale and complexity.
MR. VAN TUYL replied that during discussions of the AGIA
legislation, BP testified before both the House Finance
Committee and the Senate Finance Committee, indicating its
desire throughout the process to be able to submit a bid under
AGIA. He said BP wanted to be able to participate, but also had
expressed concerns about some AGIA provisions, providing a list
on a slide of concerns and a complete markup of the bill.
MR. VAN TUYL noted one thing on the slide was that as AGIA was
drafted, it was difficult to envision circumstances that allow
BP to make a FT commitment to a licensed project under AGIA. He
said this was because of many reasons BP has talked about - the
unavailability of a negotiated rate protection, subsidization of
competitors, and so on.
MR. VAN TUYL, asserting that the Denali project doesn't have
those encumbrances, said BP is fully committed to making Denali
a success and wants to be able to offer terms to shippers that
attract bids at open season. He added that BP wants to be able
to get its gas to market, and Denali wants to have customers to
fill its pipe for a long time to come.
3:44:41 PM
REPRESENTATIVE RAMRAS asked Commissioner Galvin whether he
believes TransCanada or Denali will have the first successful
open season.
COMMISSIONER GALVIN answered that he'd like to have that
question a year from now. Today the question is whether to
award the license, providing competition between the two. What
happens will depend on a number of factors that aren't known
now, so somebody couldn't really choose between the two.
3:45:50 PM
REPRESENTATIVE KELLY commented that he has increasing respect
for the administration, TransCanada, and the producers and
wasn't surprised when BP and ConocoPhillips came up with a
pipeline project; there was dialogue about that when AGIA went
through, so they weren't stepped on. He noted he likes where
this is and is leaning strongly toward keeping it that way, with
the competition.
3:48:56 PM
REPRESENTATIVE ROSES stated that it was news to him when he
heard Ms. Foerster say the administration should have known
three years ago that Point Thomson gas wasn't considered
available in the open season. At some point, TransCanada will
determine whether this is economic. While it was clear during
the bid process that the administration was including Point
Thomson, now, after looking at the economics, it says Point
Thomson isn't there.
REPRESENTATIVE ROSES voiced concern that this opens the door for
TransCanada to say it based its bid on having Point Thomson gas
available. He then asked whether the AGIA license has three
parts: the AGIA bill, the state's request for applications
(RFA), and TransCanada's application.
COMMISSIONER GALVIN affirmed that.
REPRESENTATIVE ROSES requested confirmation that parts of
TransCanada's application are subject to negotiation on items
other than the must haves.
COMMISSIONER GALVIN answered that it's subject to approval by
the commissioners and the restriction on the commissioners'
discretion, that it can only be changes which don't diminish the
value to the state or decrease the likelihood of success.
REPRESENTATIVE ROSES asked: What constitutes the license we're
voting on? Did the commissioners approve the application that
came in from TransCanada as a whole or parts of it? If the
latter, what parts were left out?
3:52:24 PM
COMMISSIONER GALVIN replied that he wouldn't use the word
"approved." Reviewed was the license as a whole, including all
requests for clarifying information. All that is part of the
application. What has been brought forward and recommended is
that if the legislature approves it, the administration will
issue the license constituted by all those documents. The whole
package becomes the license, and any changes to the parameters
are subject to having to be approved by the commissioners, with
the condition that it doesn't diminish the value.
REPRESENTATIVE ROSES asked if the legislature gets an up-or-down
vote, without the possibility of amending this in any way.
COMMISSIONER GALVIN replied yes.
REPRESENTATIVE ROSES lauded this forum, saying he believes this
is one of the best pre-negotiation hearings he has ever
witnessed, but it's also a perfect opportunity for a pretrial
hearing. He asked: If the legislature approves this bill, is
it your understanding that along with it there is an effective
date for the license?
COMMISSIONER GALVIN affirmed that.
REPRESENTATIVE ROSES asked: If we change that effective date,
would that be considered an amendment?
COMMISSIONER GALVIN answered that he didn't believe the
legislature would actually establish that effective date. As
the statute is written, the legislature would approve the
license and it would be issued as quickly as practical.
Depending on the effective date of the bill, that establishes
when the state has the authority to issue the license. That
effective date would be the date it is actually issued.
REPRESENTATIVE ROSES asked: So there's an effective date on the
bill that we could modify as part of our process and it wouldn't
be amending the bill, just the effective date?
COMMISSIONER GALVIN suggested that is a good question for the
lawyers. He said the caveat was because the question becomes
whether the effective date has to be before the deadline.
3:55:29 PM
REPRESENTATIVE ROSES responded that he'd get a legal opinion.
He explained that he'd asked because TransCanada may lose this
summer's work because it cannot do the major fieldwork for next
year. Thus he suggested it might be in the state's best
interests to delay the effective date in order to continue the
necessary dialogue and hopefully get some other issues out of
the way and perhaps come out of it with a partnership.
COMMISSIONER GALVIN deferred to Mr. Palmer to discuss what
TransCanada would do once the license is issued, absent field
work, that would drive the schedule.
MR. PALMER responded that, as he has described to the parties
over the last month, TransCanada assumes now that the license
will be issued at the beginning of August. A delay past that
will delay the open season, FERC filing, and in-service date.
The committees took an at-ease from 3:56:56 PM to 4:10:08 PM.
4:13:16 PM
REPRESENTATIVE OLSON asked Ms. Foerster: If the 23rd POD had
been approved and implemented by the partners in the Point
Thomson unit, would that have provided enough information to
have a grasp of the offtake available from there?
MS. FOERSTER replied that if the 23rd POD had been approved in
the last six months or so, it would have bought six months'
time, moving back those timelines she'd described. If the
analyses with AOGCC's consultants were enough to give the
answer, AOGCC likely would have an answer by the end of this
year, but not today. If production were required in order to
get an answer, then it would still be 2013.
REPRESENTATIVE OLSON acknowledged the litigation and that
Commissioner Galvin perhaps couldn't answer. He asked if the
23rd POD was rejected because it was "too little and too late."
COMMISSIONER GALVIN responded that he wouldn't comment primarily
because he wasn't involved directly enough to say whether that
was an accurate generalization.
REPRESENTATIVE OLSON noted that was the excuse he'd received
whenever he'd asked someone why it was rejected.
4:15:45 PM
REPRESENTATIVE FAIRCLOUGH mentioned the likelihood of success
and opined that Point Thomson should have been part of that
picture; she acknowledged the difference of opinion. Turning to
access and voting rights, she said there should have been some
kind of contract and surmised there is less risk for the
shippers if the throughput matches the owner equity. She asked
how TransCanada would establish voting rights, recalling that
its application seeks equity interests for the shippers.
MR. PALMER answered that TransCanada has heard clearly from
members of the legislature that they want TransCanada to attain
more than 51 percent. ExxonMobil and others say they'd like
shipping commitments to equal their equity. However, that
leaves TransCanada at zero, and TransCanada has no interest in
being a builder-operator of someone else's pipeline.
MR. PALMER said if granted a license, therefore, TransCanada
will have to balance those desires, including its desire to get
something out of its investment of time, talent, and money.
Items like voting interests are premature at this point and will
be established as discussions ensue with potential partners.
4:19:00 PM
REPRESENTATIVE FAIRCLOUGH asked Commissioner Galvin to explain
the difference between the owner-equity issue for the
TransCanada pipeline versus the Denali pipeline.
COMMISSIONER GALVIN asked that Representative Fairclough narrow
the question.
REPRESENTATIVE FAIRCLOUGH said the question was specific as far
as voting goes. There are two ways to solve the problem on
equity interest. One would be that voting interests are
different from equity and throughput. She asked the shippers to
confirm that there is less risk if their committed throughput
matches their equity.
MS. KING answered yes, her company sees less risk if the
ownership interest aligns with the shipping commitment.
CHAIR HUGGINS asked whether there was a contrasting perspective.
REPRESENTATIVE FAIRCLOUGH said her point was that TransCanada,
inside its licensing application, allows an owner equity
interest. She asked how that is different from the Denali
project that would pull shippers together in the same way.
COMMISSIONER GALVIN responded that he believes the only
difference between the two is what the pipeline company's
obligation would be to the state. Under TransCanada's proposal,
when it brings in equity partners it would still be obligated to
the state's "must haves" and to comply with the obligations of
the license. Under the Denali project there wouldn't be those
obligations.
REPRESENTATIVE FAIRCLOUGH said TransCanada under AGIA has no
percentage requirement of ownership.
COMMISSIONER GALVIN replied the end result is this: TransCanada
Alaska is getting a license. At any point and under the terms
of AGIA, it can transfer that to other parties or bring in
equity partners, subject to approval by the commissioners. The
company has offered to have shippers negotiate terms of their
equity participation. But it's still bound by the AGIA
requirements, the contractual obligations to the state.
4:23:09 PM
REPRESENTATIVE FAIRCLOUGH said she understands that within the
limited liability company (LLC) partnership, the company would
have to have all 20 "must haves" for the state; specific to
owner-equity interest, however, there really isn't a difference
except in compliance with those. The shippers could still own
the entire line, with 25 percent each for Chevron, ExxonMobil,
ConocoPhillips, and BP; that is the extreme under either the
TransCanada pipeline or a Denali pipeline.
COMMISSIONER GALVIN replied that the entire license must be
complied with. The commissioners couldn't approve a change in
the license that would violate the 20 must haves, but also
couldn't approve any change in the license that would diminish
its value. That would be the obligation of the licensee,
whether it's owned by TransCanada or owned in equal shares by
the producers.
4:24:56 PM
REPRESENTATIVE FAIRCLOUGH said her point is that the same people
could end up owning the line.
MR. PALMER responded that while that could happen, it's not
likely that TransCanada will decide to end up with zero percent
interest in this pipeline after pursing this project for the
last year under AGIA and going through this legislative process.
REPRESENTATIVE FAIRCLOUGH said her point is a range of
possibilities, with that being an extreme case, as is
100 percent ownership; she mentioned being able to finance the
pipeline.
MR. PALMER replied that TransCanada has the ability to finance
100 percent of this project if it owns 100 percent and obtains
solid transportation agreements. TransCanada is also offering
to bring in parties as partners if they wish to do so; it would
dilute its ownership in that case.
4:26:54 PM
MR. PORTER said Representative Fairclough had a good point.
There are various options for ownership in the pipe. One
example is that TransCanada is not interested in owning the GTP.
As for the Alaska portion of the line, he said he didn't know
TransCanada's position on that, but there has been discussion in
the past indicating the company would be willing to have a
different proportion in that, compared with the Canadian
portion. He said for each portion of the line, negotiations can
occur and ownership can be adjusted accordingly so there may be
a solution that works for all parties.
4:27:44 PM
REPRESENTATIVE FAIRCLOUGH mentioned gas and financing capacity.
She asked Mr. Palmer whether having multiple participants
reduces risk, as she has heard consistently. She specifically
asked whether having other equity interests would mitigate some
of TransCanada's risk.
MR. PALMER replied that if that became something valued by
potential customers as they determine whether to commit their
gas, yes, that would improve the likelihood that the project
would proceed. If those parties do become parties in the
project, they'll take a portion of the project risk as a result,
and TransCanada will proportionately reduce its potential
opportunity.
REPRESENTATIVE FAIRCLOUGH said the third criterion for the
likelihood of success that she's using for evaluation is working
inside a government structure. She noted Canadian First Nations
issues are an unknown risk, whereas the rights-of-way held by
TransCanada are definitely a plus in her review. Also uncertain
is Canada's taxing structure and what NEB will do inside Canada.
Furthermore, the permitting process inside Canada will be
perplexing, and the Mackenzie project and the availability of
labor and steel must be considered.
REPRESENTATIVE FAIRCLOUGH said the risk - or the investment,
whichever way one chooses to look at it - is the $500 million
purse Alaska is putting up. She recalled Representative Gatto
had talked about treble damages and a limitation, but said it's
a floating number and she isn't sure what it is; she commended
the commissioner for trying to provide a number between a $700
million range and $2 billion range. She indicated she needed to
feel confident about the ranges in order to vote yes and take a
chance on this license.
REPRESENTATIVE FAIRCLOUGH also said the previous partnership
liability has been mitigated by what she has heard, although the
shippers still have concerns; she expressed willingness to tell
her constituents it isn't such a red flag. However, she said
the "locking and tying" of the distribution, raised by shippers
over the last two days, interests her; she mentioned passing on
the termination costs and expressed hope that if the license is
approved, that will be negotiated.
4:31:10 PM
REPRESENTATIVE GATTO said if the state decides to throw
TransCanada under the bus at the worst possible time and
TransCanada loses an estimated $20 billion in potential gains,
the treble damages are capped at perhaps $1.8 billion, an
unknown number that is a great deal less than the amount of
revenue TransCanada could claim it is entitled to because it was
awarded a license. He asked Mr. Palmer whether the treble
damages are disadvantageous to TransCanada in that regard.
MR. PALMER answered that the treble damages clause, as
TransCanada understands it, does restrict the amount of money
TransCanada could receive if the state changed its mind and
provided fiscal advantages to a competing project. So, yes, it
restricts the amount of money that TransCanada could claim from
the state and it stipulates that amount; he noted Commissioner
Galvin had provided some estimates during the last month or so.
4:32:44 PM
CHAIR HUGGINS thanked the participants. SB 3001 and HB 3001
were held over.
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