Legislature(2013 - 2014)SENATE FINANCE 532
02/25/2014 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB64 | |
| SB138 | |
| Presentation: the Heads of Agreement and the Memorandum of Understanding, Risks, and Benefits | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 64 | TELECONFERENCED | |
| + | SB 138 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 23 | TELECONFERENCED | |
SENATE BILL NO. 138
"An Act relating to the purposes of the Alaska Gasline
Development Corporation to advance to develop a large-
diameter natural gas pipeline project, including
treatment and liquefaction facilities; establishing
the large-diameter natural gas pipeline project fund;
creating a subsidiary related to a large-diameter
natural gas pipeline project, including treatment and
liquefaction facilities; relating to the authority of
the commissioner of natural resources to negotiate
contracts related to North Slope natural gas projects,
to enter into confidentiality agreements in support of
contract negotiations and implementation, and to take
custody of gas delivered to the state under an
election to pay the oil and gas production tax in
kind; relating to the sale, exchange, or disposal of
gas delivered to the state under an election to pay
the oil and gas production tax in kind; relating to
the duties of the commissioner of revenue to direct
the disposition of revenues received from gas
delivered to the state in kind and to consult with the
commissioner of natural resources on the custody and
disposition of gas delivered to the state in kind;
relating to the authority of the commissioner of
natural resources to propose modifications to existing
state oil and gas leases; making certain information
provided to the Department of Natural Resources and
the Department of Revenue exempt from inspection as a
public record; making certain tax information related
to an election to pay the oil and gas production tax
in kind exempt from tax confidentiality provisions;
relating to establishing under the oil and gas
production tax a gross tax rate for gas after 2021;
making the alternate minimum tax on oil and gas
produced north of 68 degrees North latitude after 2021
apply only to oil; relating to apportionment factors
of the Alaska Net Income Tax Act; authorizing a
producer's election to pay the oil and gas production
tax in kind for certain gas and relating to the
authorization; relating to monthly installment
payments of the oil and gas production tax; relating
to interest payments on monthly installment payments
of the oil and gas production tax; relating to
settlements between producers and royalty owners for
oil and gas production tax; relating to annual
statements by producers and explorers; relating to
annual production tax values; relating to lease
expenditures; amending the definition of gross value
at the 'point of production' for gas for purposes of
the oil and gas production tax; adding definitions
related to natural gas terms; clarifying that credit
may not be taken against the in-kind levy of the oil
and gas production tax for gas for purposes of the
exploration incentive credit, the oil or gas producer
education credit, and the film production tax credit;
making conforming amendments; and providing for an
effective date."
10:13:00 AM
^Presentation: The Heads of Agreement and the Memorandum of
Understanding, Risks, and Benefits
MICHAEL PAWLOWSKI, DEPUTY COMMISSIONER, STRATEGIC FINANCE,
DEPARTMENT OF REVENUE, began a PowerPoint presentation
titled "The Heads of Agreement and the Memorandum of
Understanding, Risks, and Benefits" (copy on file). He
recalled that the committee had heard from the
administration's consultants over the last several hearings
and that the current presentation would attempt to bring
back the prior ones before the committee as a summary and
would describe some of the thought processes of the
administration when it put together the Heads of Agreement
(HOA) and the Memorandum of Understanding (MOU) with
TransCanada. He noted that the presentation would also
provide context for the committee and comment on what had
been presented to date.
10:13:33 AM
Mr. Pawlowski spoke to slide 2 titled "Guidance Document &
SB 138." He related that there it was important to remember
that there were only three documents that the committee
would be working through. He reported that to date, the
committee had been focusing on the HOA, which broadly
described a roadmap to advance the large Alaska liquefied
natural gas (AKLNG) line through a phased process; it also
described key commercial terms. He stated that the MOU was
a document that described an agreement to transition out of
the Alaska Gasline Inducement Act (AGIA) license and into a
more traditional commercial relationship with TransCanada.
He stated that the HOA and MOU really described to the
legislature and the public how the administration would use
the power that it would be granted if SB 138 was passed;
they were guidance documents and a road map. He stated that
SB 138 would look at three big questions: should the state
participate in the in the AKLNG project, what percentage of
the gas share the state would take, what process was used
for the development of the project-enabling contracts, how
the legislature would work with the administration through
the phased process, as well as how the administration came
back for approval before the legislature in the future..
10:15:07 AM
Mr. Pawlowski addressed slide 3 titled "Introduction."
· Should the State participate in the AK LNG project?
· What are some of the benefits?
· What are some of the risks?
· Can the risks be mitigated?
· Should the State partner with TransCanada?
o Does partnering with TransCanada advance State
interests?
o What are the risks and benefits of partnering
with TransCanada?
10:15:54 AM
Mr. Pawlowski discussed slide 4. He stated that when you
looked at the AKLNG project, one of the most compelling
interests for the state to advance a project this large was
the potential revenues that it would bring to Alaska in the
latter part of the current decade and into the middle part
of the next one. He reported that the Department of Revenue
(DOR)administration saw the opportunity of the
commercialization of North Slope gGas as providing ato
provide significant additional revenue stream on top of
Alaska's already robust oil tax revenues. He stated that
the bill had additional benefits such as getting gas to
Alaskans, growing the economy, and creating jobs. He
concluded that for the Senate Finance Committee, the
administration would be diving further into how the project
would look regarding potential investments and revenues in
future presentations.
how the project would look regarding potential investments
and revenues.
10:16:50 AM
JOE BALASH, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES,
spoke to slide 5. He related that the slide had been
presented by Deepa Poduval from Black & and Veatch
Consulting the prior week and that it consolidated and
highlighted the key findings and recommendations of the
study that the Department of Natural Resources (DNR) had
commissioned the previous year on how to maximize the
state's royalty value. He recalled the history that was
being discussed in committee the previous Thursday and that
in 2012 the project had started to pick up steam; it was
clear at that point that liquid natural gas (LNG) was the
most likely path to the commercialization of North Slope
gas. He reported that as an institution, DNR had grown to
an understand how to protect the state's royalty interest
in a North American based project, but was not entirely
sure how to do that in an LNG project; the study from Black
&and Veatch was commissioned in order gain understanding of
what those differences were, as well as what risks and
opportunities an LNG project would present to the state DNR
from a royalty perspective. He stated that as DNR evaluated
not only the differences from a regulatory and commercial
standpoint, it had also evaluated its current set of fiscal
terms and fiscal regime in order to ascertain whether or
not there was anything DNR really needed to do.
Commissioner Balash offered that ultimately, as slide 5
would show, it became clear that with large, complex, and
expensive projects, there was a competitive window that
Alaska could fit into; however, the administration would
have to work to make sure state made it in the window. He
related that the findings of the study had really helped
inform the decision making of DNR and DOR regarding the
conversation that was going on with the producers in the
context of the HOA. He reminded the committee that the
administration had been struggling to overcome the
misalignment of interests between the state and the North-
Slope Lessees; it had been through the course of the Black
& and Veatch study that the administration had seen a path
whereby, if structured properly, state participation could
maximize the value proposition for Alaska's royalty, while
mitigating ed some of the risks that the state would be
exposed to if it were to take an equity position in the
project. He concluded that having the study conducted at
the same time as the discussions between the state and
producers had been beneficial to the process.
10:20:31 AM
Senator Hoffman inquired if the Black & and Veatch study
was available. Commissioner Balash replied in the
affirmative and added that he would provide it to the
committee.
10:20:40 AM
Commissioner Balash continued to speak to slide 5 and
pointed to the bottom-middle box. He related that the
inherent risks of state participation in the a project was
something that DNR had spent a lot of time trying to
understand, as well as resolving those risks with the
project sponsors.
10:21:09 AM
Commissioner Balash addressed slide 6.
The HOA: A Step Toward Mitigating Risks
The Heads of Agreement begins the process of
mitigating risks identified in the royalty study by
committing the Parties to a phased approach to the
project.
Key State concerns are recognized and Parties commit
to developing agreements during Pre-FEED and FEED.
•Marketing Risk
•Expansion Principles
•Regulatory Framework and 3rd Parties
Commissioner Balash stated that fundamentally, the parties
that were best situated to help the state mitigate the
various risks were the same ones that it would be in
partnership with. He reported that most of the risks either
came in the upstream in the management of the gas and
production or occurred downstream in the marketing aspects
of the LNG sales process; it was here that the
administration had found several ways that these things
could be managed. He stated the upstream side had balancing
agreements that would be necessary between the different
fields and leases and explainedstated that there were
varying royalty rates between the two primary fields of Pt.
Thompson and Prudhoe Bay; the exact order in which those
fields get produced could leave the state short or long on
its share of the gas. He explained that one of the things
that the administration would be seeking during the pPre-
FEED stage was to develop the offtake and balancing
agreements upstream with the North
-Slope producer; concurrently, it would be working on the
initial marketing efforts and potential disposition
agreements with those producers on an individual basis. He
stated that the producers had the expertise and marketing
professionals in the field that were dealing with LNG
buyers that were in Pacific markets.
Commissioner Balash relayed that there were also some
broader interests of the state that the administration
wanted to keep in mind, first of which was the opportunity
for expansions. He stated that the opportunity for
expansions was something that had been important to DNR for
many years and offered that Alaska had tremendous potential
for additional gas development beyond Prudhoe Bay and Pt.
Thompson; expansion opportunities were key to maximizing
this potential. He added that the regulatory framework also
allowed for access by third parties. He reported that the
administration had chosen to use had a proprietary
construct that allowed the state to pay for its share of
the project, which it would through the tariffs anyway, but
also allowed the state to control the terms of that section
of the project. He stated that the administration felt that
the above approach was a broad way to solve multiple
problems, maximize the opportunity for the state from a
royalty perspective, and at the same time, mitigate the key
uncertainties that were identified; however, the agreements
necessary to mitigate those risks had to be developed in a
step-by-step fashion.
10:24:42 AM
Commissioner Balash spoke to slide 7. He related that while
there were some key principles laid out in the HOA, there
were a lot left that needed the details worked out; over
the next 18 months during pre-FEED, the state needed to
focus on putting those details on paper, obtain a clear
understanding what the obligations of the parties are to
one another, and how risks would be shared. He stated that
during pre-FEED, the state would be picking up its share of
the development cost, that there was an opportunity to have
TransCanada lighten the state's load a bit on those costs
from a cash perspective. He stated that what the
administration was trying to show on the slide's chart was
that the state's steps were going to be made commensurate
with of those taken my other parties. He related that the
administration was seeking 18 to 24 months and roughly $100
million in the collection of agreements and legislation to
explore an opportunity that it thought was tremendous. He
hoped that once the pre-FEED step was completed, the
project would be back before legislature for approval with
the additional detail and a body of additional agreements;
he added that approval for project's next step would come
with another commitment of 2 to 3 years and upwards of $400
million. He added that the $400 million could be a lesser
amount, depending on partnership opportunities.
10:26:35 AM
Senator Bishop requested Commissioner Balash to speak to
the state's consultants who were advising Alaska on the
issue and observed that the public might not be aware of
who was helping the state. Commissioner Balash replied that
that the state-gas team had people who dealt with the
companies on a daily basis, but behind them were the
state's consultants at Black and Veatch. He reported that
Black and Veatch was a global engineering firm that is
involved directly with the design and construction of LNG
project such as the AKLNG project; the company's business
consultancy, which Ms. Poduval was a member of, had
provided direct guidance and research regarding how these
sorts of agreements, as well as the commercial agreements
were put together. He related that Peter Abt, a managing
director at Black and Veatch, had several decades of global
gas experience, most recently working for GAZPROM in
Russia. He stated that aside from Black and Veatch, there
were some subcontractors on that contract that widened the
base of experience in assessing fiscal regimes and certain
market conditions, as well as intelligence. He stated that
one of the subcontractors, Daniel Johnston, was familiar
face and had advised either the legislature or the
administration in the past and contributed to the
competitiveness review on the project. He pointed out that
the state's outside counsel on the legal side was Greenburg
Traurig, which was also an international law firm. He
stated Ken Minesinger had served as general counsel to a
number of North American pipelines. Sinc******)
10:29:55 AM
////.
.
10:30:55 AM
Senator Hoffman directed the committee's attention to slide
7 and related that there were three 3 different categories
of funding that reflected the different levels of
commitment. He inquired when the legislature would need to
make those commitments and further queried if the payments
for 2016, 2017, and 2018 would have to be made in 2016 or
if they were spread out over three 3 different legislative
sessions. Commissioner Balash replied that there were
probably several ways to deal with that and which would
partially depend on whether the state still had a cash call
exposure through the liquefaction portion of the project;
the administration had identified a partnership possibility
with TransCanada and it may be able to identify additional
partners during the marketing phase in the liquefaction
portion. He stated that if the state was able to secure
those partners, there might not be a need for cash calls
during 2016, 2017, and 2018 on the part of the state;
however, no partners had been identified yet, so the slide
referenced $180 million to $450 million over the phase. He
stated that each party would be responsible for meeting
their cash-call requirements and that currently, the
frequency of the commitment was not yet written into the
agreement. He thought that it was premature to know with
certainty, but that the state could expect to have a
significant cash commitment in 2016.
10:33:06 AM
Commissioner Balash addressed slide 8 and related that
there were 3 major components of the project that all fit
together in order to produce LNG for marketing to the
Pacific markets. He stated that one of the components was
the gas treatment plant at Prudhoe Bay that would remove
the CO2, H2s, and other impurities that would result in a
very pure methane stream with some other potential
hydrocarbons to help keep the BTU content high; that gas
stream will be fed into the pipeline that will travel
throughout the state at a relatively high pressure and
would end into a liquefaction plant located at tidewater
that was expected to be in Nikiski.
10:34:11 AM
Commissioner Balash spoke to slide 9 and stated that the
question was what the state's share of the project would
be; a range of 20 percent to 25 percent had been identified
in the HOA as the state's share. He stated that range had
been determined through discussions with the companies, but
was also a reflection on the findings of Black and Veatch's
work to identify the minimum threshold for state
participation to make the risks Alaska was taking on worth
it. He noted that the set of commercial commitments in the
project were very long-term and that the administration
thought that having a share lower than 20 percent was too
low; conversely, the state's potential partners did not
want it to have an open-ended upper end and a top end
number 25 percent had been arrived at. He noted that the
legislation settled on state participation at about 22
percent and relayed that the number was calculated by
taking the state's royalty interest, which was fixed at
Prudhoe Bay and Pt. Thompson and expect it to produce
roughly 75/25 split between the two fields in the long-
term; on a blended basis, 13 percent was the figure for
royalty. He related that the 13 percent royalty share was
added to the production tax share to produce the total
state gas share number. He observed that the math was not
straightforward and that the production tax rate of 10.5
percent was out of 100 units of gas; it was not that 10.5
percent out of 100 units of gas but was that percentage
after the royalties were taking out. He expounded that the
state's total share of the gas was actually 10.5 percent of
the remaining 87 percent after royalty plus the 13 percent.
He concluded that the total state gas share would then be
used to determine the state's equity participation number
on the project's three major components. He pointed to the
slide's gray boxes and noted that the corresponding capital
investment required to achieve the state investment in the
3 percentages of 20, 22, or 25.
Co-Chair Kelly inquired if there was a slide that covered
risk and cash calls. Commissioner Balash replied that there
was a slide further back in the HOA section of the
presentation and that Commissioner Rodell would address it.
10:38:14 AM
Vice-Chair Fairclough thought that Commissioner Balash had
touched on her question on the blended rate on the royalty
gas. She recalled that in the Senate Resource Committee, a
floor had been set so that the Alaska's revenue from the
project could never go to zero and inquired if that
committee had set it at 10.5 percent. Commissioner Balash
believed that it was 12.5 percent.
Vice-Chair Fairclough inquired if 12.5 percent was the
average of the lease rates. Commissioner Balash replied
12.5 percent represented the base royalty rate for leases
that have an additional component like a net-profit share
or a sliding scale. Vice-Chair Fairclough wondered if it
should be set at a blended rate and thought that the Pt.
Thompsons lease was at a higher rate of 16 percent.
Commissioner Balash responded that there were some leases
that had a 16 percent rate, which was a 1/6 rate; however,
there were a lot of 1/7 leases.
Vice-Chair Fairclough relayed that the intent in setting a
floor in the Senate Resources Committee floor was to make
sure that Alaskans received the value that was negotiated
on the lease. She observed that the floor was set at the
low end and wondered if it should be blended because of the
discussion on the point of production. She noted that the
state would never go above the 15 percent gross tax as was
stated in the HOA and wondered about the play between 16
percent lease rate and Prudhoe Bay. She wondered how the
actual gas tax would be adjusted to stay within the range
of the blended number that the administration was showing
the committee.
10:40:44 AM
Co-Chair Kelly requested Commissioner Balash to restate
Vice-Chair Fairclough's original question before he
answered. Commissioner Balash replied that when DNR offered
acreage for lease at competitive sales, the terms of the
leases were noticed before the bids were brought in; it was
intended to be a transparent process. He related that when
Prudhoe Bay had been first put up for lease in 1969, the
terms were generally set at a 1/8 or 12.5 percent royalty
share. He reported that when Prudhoe Bay had first been
developed and the Trans-Alaska Pipeline System (TAPS) had
been constructed, there were additional sales in an around
Prudhoe Bay that offered terms at slightly different rates;
in some cases, the royalties were made higher and in
others, a net-profit share lease was offered for sale. He
explained that a net-profit share lease had a royalty rate
of 12.5 percent, but the bid variable was a percent of the
profit earned on that lease rather than being a bonus bid;
it was a payment that came in to DNR in addition to the
royalty. He reported that DNR had certain leases that had a
sliding scale royalty that had the base royalty set at 12.5
percent, 1/7, or 1/6, but the royalty rose upward as prices
increased. He observed that DNR had a large variety of
terms on its leases and recalled that after initial
production at Prudhoe Bay, the department began offering
some of its other leases at an even higher initial royalty
rate; that was generally why Pt. Thompson coming in a
higher royalty. He stated that Pt. Thompson had some leases
at mostly 1/7, some at 1/8, as well as some net profit
sharing and sliding scale leases; all of those leases get
blended together at the unit level and depending on the
field's production and how the individual tracks were
allocated for production purposes, it drove the math for
how much of the gas was "royalty gas."
Commissioner Balash continued to address Vice-Chair
Fairclough's question and stated that in the Prudhoe Bay
case, the track factors were fairly straight forward; DNR
had seen a lot of production and cycling of the gas, knew
where it was coming from, and knew how to allocate the
production. He stated that Prudhoe Bay's terms had been
rationalized among the producers and there was less chance
for disputes; however, when dealing with something as big
as SB 138's proposed gasline, production from both fields
would be needed to support the project. All of the proven
24 Trillion Cubic Feet (TCF) of Prudhoe Bay and all of the
proven 8+ TCF would be needed to support the sales and
purchase agreements (SPA) that would finance to project. He
relayed that the exact timing of when both of two fields
would be in production was not known currently and
furthered that part of the timing would depend on approvals
from the Alaska Oil and Gas Conservation Commission (AOGCC)
and part would depend on other construction windows. He
stated for example that if the state agreed on an overall
number that resulted in 22 percent state gas share and the
Pt. Thompson production came early, it may find it itself
with slightly more than 22 percent at that location; the
state wanted to avoid not having enough capacity in the
terms of infrastructure to move all of the state's gas in
the first year. Conversely, if Pt. Thompson gas was not
being produced in the first year and it was all from
Prudhoe Bay, the state could find itself short on gas
because Prudhoe Bay by itself would be slightly less than
22 percent. He stated that the challenge for all parties
involved was to develop a balancing agreement, so that
there was a way to long-term balance the 22 percent gas
share of the state as well as other parties shares
regardless of which field came online first; this was
something that the state and ConocoPhillips were very
aligned on because that company had a very different
ownership pattern for both fields.
Commissioner Balash continued to address Vice-Chair
Fairclough's questions and discussed the floor for the
purposes of SB 138. He stated that the authority DNR was
requesting was to modify the leases that had a net profit
share or sliding scale component so that it could fix a
number rather than having one that fluctuated; having
certain leases within units that went up and down would
make the balancing agreement harder to solve. He stated
that the question was what the fixed number would be. He
explained that if the base royalty rate in Prudhoe Bay was
12.5 percent and sliding scale went up as high as 20
percent, DNRY would probably ask for something closer to 20
percent and British Petroleum would probably want something
closer to 12.5 percent. He thought the Senate Resources
Committee had been trying to make sure that the State did
not receive under 12.5 percent; he thought that Vice-Chair
Fairclough was asking if that number should be higher than
12.5 percent to get closer to the expected blended number
and not lose value. He thought that state needed to pay
extra attention to number language that would work across
the North Slope and fields and not put the state in a
position where it could not resolve the number from a
commercial standpoint. He added that the state may want to
have a formula that was reflective of the base royalty rate
for any given lease plus a some number, so that the number
was not hard wired that may actually be lower than the base
rate, for example, at Pt. Thompson. He used 13 percent as
an example and stated that on a blended, long-term basis,
it would be the state's royalty share; however, if 13
percent was viable at Prudhoe Bay, it would be too low at
Pt. Thompson. He concluded that the state would want a more
formulaic floor instead of a set number.
10:50:02 AM
Vice-Chair Fairclough understood the interplay and the
point of production, but wondered if the state was forgoing
about 1.5 percent interest on gross because of its ability
to meet cash calls or the certainty in the alignment of the
other partners. She stated for example that if one was
looking at Pt. Thompson without blended rates and the
legislature wanted to tax gas at 10.5 percent, which was
added to the 16 percent lease, the state's share would be
about 26.5 percent; however, it was proposed that the cap
be 22 percent based on the blended rates. She noted that if
the state's tolerance for risk was greater, it could have a
cash call that when up to 25 percent; it would still be
missing an opportunity to make another 1.5 percent based on
the current lease structures that were determined years
prior if it was blended into the current proposal of a 10.5
percent gas tax. She inquired if her understanding was
correct. Mr. Pawlowski replied that Vice-Chair Fairclough
was correct and that the balancing agreements were critical
for the state and other parties; however, he clarified that
the 10.5 percent would not come out to 26.5 percent,
because the 10.5 was "after." He noted that what DNR was
trying to illustrate in slide 9 was the direct relationship
between the tax rate and state's investment in
infrastructure. He noted that these numbers did not
represent the state's total interest in the project and
that all that was being discussed were royalties,
production tax, and a share of infrastructure; in addition
to this, the state and local governments had property taxes
and there was also corporate income tax, which were both
separate from what was considered state revenues on the
project. The concept that was being advanced with bill was
the state-tax rate in combination with a royalty that would
set Alaska's share in the infrastructure.
10:53:21 AM
Vice-Chair Fairclough inquired if Alaska would see a rate
of return on its cash investments when it placed cash on
the table to mitigate risk. Mr. Pawlowski replied that the
return on investment that the Alaska would receive was laid
out in the TransCanada MOU if state used an equity option;
it was the exact same rate of return that TransCanada was
earning on its equity amount position. He added that the
return on state's investment on the liquefaction had not
been set yet and was part of what the concept going forward
needed to be. He concluded that the state would get a
return through the sale of its gas in the investment in the
infrastructure.
10:54:13 AM
Vice-Chair Fairclough wanted to be sure that the state was
discussing a single aspect inside the proposed investment
to strategy, but that there was more going on that the
state was trying to offer the lowest possible
transportation costs, which had not been gone through yet.
She appreciated the understanding that the administration
had regarding the balancing agreement and how important it
was. She noted that the balancing agreement was a future
agreement that would need to be brought back to legislature
for approval.
Co-Chair Kelly indicated that he and Senator Dunleavy had
to leave for another engagement.
10:55:11 AM
AT EASE
10:56:46 AM
RECONVENED
Co-Chair Meyer noted that several members were attending
the press availability due to time constraints.
10:57:16 AM
Commissioner Balash spoke to slide 10 and stated that it
was a re-illustration of the three major components of the
project with each of the parties' respective ownership
shares shown. He noted all parties would have a share of
the gas treatment facility, the pipeline, and the LNG plant
He explained that the benefit was in letting each party
setup financing in a way that suited its long-term
interests. He noted that for years, the state had been in
an adversarial footing relative to the three majors that
were on the slide regarding matters with TAPS and tariffs
charged. Through the state's lease agreements and the
production tax system, it did provide for a recognition of
the costs of transportation and the question was what that
cost was. He reported that the construction cost of
infrastructure was straightforward and relatively easy to
identify; how that cost was financed was what drove the
ultimate transportation charges. He reported that generally
the state was interested in lowest possible cost of
capital, which usually meant a higher debt component and
lower share or return; for that reason, DNR had paid a lot
of attention to the how the state's partners financed
infrastructure. He stated that in the construct that was
proposed in the HOA, the state taking on its share in all
three components meant that it did not have to care about
the relative financing of the three3 other partners because
it was not all being blended into a single tariff and was
not being used to calculate the production tax or royalty
values; instead, the state would be in a position to order
it's financing in a manner that it thought best served
Alaska's long-term interests or put together partnerships
on transportation services with terms that worked for
Alaska.
Commissioner Balash responded to Vice-Chair Furlough's
question regarding Alaska's return on equity (ROE) at the
LNG plant. He noted that regardless what the ROE was set
for on the state's share of the project, the Alaska was
paying itself and could set the ROE at 6 percent or 12
percent; however, if it was set at a higher number, it
would just mean that it would come out of the royalty
proceeds from LNG sales and result in a lower royalty
number. He concluded that as long as the state was charging
itself, it would be shifting funds from one pocket to
another in moving the ROE around. He stated that the ROE
became more important regarding the state's partners and
thought that Commissioner Rodell would be able to walk
through some slides on the MOU to illustrate that point.
11:01:10 AM
Commissioner Balash spoke to slide 11 and related that the
committee had seen it presented the prior week by Ms.
Poduval. The slide checked the royalty study's findings
against the HOA. He related that the alignment through
equity recommendation was achieved in a very direct manner
in the HOA. He added that DNR's and its contractor's
analysis showed that the current alignment improved the
economic metrics for producers and the commercial
attractiveness for the project; the alignment also took
some steps, though not all of them, to reduce overall
government take. He stated importantly, the current
alignment preserved the state's royalty value, but it did
not answer all of the questions; it did take steps to
manage some of the risks, but there were issues with the
capital costs that the HOA did not address directly. He
stated that there was some language in the HOA that DNR
thought had great potential to benefit the state and
mitigate the risks of RIK marketing and price exposure;
each of the producer companies were prepared to come
forward individually assist the state in the disposition
and sale of its LNG. He stated that DNR thought that
overall structure went a long way to providing a path
forward with 3rd-party access to the line and expansion
opportunities, which was an issue that the state and the
lessees were having trouble with; the construct seemed to
work for the state and lessees and held great promise.
11:04:04 AM
Commissioner Balash discussed slide 12.
Key Takeaways: Heads of Agreement
· LNG is a significant opportunity for Alaska and
Alaskans.
· Phased process with commensurate steps.
· Off-ramps for all Parties.
· Maintains AGDC momentum on Alaska Stand-Alone
Pipeline (ASAP).
· Creates opportunities to mitigate State risks
identified in royalty study.
· Major risk is cost of State participation
Commissioner Balash spoke to slide 12's first bullet point
and stated that the project was not only an opportunity in
terms of benefit to treasury, but also in the business and
job opportunities that it would represent. He thought that
the peak construction was estimated to result in about
15,000 jobs and after that peak, the long-range operation
would require something on the order of 1,000 jobs that
were be in Alaska as long as those SPAs were in place; the
SPAs would probably be in place for 20 or 30 years. He
stated that process itself took a phased approached and
that the legislation was not asking for a 20 or 30-year
commitment; the bill was asking for measured authority,
some time, and some cash. He reported that there were off-
ramps for all of the parties and that the HOA itself
expired at the end of 2015. He stated that the big risks
that the state might face in the project had been
identified and the state had begun to measure ways to
mitigate those risks; he thought that a lot of those
problems would be solved in the next phase through further
commercial negotiation and agreement with the other project
parties. He added that cost was a major risk for the State
of Alaska and stated it would be very important to monitor
the state's cash flows during the period of construction.
He noted that state needed to be careful of the role of
financing the opportunities for cash exposure during the
period of 2019-2023, which was where partnerships had the
greatest opportunity to mitigate the state's risks in the
future.
11:07:15 AM
Vice-Chair Fairclough noted that Commissioner Balash had
referenced the state's ROE and how it could have an impact
on tariff rates as the state was trying to provide lower-
cost energy to Alaskans. She requested Commissioner Balash
to expand on the comment; she was thinking about the
Insterstate Commerce Clause and how it would fit inside of
the state's ability to try to reduce the tariff charges.
She thought that the commissioner might want to mention
Federal Energy Regulatory Commission (FERC) regulation on
the pipe versus the rate. Commissioner Balash replied that
the state had traditionally relied on rate making on
pipelines to protect its interests, which was most easily
seen in the case of TAPS. He stated that over the last
decade and a half as Alaska had hoped for pipeline
connected to the Lower-48, the state would have been
relying on FERC and the Canadian side's National Energy
Board (NEB) to connect producing fields with a liquid and
transparent market place; this would have meant highly
regulated infrastructure to carry the gas from fields to
market in a very straight forward way to value the state's
royalty interest. He stated, however, as the project
focused to an LNG project, the state faced a different sort
of value proposition where it would no longer take its own
gas to a transparent and liquid hub; instead, that gas
would be taken to locked-in buyers who had agreed to
specific terms for very long period of time and were in a
propriety deal. He furthered that LNG market place was
generally not transparent or liquid and the value question
became a little cloudier. He noted that with LNG there was
still a pipeline involved, but there was the addition of a
liquefaction plant and that FERC did have some jurisdiction
over liquefaction facility, which was generally limited to
environmental health and safety matters; FERC did not
regulate for access by 3rd parties or rates. He observed
that the state faced a little bit of a question mark
because under the lease agreements, the state was entitled
to its royalty share, but the lessees were entitled to a
reasonable transportation deductions; because liquefaction
was part of the process of transporting gas, the question
was how to go about determining what the reasonable charge
was for liquefaction. He explained that that area of
liquefaction was not regulated, the state could not rely on
FERC to tell it the answer; the state was left largely to
settle those differences in commercial agreements or in
litigation.
Commissioner Balash continued to address Vice-Chair
Fairclough's comments and thought that the state needed to
look at the cost of that infrastructure, the debt relative
to equity was financed, and what the return on that equity
was. He stated that if the state was using its own money to
construct the project, it could charge a very relatively
high ROE; if it did that, it was subtracting value from the
market prince in the SPAs that got deducted and resulted in
a smaller and smaller wellhead value where royalty was
calculated. He stated that the higher the state pushed
those tariffs and the smaller it made that net-back, the
less value that was created for the Permanent Fund; it also
started to the affect the starting point for the price of
gas to Alaskans and the state faced an odd dilemma. He
explained that the state could arrange the financing so
that the liquefaction charge was really high and the
pipeline charge was really low, gas could be moved to
Alaskans at what would appear to be a low price; however,
the state would really be shifting the costs from one
pocket to another and would be susceptible to accusations
of interfering with the market place. He would rather not
speculate on where those lines where in order to preserve
them for future discussions with counsel and regulators;
however, there were some odd interplays that could occur
depending on the overall structure and what the price was
from a net-back perspective at the North Slope.
11:14:40 AM
Mr. Pawlowski spoke to Vice-Chair Fairclough's earlier
question regarding how Alaskans and other parties could see
what the cost of moving gas through the pipeline was and
stated that it was found in the MOU with TransCanada. He
thought given the proprietary nature of the project,
TransCanada brought in the best of both worlds in that
there was a 3rd party actor providing the transparent terms
for potential shippers. He thought that the terms
highlighted on slide 13 were very competitive compared to
other gasoline projects that were regulated by FERC.
11:16:09 AM
ANGELA RODELL, COMMISSIONER, DEPARTMENT OF REVENUE, spoke
to slide 13 and the memorandum of understanding. She stated
that the state's participation in the project would require
significant financial and human resources. DOR believed
that the path forward was to take advantage of the already
existing partnership with TransCanada under the Alaska
Gasline Inducement Act (AGIA) framework; this and the
investment made by both the state and TransCanada made the
company a natural partner to assist in moving the project
forward. She believed that the state did need a partner in
the project because at the end of the day it was a state
government and had an obligations to Alaskans to continue
to provide a safe and prosperous environment to live in.
She reported that the state did not have the right
expertise and that TransCanada was an independent pipeline
company that knew how to build pipelines; the company had
also spent the last 6 years developing an understanding the
environment and challenges that were unique to Alaska. She
stated for the above reasons, she and Commissioner Balash
had determined that entering into the MOU with TransCanada
was in the best interest of the state.
Commissioner Rodell addressed slide 13.
The Memorandum of Understanding
The MOU with TransCanada provides a roadmap for a
transition from the AGIA license to a more traditional
commercial relationship with TransCanada.
The MOU describes how the State will:
1. Abandon the AGIA license.
2. Partner with TransCanada in the midstream
(Transmission lines, GTP and Pipeline) of the AKLNG
project.
3. Provide for active interest in expansions.
Key Terms of MOU:
1. Favorable Debt to Equity Ratio
•75/25 ratio for rate-making purposes reduces the
State's tariff.
•Lower tariffs improve the State's overall cash flows.
2.Cash Contributions by TransCanada
•TransCanada as project developer reduces the State's
exposure to cash calls and obligations until the
pipeline is in service.
3.Improved Value to the Treasury
•When you consider the opportunity cost of utilizing
the State's capital (which earns 6% in the treasury),
our NPV is improved overall.
4.Expansions
•TransCanada committed to 70/30 capital structure for
expansions.
5.Gas to Alaskans
•At least 5 offtake points
•Distance sensitive rates with three zones for
delivery
11:19:06 AM
Commissioner Rodell spoke to slide 14.
MOU: Transporting Alaska's Gas: The MOU details
TransCanada's terms of service for transporting
Alaska's State Gas Share via the GTP and Pipeline. It
is further contemplated that a subsidiary corporation
of AGDC will be established to carry the State's
interest in the LNG plant.
Commissioner Rodell spoke to slide 14 and related that the
slide's diagram attempted to depict how the state
transitioned its gas share. She noted that TransCanada came
in with the state's gas share on the gas treatment facility
and transmission, as well as with the pipeline. The
subsidiary of AGDC would take the state's gas share in the
LNG facility.
11:19:41 AM
Commissioner Rodell addressed slide 15.
Exhibit B of the MOU: Contains a term sheet for the
State to exercise an equity option up to 40%* of the
partnership established by TransCanada for the
relevant portion of the midstream.
Commissioner Rodell stated that the option to exercise
equity on slide was important because it would allow the
state to make a decision if it wanted to take more on after
pre-FEED when more was known about what the demands of the
project and the demands on the state would be.
11:20:37 AM
Commissioner Rodell spoke to slide 16.
MOU: Describes how the State will share the
responsibility for its share of the project with
TransCanada
Commissioner Rodell stated that slide 16 was another
picture of what was discussed on the previous two slides
and did assume a 25 percent equity participation for the
ease of illustration.
11:20:54 AM
Commissioner Rodell discussed slide 17 and noted that it
was one of slides that Black & Veetch had included in a
previous presentation. She thought that it was important to
show because it depicted how the levers were interconnected
and what various decisions' impacts would be. She reported
that if the state wanted to decrease the equity by 5
percent and increase the debt, it represent the equivalent
of about $200 million in additional net present value (NPV)
to the state; there was clearly value in having a higher
debt, lower equity percentage. She noted that increasing
the ROE by 1 percent would result in a loss of $100 million
to the state. She noted that for each year of delay in the
project operation resulted in a loss $800 million in NPV to
the state. She relayed that the slide spoke to the value of
maintaining momentum and striving to get to the final
investment decision (FID) in 2018.
11:22:49 AM
C
Commissioner Rodell addressed slide 18 and stated that DOR
wanted to understand what the other pipelines had as the
debt/equity structures and ROE. She stated that the
information on the slide came from the public filings
within the FERC certificate orders; the pipelines were
natural gas pipelines located within North America that
showed that capital structures tended have much higher
equity than what was in the MOU with TransCanada. The ROE
of the slide's pipelines was 13 percent or 14 percent. She
offered that the slide showed that the state had negotiated
a fair deal with TransCanada and that it was the right way
to go.
11:23:42 AM
Commissioner Rodell spoke to slide 19 and related that one
of the things that DOR was working on, which she thought
would be presented to the committee at future meetings, was
a more detailed analysis of the cash calls and how it
interacted with state's budget, revenue projections, and
other commitments that the state had; however, that was not
included in the current presentation. She related that the
slide showed what kind of cash commitments the state was
being asked to make on the project. She reported that if
the state chose to go it alone, about $108 million would be
needed to fund Alaska's portion of the pre-feed, which was
in the fiscal notes for the FY15 budget. She clarified that
these exact amounts were not in budget, but that the FY15
notes attached to the bill would include amounts to fund
the state's investment in pre-Feed. She offered that if the
state chose not to exercise the 40 percent buyback option
with TransCanada, the state's investment for the pre-FEED
period would about $43 million; DOR would be asking for
money to repay TransCanada the 40 percent in the FY16
budget if the state decided to go forward with the option.
She pointed out that if the state wanted to go it alone,
the FEED stage would cost another $400 million; mostly
likely this amount would be included in the FY16 budget
with supplemental in FY17 and FY18 as the cash calls were
better understood. She stated that without using the buyout
option, FEED would cost the state about $180 million; if
the state chose to exercise the 40 percent buyback, the
cost looked closer to $340 million.
Commissioner Rodell continued to speak to slide 19 and
stated that the state would have to evidence that it had
the money to make the commitments either through
appropriation or some other mechanism. DOR was continuing
to explore what the other mechanisms might be available to
the state in terms of making that evidence. She stated that
DOR was looking at if it was possible pursue a line of
credit or letter of credit that the state could draw on
without running an appropriation risk.
Co-Chair Meyer stated that the committee did have SB 138 in
its possession and that it was ok to refer to the bill.
11:26:59 AM
Vice-Chair Fairclough was looking at the time value of
money wondered and the committee's deliberation of the $3
billion into the pension plan; she wondered why the state
would not set aside $452 million to get to pre-FEED. She
observed that the $452 million would earn interest in an
account and the state would still have all of its off-ramps
and cash. He thought that debt was part of the reason, but
requested an explanation of the reasons behind not doing
this. Commissioner Rodell replied that it was a good point
and that setting aside that money had value. She stated
that part of the reason DOR had not proposed setting aside
the funding were concerns of not wanting to create any
constitutional issues around dedicated funds if it was kept
inside the Constitutional Budget Reserve (CBR) Fund for
that purpose. She was concerned about the legislature's
ability to carve off a piece of that funding and how it
would appropriated out and not appear like a multi-year
appropriation. She thought that there was value in setting
that amount aside, but that what the potential competing
demands might be on the budgetary side needed to be
recognized. She added that DOR was working on a detailed
analysis of setting that money aside.
11:29:33 AM
Mr. Pawlowski added that one thing to be careful about when
thinking about how to structure setting money aside to get
to pre-FEED was the horizon over which the money could be
invested. He stated that when existing funds were used that
were leveraging off of the way the money was currently
invested now, it was important to pay close attention to
when the cash was actually needed. He thought that the
balance of whether the money was better managed in one fund
versus another fund was important, and if it was efficient
to keep it separate when it was part of the state's
reserves and was being managed under the current practices.
11:30:31 AM
Vice-Chair Fairclough thought that the timeframe was short
enough that the money could be issued as a grant to AGDC.
She noted that the legislature gave grants to non-profits
and understood that her idea was on a much larger scale.
She thought that the proposal for the $3 billion was to
transfer those assets in the form of its current state and
move the management responsibilities over the Alaska
Retirement Management Board (ARMB) versus paying for
selling products that the state was managing and rebuying
them, which would result in administrative cost overheads.
She added that the $3 billion would go to paying a debt
that actuarially was presented to the public on Alaska's
finances; she wondered if that was the difference in the
dedicated fund issue between the $3 billion infusion and
her suggestion of setting $452 million aside for the
project. Commissioner Rodell replied that the legislature
was restricted currently from carving off and dedicating
reserves for a specific cause and that the question was if
it was willing to make an appropriation either as a grant
or as appropriation to the Alaska Capital Corporation; the
legislature could also create a new vehicle to house the
money. She stated that there was tension surrounded how the
funding would be set aside and structurally created so that
it was clearly identified for the purpose of funding or
acting as a backstop to the state's participation in the
project during the pre-FEED and FEED gates; DOR would then
adjust the asset allocation and investment of that to take
into account when those cash calls were going to happen.
11:32:39 AM
Vice-Chair Fairclough stated that the state did not need
another new organization to be stood up and thought that
using an existing structure would be ideal.
11:33:13 AM
Co-Chair Meyer thought that Vice-Chair Fairclough had a
good point and recalled setting up a fund to put money in
for building a pipeline and other capital projects; he
thought that the fund was still available and was housed in
Alaska Housing Finance Corporation (AHFC). He thought that
fund was setup to earn good interest for money that sat
there and that there was possibility to do what Vice-Chair
Fairclough was suggesting. Mr. Pawlowski replied that the
legislation did contemplate the creation of a new fund
within AGDC, which was done to protect the missions of
AGDC, but Vice-Chair Fairclough's comments opened the
question of how the state would want to use the fund. He
thought that discussing the fund and its possible uses was
a good dialogue for the committee to have with the
administration.
11:34:17 AM
Senator Hoffman wondered if FID would take place late in
2018 or in 2019, as well as what form it would come in.
Commissioner Rodell relied that it was expected that the
state would be wrapping up the FEED stage at the end of the
2018 calendar year and that FID was expected at the start
of calendar year 2019.
11:34:53 AM
Senator Hoffman inquired what form the FID would be
presented in and whether it be legislation. Commissioner
Rodell replied that it would require legislation because it
was the point at which the state would decide if it really
wanted to move forward with the pipeline.
11:35:07 AM
Senator Hoffman inquired if that would take place in late
2018 or in 2019. Commissioner Rodell replied that it was
hard to say at this stage, but believed that it would most
likely occur during the regular session of 2019.
11:35:38 AM
Senator Hoffman noted that the timing was a big decision
because 2017 and 2018 would be one legislative session and
that 2019 and 2020 would be another. Commissioner Rodell
replied that Senator Hoffman raised a very valid point and
to the extent that FEED was successful, the administration
would be coming back for approval sooner rather than later.
11:36:07 AM
Vice-Chair Fairclough noted that the unique point at FID
would mean that the state had secured gas contracts for the
volume and would have a defined tariff number. She hoped
that if the state went that far, the economics would be
positive for Alaska. Commissioner Rodell replied that the
administration would also have much higher defined costs of
the project as well.
11:36:55 AM
Commissioner Rodell addressed slide 20 and stated that it
gave a pictorial of how having partners could reduce the
state's investment during peak construction and what the
value of sharing that risk was to the state. She reported
that if the state did the project without a partner, it
would have significant cash outlays throughout the period
and it reached in excess of potentially $3 billion per year
for 2 or 3 years during peak construction; that cash outlay
was reduced almost in half if the state allowed TransCanada
to carry all of the state's participation in the midstream
and the gas treatment facility.
11:37:53 AM
Vice-Chair Fairclough if TransCanada would still be as
likely, based on their rate of return for shareholders, to
mitigate cash calls during FID if the state set aside the
money she had referenced earlier to get the state to pre-
FEED and the decision points; this way state would not be
paying TransCanada interest on equity. She wondered if
there was any kind of interplay or dependency in the
current negotiated contracts that allowed TransCanada to
not go forward with the state's option at FID if the state
had not been an active participant in the project in the
years prior. Commissioner Rodell thought that when the FID
decisions were reached there would a re-assessment by both
sides and that as the MOU was currently written,
TransCanada and the state could decide to not to continue
that partnership. She added that the administration
expected to continue going forward with the project. She
stated that TransCanada not being able raise the money and
not being able procure debt to finance the state's share
portion was a an off-ramp in the MOU; in this case, the
state would have to come up with the funding. She stated
that there was risk that TransCanada would not be able to
go forward with the project, but the possible reasons for
that happening were finance risks that all participants
were exposed to.
11:40:09 AM
Vice-Chair Fairclough noted that if the project reached
FID, the numbers would be much more refined and that the
project could should be able stand on its own and be
economically viable for both the State of Alaska and a
potential equity provider.
11:40:30 AM
Commissioner Rodell addressed slide 21.
CAN THE STATE GO IT ALONE? - STATE'S DEBT CAPACITY
• Financing the State's share of the AKLNG Project on
the State's balance sheet - key issues:
• At what cost of debt?
• Debt servicing as what % of general fund
unrestricted revenue.
Scenario 1
(lower interest)
• SOA Debt at 4.6%
• Debt Service limited to 3% of GFUR
Scenario 2
• SOA Debt at 4.9%
• Debt Service limited to 5% of GFUR
Scenario 3
(higher interest)
• SOA Debt at 5.6%
• Debt Service limited to 6% of GFUR
* High-level, indicative assumptions based on input
from Department of Revenue
Commissioner Rodell spoke slide 21 and stated that DOR had
given Black & Veatch certain assumptions when making the
scenarios. She pointed out that in Scenario 1 it was
assumed that the debt would be appropriation debt would be
AA+ rated because it would be one notch below the state's
AAA credit rating. She noted that the assumption that the
scenarios would use appropriation debt was because general
obligation debt required a vote of the people and that
there were currently no revenues available to finance under
a straight revenue construct. She addressed Scenario 1's
debt service and stated that it assumed the state's current
debt obligation of 5 percent of unrestricted General Fund
Revenue; the scenario would take the state up to 8 percent,
which was considered good a financial construct. She noted
that Scenario 2 would add 5 percent and would take the
total obligations of the state up to 10 percent of its
unrestricted General Fund Revenue; it would be at a A
rating and would cost more because of the lower credit
rating. She stated that Scenario 3 would have BBB rating.
Commissioner Rodell continued to address slide 21 and
related that the more unrestricted General Fund Revenues
that the state attached to the project over and above its
current debt commitments the lower the rating and the
higher cost. She pointed out that Scenario 1 provided the
lowest cost of debt, but it also gave out the least amount
of proceeds; under Scenario 3 had the most proceeds
produced, but at a higher cost.
11:43:15 AM
Commissioner Rodell addressed slide 22 and stated that when
Black & Veatch had formulated the different scenarios, it
had started off at the 20 percent equity stake because the
company thought that it was a good place to start. She
stated that the slide showed that if the state did not
partner for the project, the state would generate
approximately $3.5 billion-$6 billion in debt depending on
the interest the rate; the remaining balance would have to
come from equity. She noted that with the partnership with
TransCanada in scenarios 2 and 3, the state was able to
fund a larger proportion of its participation with debt
progressively in each one.
11:44:22 AM
Co-Chair Meyer thought that Alaska was not currently over-
leveraged with debt, but wondered if there was any concern
that the SB 138's project would get the state in over its
head regarding debt. Commissioner Rodell responded that
there was concern about how the extra debt would affect the
state's position and fathered that the state's revenue
source was volatile during the projects time period and
seemed to be going down. She concluded that DOR did have
concerns regarding how much debt the state could take on,
but that the state was not over-leveraged; the state was
not using all of the capacity that was available to it. She
relayed that the state had to recognize that it had debt
obligations that were in the form unissued general
obligation that had already been authorized by the voters
and the School Debt Reimbursement Program; the
reimbursement program did not have any limits or caps. She
stated that the pension liability was recognized by the
rating agencies as a state liability. She offered that how
the state structured its partnerships, as well as how it
would participate in the project was very important due to
the above concerns; additionally, the concerns were the
reasons that the state going it alone was a very
troublesome option from her standpoint.
11:46:14 AM
Co-Chair Meyer noted that the prospect of the state going
forward with the project alone was troubling to him and
other committee members as well and pointed out that some
of the debt, such as the School Debt Reimbursement Program,
could not be controlled. He explained that under the
reimbursement program, the state would have to pay 70
percent of the costs of building a new school if the
municipality passed a new school.
11:46:39 AM
Senator Hoffman noted that the state did not know what its
credit rating would be in 8 years and that it may not be
AAA, especially with the bleed of at least $1 billion out
of the general fund over that time period. He thought that
Alaska credit rating could drop drastically and noted that
he did not hear DOR discussing that eventuality. He thought
that the state balancing its own finances would be a key
factor in getting loans. Commissioner Rodell replied that
the point was valid and that she had been assuming that the
state would continue to balance its checkbook; however, the
Senator Hoffman was correct that there were scenarios under
which the pressures of spending versus revenues created a
downgrade on the state's credit rating. She explain that
the uncertainty was why slide 21 arranged the debt to show
what a A and BBB rated structure would look like. She
thought that another risk that had not been recognized in
the presentation regarding debt was what the future demands
on state infrastructure would be to support the project.
11:48:34 AM
Mr. Pawlowski directed the committee back to slide 4 and
related that it represented the tension that the
administration struggled with internally. He commented on
the slide's projection and relayed it reflected Black &
Veatch taking DOR's risk analysis, very conservative
revenue forecast case and running a future project based on
it. He reported that where the blue line would go after
2018 or 2019, depended a lot on what happened with the
projections the department was currently providing the
state and the upside potential, which was presented in the
Revenue Source Book. He relayed that upside potential
reflected higher levels of production that DOR saw
indications of, but were not counting on. He stated that in
the long-term, commercializing North Slope gas had the
potential to provide a material additional revenue stream
and that as the department looked at the long-term versus
short-term, it tried to manage the short term responsibly
enough to get to the longer-term blend of oil and plus gas
revenue, which would provide a robust revenue future for
the state; this was ultimately what DOR was trying to with
the HOA and with the partnership with TransCanada.
11:50:16 AM
Senator Hoffman noted that it was an eight-year span and
that oil and gas over the last eight years fluctuated
widely. He did not see much fluctuation in DOR's chart. He
stated that no one had a crystal ball and no one had
predicted the price of oil to be $114 per barrel. He
thought that state did not know what would happen to the
price of oil or gas.
11:51:08 AM
Vice-Chair Fairclough recalled the prior discussion of the
bullet pipeline versus a big line and that there had been
an attempt to get consensus for years for a bullet line to
get to provide energy in state, specifically for rural
Alaska; there had been great opposition to the bullet line
because of the worry of the tariffs being too high. She
stated that the legislature had the big line before it as
an option and that it was absolutely uncertain; she was
unsure of Alaska's tolerance for risk on the project. She
noted, however, that Alaska currently had the reverses to
take it through that number and that if it stalled for even
two years, the timeline was pushed and the reserves became
even more dependent on the volatility of that particular
moment in time.
11:52:38 AM
CCommissioner Rodell spoke to slide 23.
Key Takeaways: MOU
· Delays in momentum will generally outweigh gains in
commercial terms.
· Partnering with TransCanada:
· Advances key State interests (expansion & access)
during Pre-FEED and FEED.
· Supports larger State Gas Share by sharing risk in
construction.
· Provides transition out of AGIA with passage of
enabling legislation.
· Off-ramps exist with TransCanada in MOU.
Commissioner Rodell reported that the state would be
revisiting the project and how the state would move forward
every legislative session because there would be decisions
to be made at each point regarding contracts or
appropriations.
11:53:40 AM
Commissioner Rodell discussed slide 24.
Summary
· State participation in the AK LNG project:
· Maximizes the value of the State's resources.
· Improves competitiveness of AK LNG project.
· Puts State in a position to mitigate risks.
· Partnering with TransCanada:
· Advances key State interests (expansion & access)
during Pre-FEED and FEED.
· Supports larger State Gas Share by sharing risk in
construction.
· Phased process allows all Parties to mitigate risks.
11:54:17 AM
Senator Dunleavy noted that as he listened to the questions
and comments and he was thinking about the four quarters of
partnership between ConocoPhillips, BP, ExxonMobil and the
State of Alaska. He inquired if there was anything
preventing the state from talking to and taking on
additional partners that may want gas in order to lower the
state's risk on the project even further. Commissioner
Rodell replied in the negative and added that she expected
that the state moved closer to FEED and FID and had more
certain information, that buyers would be interested in
getting a piece of the transmission facility to ensure
access. She concluded that in 5 years, the financial
construct for the state's portion of the project would look
very different from the current plan.
11:56:01 AM
Senator Dunleavy noted that the presentation had various
scenarios of investment for the state and the return and
observed that this was for the state's quadrant. He
observed that the state could bring in partners that would
help reduce that load within its own quadrant. Commissioner
Rodell replied in the affirmative.
11:56:22 AM
Co-Chair Kelly directed the presentation back to slide 24
and requested an explanation of the state's ability to
mitigate risk. Mr. Pawlowski responded that Senator
Dunleavy had pointed to one place where risk mitigation was
possible. He explained that the when the state had a share
of the project and freedom to bring in partners, as was the
case with TransCanada, Alaska had an opportunity to share
some of the risk; for instance, if an LNG buyer wanted to
enter into a long-term contract with the Alaska, the state
may ask the long-term buy to shoulder the take or pay
commitment in moving the gas from the North Slope all the
way through the project. He related that being an active
participant in the project opened doors for the state to
have an asset to share and enabled a wide variety of
opportunities to explore during pre-FEED.
11:58:02 AM
Senator Hoffman directed the presentation back to slide 13
and discussed the two bullet points under key term #5,
which were the 5 take-off points and distance sensitive
rates to 3 zones to delivery. He thought that somewhere
along the long line before FID, the time frame and the
specifics of the delivery of gas to all Alaskans needed to
be worked out in order to let the state's residents know
that the project would make Alaska a more affordable place
to live. He thought that getting gas to all Alaskans was
critical element of the project for Alaskans.
11:59:18 AM
Senator Dunleavy inquired if it was the state's
responsibility of delivering cheap gas to Alaskans or if
the entire concept worked to that end and was a
responsibility shared by all of the partners. Mr. Pawlowski
replied that the terms of the MOU was solely dictating to
TransCanada how it would charge for gas moving in state;
however, the actual shares of what would be delivered in
state and what that would look like was yet to be
determined. He concluded that the structure of how that
responsibility would be managed was all part of the design
work and development in pre-FEED. HE concluded that gas
would be provided to Alaskans and the MOU with TransCanada
set specific rates to protect Alaskans with the distance
sensitive delivery.
Senator Dunleavy stated that the concept of getting
affordable gas to all Alaskans was very important to people
in Alaska and that he would be looking at this element and
the risk versus income. He noted that one could invest in
an ideas, but that how much the state would invest in the
project versus how much it would get out of it, as well as
getting affordable gas to Alaskan was what would drive his
decisions on the issue.
12:01:29 PM
SB 138 was HEARD and HELD in committee for further
consideration.
12:01:47 PM
Co-Chair Kelly discussed the following meeting's agenda.