Legislature(2013 - 2014)SENATE FINANCE 532

03/10/2014 05:00 PM FINANCE

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05:21:31 PM Start
05:22:23 PM SB138
05:29:59 PM Presentation by Enalytica:
06:17:54 PM SJR21
06:29:37 PM SB191
06:32:59 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSSJR 21(FIN) Out of Committee
Heard & Held
Moved CSSB 191(FIN) Out of Committee
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."                                                                                                           
5:22:23 PM                                                                                                                    
^Presentation by enalytica:                                                                                                     
NIKOS  TSAFOS,   PARTNER,  ENALYTICA,  began   a  PowerPoint                                                                    
presentation titled "Cash  Calls and Cash Flows  & Impact on                                                                    
Oil Revenues" and spoke to  slide 4 titled "SOA's Cash Calls                                                                    
and Off-Ramps"  (copy on  file). He  related that  the slide                                                                    
was a base case, while the  next slide was a stress-case. He                                                                    
pointed  out  that the  slide  had  4  groups of  bars  that                                                                    
included  the  pre-FEED,   FEED,  construction,  and  online                                                                    
stages;  all  of  the  numbers   were  cumulative  with  the                                                                    
exception  of  the  online  numbers,  which  was  an  annual                                                                    
number. He  stated that the  green on the slide  assumed the                                                                    
project without  TransCanada and  no debt. The  yellow still                                                                    
assumed  no TransCanada,  but also  that 70  percent of  the                                                                    
state's  share   would  be  financed  with   debt.  The  red                                                                    
reflected an  option that had  TransCanada with  the buyback                                                                    
and was structured  with Alaska having 40 percent  of the 25                                                                    
percent  of  the  treatment  plant   and  the  pipeline.  He                                                                    
reported that the blue-purple reflected  a scenario in which                                                                    
TransCanada had 100 percent of  the interest in the pipeline                                                                    
and  the  state   only  had  a  25  percent   share  in  the                                                                    
liquefaction. He pointed out that  the first thing that came                                                                    
to mind was  that the construction part stood out  as far as                                                                    
the costs  of the project,  but noted  that each one  of the                                                                    
slide's  scenarios   had  a  range  between   the  different                                                                    
options. He stated that in  the first phase, the estimate of                                                                    
costs was somewhere between $55  million to $150 million and                                                                    
observed  that  without  TransCanada,  the  state  could  be                                                                    
spending  about $500  million; that  figure could  be coming                                                                    
down around $250 million to  $330 million. He concluded that                                                                    
the difference  between the 2  numbers was  what TransCanada                                                                    
would be paying as part of the FEED study.                                                                                      
Ms. Tsafos  continued to  address slide  4 and  related that                                                                    
the   key  thing   to  remember   before  construction   was                                                                    
represented in the  stop lights on the bottom  of the slide.                                                                    
He related that at the end  of the pre-FEED study, the state                                                                    
and its partners had 3 options.  1 option was to abandon the                                                                    
project if the  numbers did not work at the  end of the pre-                                                                    
FEED study;  the state would  have to  reimburse TransCanada                                                                    
because it would  have been paying the state's  share on the                                                                    
project thus  far. He  relayed that a  second option  was to                                                                    
adjust the state's share by  selling down some of its equity                                                                    
if  it did  not want  as  much of  a share  as it  initially                                                                    
thought. He stated that the  third option was represented by                                                                    
the green  light, which meant  that the state  would proceed                                                                    
with  the project  and authorize  the next  set of  funding,                                                                    
which was reflected  by the bar-grouping on the  top of $486                                                                    
million, $486  million, $417 million,  and $266  million. He                                                                    
stated  that at  the end  of  the FEED  phase, which  lasted                                                                    
about 2-3  years, there were  again 3 possible  pathways; at                                                                    
this point, the project could  be still be abandoned and the                                                                    
state would still liable to  compensate TransCanada for what                                                                    
it spent  on the state's  behalf, plus interest.  He relayed                                                                    
that the state  could also still adjust its  equity share to                                                                    
25 percent,  something lower, or something  higher. He noted                                                                    
that the state could also move  on with the project as is at                                                                    
this point too. He stated  that once the project reached the                                                                    
construction phase, the cash  outlays would be significantly                                                                    
bigger and  were estimated to  be almost $12 billion  if you                                                                    
assumed no TransCanada and no  debt; the cost estimates fell                                                                    
in  each  scenario  to  $3.5   billion  to  $5  billion.  He                                                                    
concluded that  at construction and  FID were reach,  it was                                                                    
generally  too late  to abandon  the  project; however,  the                                                                    
state's share could still be adjusted at any point                                                                              
Mr.  Tsafos continued  to speak  to slide  4 and  recalled a                                                                    
discussion  in   committee  several   weeks  prior   of  the                                                                    
Queensland  Curtis LNG  project in  Australia about  how its                                                                    
equity  ownership  had  changed  over time.  He  added  that                                                                    
during   the  construction   phase,  the   state  would   be                                                                    
responsible  for   covering  whatever   its  share   of  the                                                                    
project's  costs were;  if the  project costs  rose at  this                                                                    
point,  the state  would  have to  cover  whatever share  of                                                                    
equity it  had settled on.  He stated that a  plus regarding                                                                    
the  project  was  that  the  annual  online  revenues  were                                                                    
estimated at  a range of  $2.9 billion to almost  $4 billion                                                                    
counting only gas.  He pointed to the green  category on the                                                                    
slide and  noted that the  state generated the  most revenue                                                                    
in that category because it did  not have to repay any debt;                                                                    
if the state chose that same  scenario but took on debt, the                                                                    
$500  million or  so difference  was the  interest that  the                                                                    
state would be paying back its  lenders.  He stated that the                                                                    
deltas  in  the scenarios  with  TransCanada  were what  the                                                                    
state would  be paying  back to  that company.  He concluded                                                                    
that  the  chart  was  slightly  busy, but  that  it  was  a                                                                    
compelling visual  display of the all  the different phases,                                                                    
cash commitments,  and variations that depended  on the type                                                                    
of  partnership  the   state  chose,  as  well   as  how  it                                                                    
structured  its  financing.  He reiterated  that  the  slide                                                                    
represented a base-case.                                                                                                        
5:29:59 PM                                                                                                                    
Mr. Tsafos  addressed slide 5  titled "Stress  Testing SOA's                                                                    
Cash Calls and Revenues." He  related that the slide was the                                                                    
stress-case and  was intended  to show  what a  bad scenario                                                                    
would look  like. He  stated that in  general, there  were 3                                                                    
things that  enalytica thought  most impacted  the economics                                                                    
of LNG projects;  the first was that the  project would cost                                                                    
more.  Higher than  expected  costs  affected the  economics                                                                    
because  it  required  more  money up  front,  but  it  also                                                                    
required  a  higher  repayment  if debt  was  taken  on;  it                                                                    
represented  a capital  expenditure stress.  He stated  that                                                                    
the  second  most  likely  thing  to  impact  the  project's                                                                    
economics  was the  assuming a  much lower  sales price.  He                                                                    
observed that the slide used  $7 per million British thermal                                                                    
units  (/MMBTU),  which  really was  a  stress-case  because                                                                    
there was  almost no LNG flowing  to Japan and Korea  as low                                                                    
$7/MMBTU;  it  was  way outside  of  market  conditions.  He                                                                    
stated that the  last major potential impact  to the project                                                                    
was  utilization  and offered  that  the  way to  view  this                                                                    
aspect was the  impact of one-off events, such  as having to                                                                    
shut down  the plant for 2  to 3 months. He  stated that the                                                                    
idea  that  a project  would  only  run  at 80  percent  was                                                                    
unlikely  and that  the  plays that  usually  ran below  100                                                                    
percent utilization tended to  do so because of insufficient                                                                    
gas; this  also occurred  because a  play was  diverting the                                                                    
gas to the local market. He  added that it was unlikely that                                                                    
SB  138's project  would not  have access  to enough  gas or                                                                    
have  a  big   enough  local  market  to   result  in  under                                                                    
Mr. Tsafos  continued to  address slide  5 and  related that                                                                    
under-utilization did  not usually  occur because  of design                                                                    
reasons. He  stated that the  slide was meant as  a one-year                                                                    
rather than  a 25-year stress  test. He pointed to  the four                                                                    
clusters of  bars and  number on the  slide and  stated that                                                                    
the first  and third  groups were the  same as  the previous                                                                    
slide's base  cases. He  added that  pre-FEED and  FEED were                                                                    
excluded  from the  slide because  cost escalation  in those                                                                    
areas would probably not make  or break the economics of the                                                                    
project. He stated  that the first 2 clusters  showed what a                                                                    
25  percent higher  capex would  do to  the cash  calls; the                                                                    
cash  calls  increased  from  $11.8  billion  in  the  first                                                                    
groupings  to $14.7  billion in  the no  debt/no TransCanada                                                                    
scenario.  In  the  slide's  other  cases,  the  call  calls                                                                    
increased $1.2  billion with  the buyback  from TransCanada,                                                                    
which was reprinted in the  first yellow bars; the delta was                                                                    
little  less  than  $1  billion  if  TransCanada  owned  100                                                                    
percent of pipeline.                                                                                                            
5:33:39 PM                                                                                                                    
Mr. Tsafos  continued to  discuss slide 5  and spoke  to the                                                                    
revenue side.  He stated that  the stress-case  was additive                                                                    
and  related  that higher  costs,  lower  prices, and  lower                                                                    
utilization  were happening  at  the same  time. He  offered                                                                    
that  the stress-case  represented  a perfect  storm in  LNG                                                                    
terms. He  noted that on  the right  side of the  slide, the                                                                    
green bars  went from  about $4 billion  to $1.6  billion in                                                                    
the  no TransCanada/no  debt  case.  The estimated  revenues                                                                    
ranged from  the $3.5 billion  to a little under  $1 billion                                                                    
in  the  no  TransCanada/leveraged debt  scenario  and  $3.2                                                                    
billion.  The  revenue  ranged from  $3.2  billion  to  $700                                                                    
million  in the  TransCanada with  buyback option.  He noted                                                                    
that the  lowest-case revenue projection  for the  state was                                                                    
$2.9 billion  to $500  million. He  stated that  the slide's                                                                    
numbers underscored  the point  that LNG  projects generally                                                                    
did not  lose money;  however, investing the  equivalent $14                                                                    
billion  or  $15  billion  in order  to  annually  get  $1.6                                                                    
billion back was not a  wise investment given the time value                                                                    
of money. He  offered that under the  stress-case, the state                                                                    
would still  not be  cash-flow negative  even in  the lowest                                                                    
revenue  case and  would not  be  at the  point where  state                                                                    
reserves  were needed  for obligations  on  the project.  He                                                                    
concluded that the scenario would  have to be worse than the                                                                    
parameters on  the stress test.  He stated that quite  a bit                                                                    
had  to go  wrong for  the project  to not  produce positive                                                                    
revenue, but  that the core  point was that maybe  the state                                                                    
would earn a smaller return if things went wrong.                                                                               
5:37:15 PM                                                                                                                    
Co-Chair Kelly inquired if  Senator Dunleavy's question from                                                                    
earlier  in  the day  had  been  answered. Senator  Dunleavy                                                                    
replied that he  was going through some  notes currently and                                                                    
was still processing the issue.                                                                                                 
JANAK  MAYER, PARTNER,  ENALYTICA, added  some insight  into                                                                    
slide  5. He  related that  all of  the cases  that involved                                                                    
some form  of debt,  which were  all of  them but  the green                                                                    
ones, assumed that the net  cash flows after the yearly debt                                                                    
payments on both the principle and interest had been paid.                                                                      
Senator  Dunleavy   inquired  if   $7  was  the   low  price                                                                    
assumption  in  the  stress-case.   Mr.  Tsafos  replied  in                                                                    
affirmative and  inquired if Senator Dunleavy  did not think                                                                    
that was low enough.                                                                                                            
Senator  Dunleavy  inquired  what   the  price  of  LNG  was                                                                    
currently. Mr.  Tsafos replied that  the answer  depended on                                                                    
the  location.   Senator Dunleavy  inquired what  the lowest                                                                    
was  that he  was  aware  of. Mr.  Tsafos  replied that  the                                                                    
lowest  currently was  Henry Hub,  which  would probably  be                                                                    
about $5/MMBTU, but that it was  not a relevant price for SB
138's  project. He  thought that  off the  top of  his head,                                                                    
there were 3  contracts that were signed in  the early 2000s                                                                    
that had  met the $7/MMBTU;  the rest  of LNG, which  was 70                                                                    
percent of the  market, traded at way  higher than $7/MMBTU.                                                                    
He  stated for  example that  if you  took a  low Henry  Hub                                                                    
price  of  $3/MMBTU  and included  all  the  cheapest  costs                                                                    
infrastructure costs as  a contract, the gas  would still be                                                                    
above  $7/MMBTU by  the time  it  got to  Asian markets.  He                                                                    
commented  that a  sustained environment  of $7/MMBTU  would                                                                    
probably price out 30 percent  to 70 percent the LNG supply.                                                                    
He  surmised that  a price  of $7/MMBTU  would wipe  out gas                                                                    
markets in East Africa, Western  Canada, a lot of the Lower-                                                                    
48, and  Russia; there  was not much  supply out  there that                                                                    
could  continue to  flow  to  keep the  price  that low.  He                                                                    
admitted that it was possible  that the price could go lower                                                                    
than $7/MMBTU  and that it  was 15 years prior;  however, in                                                                    
terms  of where  the market  was now,  $7/MMBTU made  a good                                                                    
5:41:50 PM                                                                                                                    
Senator Dunleavy requested a brief AT EASE.                                                                                     
5:41:53 PM                                                                                                                    
AT EASE                                                                                                                         
5:46:20 PM                                                                                                                    
5:46:37 PM                                                                                                                    
Co-Chair Meyer thought  that $7/MMBTU as the  worst case was                                                                    
legitimate  and noted  that Henry  Hub was  between $3/MMBTU                                                                    
and $5/MMBTU.  He stated that  there were  several contracts                                                                    
back in 2000s that were  at $7/MMBTU, but thought that there                                                                    
was less  supply at that time.  He noted that gas  was being                                                                    
discovered everywhere. He expressed  concerns that there was                                                                    
a lot  supply for the  gas market  and hoped that  there was                                                                    
enough demand  to meet  it. He  additionally hoped  that gas                                                                    
would  be  coming from  high-cost  areas  that Alaska's  gas                                                                    
could compete with.  He thought that there was  a supply and                                                                    
demand  graph somewhere  in the  charts. He  hoped that  gas                                                                    
never  reached $7/MMBTU  again, but  thought that  it was  a                                                                    
good number to use.                                                                                                             
Co-Chair Kelly  requested an explanation  of the  supply and                                                                    
demand graph that Co-Chair Meyer had referenced.                                                                                
Mr. Tsafos  responded that enalytica saw  demand increasing.                                                                    
He stated that the key part  to understand on the supply and                                                                    
demand  chart was  that  the  graph was  based  on what  was                                                                    
contracted  and what  was  preliminary  contracted and  that                                                                    
there was  a grab for what  was in effect up  for grabs. For                                                                    
the  project's window,  which was  the  early to  mid-2020s,                                                                    
there  was  no one  else  marketing  to that  timeframe.  He                                                                    
stated that one  of the key benefits of the  project was its                                                                    
timing   and  lack   of  competing   supply  that   was  not                                                                    
speculative. He related  that there was a  supply and demand                                                                    
chart, but  because the project  was further out,  there was                                                                    
not much competing supply.                                                                                                      
5:49:16 PM                                                                                                                    
Co-Chair  Kelly  inquired  where  the  tab  was.  Vice-Chair                                                                    
Fairclough  replied that  it  was a  chart  that showed  the                                                                    
Asian markets; it had gas  sales somehow between $10/McF and                                                                    
$17/McF.  She noted  that  she  had seen  the  chart in  the                                                                    
Senate Resources Committee.                                                                                                     
Mr.  Mayer  related  that  the  chart  was  in  the  initial                                                                    
presentation enalytica  had given in the  Legislative Budget                                                                    
and Audit Committee.                                                                                                            
Co-Chair Kelly stated  that there were staff  who could find                                                                    
the  proper  chart  and   requested  that  the  presentation                                                                    
5:50:23 PM                                                                                                                    
Mr. Mayer spoke  to slide 6 titled "In  Kind W/Equity Offers                                                                    
More  Downside  Protection."  and  related  that  it  was  a                                                                    
revised version of a slide  that was previously presented to                                                                    
the  committee. He  relayed that  the slide  was created  to                                                                    
show  lower  price  levels  and   that  Co-Chair  Meyer  had                                                                    
requested that the slide show  prices down to the $10/MMBTU;                                                                    
however, it  went as low  as $8/MMBTU because it  was easier                                                                    
to  model  that   way.  He  related  that   the  green  line                                                                    
represented  the status  quo and  that  Alaska continued  to                                                                    
move forward  and was able  to tax  the project by  value at                                                                    
the well head and the net  of costs stayed at the 35 percent                                                                    
profit-based tax;  the slide  showed the  scenario regarding                                                                    
total cash over the life of  the project to state at a range                                                                    
of different  prices. He  reported that  the red  and yellow                                                                    
represented going in kind with equity  at a 20 percent or 25                                                                    
percent  share. He  stated that  if the  project went  ahead                                                                    
with the  current structure  at the  current price  range of                                                                    
$15/MMBTU-$18/MMBTU, the  economics would look  pretty good;                                                                    
it would  be even better if  you took into account  the time                                                                    
value  of  money. He  noted  that  when  you looked  at  the                                                                    
project  at lower  prices,  the value  of  being the  taxing                                                                    
authority  fell  away  quickly  because  most  of  a  taxing                                                                    
entity's  value  lied  in  the   fixed  claims  embodied  by                                                                    
tariffs; those claims  were fixed, so as the  LNG price went                                                                    
down the  impact of them  was to  magnify the impact  of the                                                                    
falling price on the value to  the state. He stated that the                                                                    
status quo in  value looked good at current  LNG prices, but                                                                    
looked  less   so  in   the  case   of  lower   LNG  prices;                                                                    
correspondingly, the  opposite was true of  what happened to                                                                    
producers and the federal government.                                                                                           
5:53:30 PM                                                                                                                    
Mr.  Mayer addressed  slide 7  titled "SOA  Equity Leads  to                                                                    
Higher Gov't  Take on Average"  and stated that it  had been                                                                    
shown in committee before; it  showed the overall government                                                                    
take and  the division  of cash  within the  different stake                                                                    
holders. The  slide also revised  the producer wedge  of the                                                                    
slide to emphasize that there  were 3 separate producers. He                                                                    
thought  that it  is  reasonable to  assume  that the  state                                                                    
would be  capturing 25 percent  of the value of  the project                                                                    
and that  most of the  value would  go to the  producers. He                                                                    
related that the  slide showed that in all  cases, the value                                                                    
to  the state  was much  more than  a quarter  of the  total                                                                    
value  of the  project. He  stated  that the  y-axis of  the                                                                    
charts showed the overall percentage  split of cash flows to                                                                    
the project. He stated that if  the green and blue bars were                                                                    
added, the  total undiscounted government take  of the state                                                                    
and the federal  government could be seen;  with the current                                                                    
structure  and  conditions,  that figure  stayed  around  50                                                                    
percent.  He reminded  that the  50 percent  was looking  at                                                                    
government take across  the entire project and  not just the                                                                    
upstream components  and that as  a result, it  was expected                                                                    
that  the  number would  be  much  lower to  equivalent  oil                                                                    
numbers in previous year where  only upstream, which was the                                                                    
most  heavily taxed  component, was  taken into  account. He                                                                    
stated that  the current structure  and LNG  prices provided                                                                    
good value to the state.                                                                                                        
Mr. Mayer continued  to address slide 7 and  related that in                                                                    
the in  kind or equity  scenario, the overall  proportion of                                                                    
the value  coming to the  state was higher;  particularly in                                                                    
the 25  percent equity  case, the  state would  be receiving                                                                    
substantially more  than a 25  percent share of  the overall                                                                    
project.  He stated  that the  green area  on the  slide was                                                                    
much closer to  all 3 producers in the 25  percent case; the                                                                    
share of the state's value  of this scenario was much closer                                                                    
to all 3 producers combined                                                                                                     
5:57:12 PM                                                                                                                    
Mr. Mayer addressed  slide 8 titled "Impact of  Gas CAPEX on                                                                    
Oil Revenues"  and recalled that  there had been  a previous                                                                    
question regarding  the impact of upstream  capital spending                                                                    
on gas, and especially what  impact it had on production tax                                                                    
revenues from  oil. He stated  that as SB 138  was currently                                                                    
written and gas  moved to a gross-based tax  for which there                                                                    
were no deductions of costs,  all costs on upstream spending                                                                    
for  oil and  gas were  deductible against  the profit-based                                                                    
tax on  oil. He offered  that there  had been a  question of                                                                    
how  much  of  an  impact  upstream  costs  associated  with                                                                    
developing the gas  project could have on  the revenues that                                                                    
the state  would otherwise receive  in the years  during the                                                                    
development of  oil and that  the answer it depended  on how                                                                    
much upstream capital was spent;  however, slide 8 assumed a                                                                    
$3 billion base-case  and a higher case of  $4.5 billion. He                                                                    
stated that  generally speaking,  depending on  the upstream                                                                    
spending,  between $250  million and  $350 million  would be                                                                    
reduced  from the  revenues that  the state  would otherwise                                                                    
forecast  having in  those years  as a  result of  the costs                                                                    
being written against  the oil tax liability.  He noted that                                                                    
the slide included  production tax and royalty,  but none of                                                                    
the other  elements, such as  state income tax  and property                                                                    
tax; additionally, it was conceivable  that there would be a                                                                    
further impact on state income  tax but that would depend on                                                                    
how  depreciation  of  the capital  on  project  worked  and                                                                    
whether producers  had been able  to claim  depreciation for                                                                    
some of those assets  before the liquefactions project began                                                                    
running.  He stated  that in  other analyses  that enalytica                                                                    
had  conducted of  the project  that showed  a higher  total                                                                    
state  impact  than the  slide  depicted  because there  was                                                                    
conservative estimated  impact of  upstream spending  on the                                                                    
state income tax; however,  enalytica was specifically asked                                                                    
on slide 8 about what the  impacts would be on revenues that                                                                    
came  specifically from  royalties and  production tax  from                                                                    
6:00:06 PM                                                                                                                    
Senator Dunleavy inquired  if there were any  changes to the                                                                    
legislation that enalytica would  advise. Mr. Tsafos replied                                                                    
that he  would probably start by  maxing out the tax  to get                                                                    
to 25 percent  equity and work down if he  decided over time                                                                    
that he  did not want  as much. He  opined that it  would be                                                                    
useful having  more clarity regarding  AGDC and  whether the                                                                    
state  would  be  spending  money in  parallel  for  an  LNG                                                                    
project and in-state line, as  well as how coordinated those                                                                    
two  expenditures and  streams  were. He  furthered that  he                                                                    
would  like  to see  how  those  two  streams of  cash  were                                                                    
related. He  stated that when  looking at the  fiscal notes,                                                                    
there  was  some  money  for consultants  in  the  bill  and                                                                    
offered that this  was a great opportunity for  the state to                                                                    
formulate  a   permanent  staff  with  great   gas  and  LNG                                                                    
Mr. Mayer agreed  with all of Mr. Tsafos'  points, but added                                                                    
that  he would  want  assurances on  understanding what  the                                                                    
envisioned  process   was  in   terms  of   the  contractual                                                                    
negotiation process, what  executive session briefings would                                                                    
look like  and how often they  would be likely to  occur. He                                                                    
thought that  when the  end result came,  the only  way that                                                                    
the involved  partners would be comfortable  with agreements                                                                    
had been  reached was through  regular feedback.  He relayed                                                                    
that it was critical that  everyone was comfortable with how                                                                    
things were likely to play out.                                                                                                 
6:04:01 PM                                                                                                                    
Mr.   Tsafos  added   that  another   thing  that   was  not                                                                    
necessarily a thing  to change but something  that needed to                                                                    
be  understood well  was that  if  the project  were to  get                                                                    
stalled, the  state might still be  compensating TransCanada                                                                    
for the study  expenses. He expressed that he  would like to                                                                    
understand  the termination  clauses  of  the Memorandum  of                                                                    
Understand and  determine whether  the state would  still be                                                                    
on the  liable for costs  if the project was  terminated but                                                                    
not by  the state. He thought  that it was one  thing to say                                                                    
that  if  the  state  kicked  out a  partner,  it  would  be                                                                    
responsible reimbursing that entity  for costs, but wondered                                                                    
what  would happen  if  the project  fell  apart through  no                                                                    
fault of the state's.                                                                                                           
Senator  Dunleavy inquired  if enalytica  would vote  for or                                                                    
against the bill  if it was his position. Mr.  Meyer was not                                                                    
trying to  be evasive,  but did  not want  to step  over the                                                                    
line  of  advising  policy   versus  analysis;  however,  he                                                                    
thought that  it was clear  when looking at  the fundamental                                                                    
problems  and challenges  of getting  a project  moving that                                                                    
large export  project was in  the best interests  of Alaska,                                                                    
there were  a number  of challenges  in making  that happen,                                                                    
and  that there  were a  limited number  of days  to resolve                                                                    
those difficulties. He stated  that regardless of what broad                                                                    
structure  was   chosen,  enalytica   felt  that   the  core                                                                    
principles had  ways of addressing those  problems that made                                                                    
a lot  of sense. He  observed that when enalytica  had brain                                                                    
stormed on  other ways to  solve the project's  problems, it                                                                    
was  able  to  come  up  with  a  few  but  none  that  were                                                                    
compelling better.                                                                                                              
6:06:43 PM                                                                                                                    
Mr. Tsafos  stated that in  his experience at PFC  energy he                                                                    
had  studied or  worked  on  a number  of  LNG projects.  He                                                                    
related  that a  lot projects  gave him  a bad  gut reaction                                                                    
that  they  would not  happen;  however,  that was  not  the                                                                    
reaction he had  after spending a month and  half in Juneau.                                                                    
He stated  that there was  not an aspect that  enalytica had                                                                    
seen that was insurmountable.                                                                                                   
Senator  Dunleavy noted  that it  was a  large project  that                                                                    
would  build a  pipeline great  distances. He  recalled that                                                                    
Alaska had  had earthquakes  in the past  and spoke  about a                                                                    
recent quake  in 2002 on the  eastern side of the  state. He                                                                    
assumed  that there  was insurance  somewhere in  the market                                                                    
for large-scale  projects and inquired if  that was correct.                                                                    
Mr. Meyer  replied that  generally, insurance  was available                                                                    
for   most   risks    including   catastrophic   ones   like                                                                    
earthquakes;   however,   insurance  markets   became   less                                                                    
efficient  with  a  projects  as  big  as  $65  billion.  He                                                                    
expounded insurance  markets became less and  less efficient                                                                    
the  bigger the  capital  expenditures were;  even more  so,                                                                    
when a high magnitude outcome in  terms of the cash at right                                                                    
and the  low probably of  outcome were combined.  He relayed                                                                    
that knowing  what the  right price  was for  that insurance                                                                    
and finding and that  be an efficiently-priced product would                                                                    
be  the difficulty  regarding  obtaining  insurance for  the                                                                    
project.  He  stated  all  of  the  questions  in  terms  of                                                                    
understanding the  magnitude of that  risk and how  it would                                                                    
be  best mitigated  would represent  a  discussion that  the                                                                    
partners would  need to understand during  the FEED process.                                                                    
He concluded that  FEED was a time for  very detailed things                                                                    
to be known at the most minute level.                                                                                           
6:09:17 PM                                                                                                                    
Senator Dunleavy inquired if the  committee could get a list                                                                    
in  writing  of  suggestions   and  recommendation  of  what                                                                    
enalytica  would  advise  as the  state  worked  though  the                                                                    
project. Co-Chair Kelly acknowledged the request.                                                                               
Vice-Chair Fairclough  believed that each of  the items that                                                                    
the consultants had  raised had already been  brought to the                                                                    
chairman's attention. She thought  that Senator Dunleavy had                                                                    
previously met  with the consultants  and had  asked similar                                                                    
questions and  thought that the  chairman was aware  of each                                                                    
of those issues.                                                                                                                
6:10:20 PM                                                                                                                    
SB  138  was  HEARD  and   HELD  in  committee  for  further                                                                    
6:10:27 PM                                                                                                                    
AT EASE                                                                                                                         
6:17:06 PM                                                                                                                    

Document Name Date/Time Subjects
SFIN, enalytica, Mar 5.pdf SFIN 3/10/2014 5:00:00 PM
SB 138
SJR21 work draft version O.pdf SFIN 3/10/2014 5:00:00 PM
SJR 21
CS SB191 work draft version N.pdf SFIN 3/10/2014 5:00:00 PM
SB 191