Legislature(2005 - 2006)SENATE FINANCE 532
07/31/2006 01:30 PM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV
| Audio | Topic |
|---|---|
| Start | |
| SB3002 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB3001 | TELECONFERENCED | |
| += | SB3002 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE SPECIAL COMMITTEE ON NATURAL GAS DEVELOPMENT
July 31, 2006
1:57 p.m.
MEMBERS PRESENT
Senator Ralph Seekins, Chair
Senator Gary Wilken
Senator Con Bunde
Senator Fred Dyson
Senator Thomas Wagoner
Senator Ben Stevens
Senator Kim Elton
MEMBERS ABSENT
Senator Lyda Green
Senator Bert Stedman
Senator Lyman Hoffman
Senator Donny Olson
Senator Albert Kookesh
COMMITTEE CALENDAR
SENATE BILL NO. 3002
"An Act relating to the Alaska Stranded Gas Development Act;
relating to municipal impact money received under the terms of a
stranded gas fiscal contract; relating to determination of full
and true value of property and required contributions for
education in municipalities affected by stranded gas fiscal
contracts; and providing for an effective date."
HEARD AND HELD
SENATE BILL NO. 3001
"An Act relating to the production tax on oil and gas and to
conservation surcharges on oil; relating to criminal penalties
for violating conditions governing access to and use of
confidential information relating to the production tax;
amending the definition of 'gas' as that definition applies in
the Alaska Stranded Gas Development Act; making conforming
amendments; and providing for an effective date."
SCHEDULED, NOT HEARD
PREVIOUS COMMITTEE ACTION
BILL: SB3002
SHORT TITLE: STRANDED GAS AMENDMENTS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
07/12/06 (S) READ THE FIRST TIME - REFERRALS
07/12/06 (S) NGD
07/13/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/13/06 (S) Heard & Held
07/13/06 (S) MINUTE(NGD)
07/14/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/14/06 (S) Heard & Held
07/14/06 (S) MINUTE(NGD)
07/24/06 (S) NGD AT 1:30 PM SENATE FINANCE 532
07/24/06 (S) Heard & Held
07/24/06 (S) MINUTE(NGD)
07/25/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/25/06 (S) Heard & Held
07/25/06 (S) MINUTE(NGD)
07/26/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/26/06 (S) Heard & Held
07/26/06 (S) MINUTE(NGD)
07/27/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/27/06 (S) Heard & Held
07/27/06 (S) MINUTE(NGD)
07/28/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/28/06 (S) Heard & Held
07/28/06 (S) MINUTE(NGD)
07/31/06 (S) NGD AT 1:30 PM SENATE FINANCE 532
BILL: SB3001
SHORT TITLE: OIL/GAS PROD. TAX
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
07/12/06 (S) READ THE FIRST TIME - REFERRALS
07/12/06 (S) NGD
07/13/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/13/06 (S) Heard & Held
07/13/06 (S) MINUTE(NGD)
07/14/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/14/06 (S) Heard & Held
07/14/06 (S) MINUTE(NGD)
07/24/06 (S) NGD AT 1:30 PM SENATE FINANCE 532
07/24/06 (S) Scheduled But Not Heard
07/25/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/25/06 (S) Heard & Held
07/25/06 (S) MINUTE(NGD)
07/26/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/26/06 (S) Heard & Held
07/26/06 (S) MINUTE(NGD)
07/27/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/27/06 (S) Heard & Held
07/27/06 (S) MINUTE(NGD)
07/28/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/28/06 (S) Scheduled But Not Heard
07/31/06 (S) NGD AT 1:30 PM SENATE FINANCE 532
WITNESS REGISTER
DONALD SHEPLER
Greenberg Traurig, LLP
Consultant to the Legislature
POSITION STATEMENT: Testified on SB 3002
RICK HARPER
Econ One Research, Inc.
Consultant to the Legislature
Three Allen Center, Suite 2825
333 Clay Street
Houston, TX 77002
POSITION STATEMENT: Testified on SB 3002
MARTIN MASSEY, Joint Interest Manager for U.S. Operations
ExxonMobil Production
POSITION STATEMENT: Testified on SB 3002
DAVID VAN TUYL, Commercial Manager
Alaska Gas Group
British Petroleum (BP)
POSITION STATEMENT: Testified on SB 3002
WENDY KING, Director of External Strategies
ANS Gas Development Team
ConocoPhillips Alaska, Inc.
PO Box 100360
Anchorage, AK 99510
POSITION STATEMENT: Testified on SB 3002
ACTION NARRATIVE
CHAIR RALPH SEEKINS called the Senate Special Committee on
Natural Gas Development meeting to order at 1:57:51 PM. Present
at the roll call were Senators Gary Wilken, Con Bunde, Fred
Dyson, Thomas Wagoner, Ben Stevens, Kim Elton and Chair Ralph
Seekins.
SB 3002-STRANDED GAS AMENDMENTS
CHAIR RALPH SEEKINS announced the committee would continue the
hearings on natural gas development. He introduced Don Shepler,
and Rick Harper, Consultants to the Legislature.
1:58:58 PM
DONALD SHEPLER, Greenberg Traurig, LLP, Consultant to the
Legislature testified on the issue of Basin Control and provided
a written memorandum outlining his views [Basin Control Issues
Arising From SGDA Contract]. He said that it is essential to
identify the problem up-front. The issue arises out of the
concerns of the "independents" or "explorer-producers" that
access to the pipeline will be limited or restricted such that
they have to give up their leases or sell their gas to the
producer-owners at distressed prices.
CHAIR SEEKINS asked whether by "independents" he meant companies
that are not part of pipeline project itself, without any
implication as to the size or capital value of the company.
MR. SHEPLER responded that he meant non-owner producers as
opposed to owner-producers.
He explained that the issue of access only arises when one group
of competitors has ownership and control of the pipeline
facility that their competitors need in order to monetize their
reserves. Said another way, if there were an independent
pipeline company that had no ownership interest in the upstream
production activities, it would not present the issue of Basin
Control that comes with ownership being held by parties
competing with potential shipper-producers on the North Slope.
MR. SHEPLER advised that the access issue is paramount to the
non-owner producers that compete with the owners for gas leases
and reserves; but that may not be the only issue under the
heading of Basin Control. It could encompass others such as how
leases are administered and how they revert to the state. His
experience indicates that, if the independents had assurance
that the pipeline would be available for their gas in a timely
fashion, Basin Control would be a non-issue.
An independent pipeline would have a different economic
incentive because, for an independent pipeline, expansion is the
"lifeblood" of the business; its return on equity is based on
how much steel is in the ground.
Econ One Research, Inc. estimated that, at a $2.50 tariff end-
to-end, the equity return dollars that the producer-owners would
receive would be in the $.20 to $.25 per Mcf of capacity range,
as opposed to the netback of perhaps $3.00 per Mcf, assuming a
market price of $5.50. Clearly, the producer-owners have a
greater stake in the upstream than the midstream segment.
He said the divergence of interests becomes more evident in
expansion, because the additional incremental profit is very
small. He is concerned the producer-owners would not have the
financial incentive to expand the pipeline except to the extent
that they had incremental gas of their own to go through it.
The question to the legislature is how can it ensure that the
pipeline project, with this group of sponsors, will mimic the
incentives of an independent pipeline; and how can it rely on
the federal legislation (Section 105 of the 2004 statute) that
gives FERC the authority to compel an expansion, when the 2004
statute has not been judicially construed or tested. Timing is
also an issue. The independent producers need to know that the
capacity will be available when they need it.
One alternative would be for the state to rely on Article 8.7,
the state-initiated expansion provision in the contract, but
that section is subject to many conditions. The party that asked
for the expansion would still have to bid in open season and
still have to deal with timing. Another alternative would be to
rely on the FERC enforcement mechanisms, but there are issues of
litigation and timing associated with that too.
2:11:56 PM
MR. SHEPLER suggested that, while the state is negotiating
taxes, royalties, and other concessions with the sponsor group
in exchange for commitments to build the pipeline, it insert
binding commitments into the contract to expand the pipeline
under reasonable terms and conditions. He recommended that these
include: the pipeline would conduct periodic open seasons,
binding or non-binding; the pipeline sponsors would agree to
file for expansion certifications upon request by creditworthy
shippers, (using Article 8.7 limits as a benchmark for a
reasonable engineering increment); expansion would be predicated
upon the use of rolled-in pricing.
By building the terms and conditions above into the contract,
the state could replicate the motivations of an independent
pipeline company. The expansion commitments should not
materially affect the producer-owners' commitment or ability to
build the pipeline.
2:16:24 PM
SENATOR ELTON said that some of what Mr. Shepler said echoed the
concerns of Anadarko regarding Article 8.7. He referenced the
need to start over on Article 8.7 to get rid of some of the
hurdles to state-initiated expansion, and substitute rolled-in
pricing and periodic open seasons.
2:17:12 PM
MR. SHEPLER agreed that he is not a fan of Article 8.7, as it
has too many hurdles to be a reliable expansion mechanism. He
said that it might not have to be thrown out, but it should be
modified. The committee has heard that there are three expansion
vehicles available in this project: FERC mandated, voluntary,
and Article 8.7, but the contract is completely silent on
voluntary expansion. There should be a provision in the contract
laying out terms for a voluntary expansion.
2:18:49 PM
SENATOR ELTON said he recalled a suggestion that the LLC may
make it easier for state-initiated expansion. But he believed
that the controlling document should be the contract that is
before the committee and not an LLC.
2:19:28 PM
MR. SHEPLER pointed out that the LLC may be able to take care of
the issue, but no one has seen the LLC and he feels it is too
important an issue to leave to chance.
2:19:54 PM
SENATOR BEN STEVENS arrived.
2:20:04 PM
SENATOR WAGONER asked whether modifying Article 8.7 would be a
deal-breaker.
MR. SHEPLER responded that he did not know, but he did not
believe that a pipeline owner should have any objection to that
type of provision. Any objection it might have would relate to
its interests in the upstream and not to its interests as a
pipeline owner.
2:21:09 PM
SENATOR BEN STEVENS asked if Mr. Shepler could explain footnote
8, on page 19.
2:22:15 PM
MR. SHEPLER responded that, in recent discussions, the sponsor
group said that the pipeline will be expanded, and that the
pipeline could be expanded from 4.5 bcf to about 6 bcf a day
using low-cost compression; but the presumption is based on
specific sizing in the initial design of the pipeline, and
nothing in the contract commits the parties to 4.5 bcf per day
design capacity or to expansion to 6 bcf per day.
2:24:07 PM
SENATOR BEN STEVENS said that he was not sure Mr. Shepler's
comments explained footnote 8. He referred to a sentence in the
footnote that reads:
As noted by Anadarko, the physical interest finding
indicates that only the sponsor group proposed using a
large diameter pipe. It may be that the other companies
that discussed the project with the state had a more
realistic handle on the design issue and the sponsors will
eventually come around to the smaller design. In that case,
of course, the economics of expansion will be much
different than has been presented to date.
He asked Mr. Shepler if that is merely speculation.
2:25:11 PM
MR. SHEPLER responded that the fiscal interest findings note
that the sponsor group was the only group that committed to
build the larger diameter pipeline. The other proponents
proposed a smaller diameter pipeline.
2:25:38 PM
SENATOR BEN STEVENS asked how Mr. Shepler knew that.
2:25:47 PM
MR. SHEPLER replied that it is in the fiscal interest finding
and is quoted in the Anadarko written comments that were filed
on the contract. He said that because there is no prohibition on
changing the qualified project plan, or no state veto over
material changes to the qualified project plan, it may evolve
over time and the pipeline that is built may not have that
expansibility in the design. So it is speculative, but the
assumption is that the line will be expanded to the 6 bcf per
day level. He noted that the assumption is encouraging, but felt
the expansion should be in the contract.
2:27:06 PM
SENATOR WAGONER commented that there are two ways to look at the
expansion to 6 bcf, one is with a 52-inch pipe, the other is
with a 48-inch pipe and much more expensive looping.[Looping:
Increasing capacity on a pipeline system or segment by adding
another pipeline running parallel to existing lines.] It is the
size of the pipe that makes it easier to expand capacity.
2:27:56 PM
MR. SHEPLER responded that it is also his understanding that the
smaller pipe cannot be expanded as economically as the larger
one.
2:28:54 PM
CHAIR SEEKINS said he had never read through a filing for a
tariff, and asked what goes into compiling the reimbursable
costs for a tariff.
2:29:27 PM
MR. SHEPLER replied that there are no "reimbursable" costs per
se.
CHAIR SEEKINS corrected himself to say those on which he could
get the 14 percent return.
MR. SHEPLER said that the FERC reviews the detailed construction
proposal filed by the pipeline and initial rates are established
in the certificate order. After three years, the FERC requires
the pipeline to re-justify its cost estimates and adjusts rates
based on the outcome of its analysis.
2:30:38 PM
CHAIR SEEKINS asked if things like the Environmental Impact
Statement (EIS) are part of that filing.
2:30:56 PM
MR. SHEPLER replied that the items are either "cost of service"
or expensed items, or capitalized items, which could include a
lot of the environmental work, and these go into the rate base.
2:31:12 PM
CHAIR SEEKINS asked if access, roads, and engineering costs
would be included.
MR. SHEPLER replied yes.
CHAIR SEEKINS asked whether there would be a very large
difference in the engineering costs between a 48 and a 52-inch
pipe.
MR. SHEPLER replied that he could not answer that question.
2:32:21 PM
RICK HARPER, Econ One Research, Inc., Consultant to the
Legislature, interjected that he was not sure either, because a
52-inch pipe is not usual. He noted that, when dealing with
smaller increments, say the difference between an 18-inch and a
24-inch pipe, the cost difference is not great.
2:32:42 PM
SENATOR DYSON said that the committee heard testimony that no
one has previously used 52-inch pipe to carry the pressure
required to get to 6 bcf, and that no one is capable of doing it
at this time. The transportation of the larger pipe is also a
new issue. The implication was that a bigger pipe with thicker
walls and a higher-pressure capacity, would ultimately be
cheaper than smaller pipes.
CHAIR SEEKINS mused that he was trying to view future
expandability in two ways, first as a non-producer and second as
a producer. The incentive to control costs would not be as great
for a non-producer whose return is based on how much steel is in
the ground, as it would for a producer.
2:36:29 PM
MR. SHEPLER confirmed that is a point the sponsor group raised.
CHAIR SEEKINS commented that is because they would have to pay
for it one way or the other.
MR. SHEPLER confirmed that they would. He said that, with the
addition of the compression-based expansion, rates should
decline. His only objection was that there is no contractual
commitment. He also noted that to foster competition, capacity
is key.
2:38:00 PM
CHAIR SEEKINS said that it serves the state's interests to be
able to ship more gas. He wondered whether, as an owner, it
could reduce its costs by shipping more.
MR. SHEPLER responded that it could, as long as it was not
necessary to engage in looping.
2:38:35 PM
CHAIR SEEKINS said that his only concern, on the competitive
side, would be whether it would cause an incremental cost to the
shippers that are already there.
MR. SHEPLER said that could be an issue in a looping expansion.
The debate is whether to charge the expansion costs to the new
shipper, or spread them out among the other shippers as well.
That model would cause a slight increase to existing shippers,
but not as great an increase as the new shipper would have to
bear individually.
2:39:37 PM
CHAIR SEEKINS asked for clarification that existing shippers
would have to subsidize new shippers.
2:39:59 PM
MR. SHEPLER replied yes. According to FERC, they would have to
pay a slightly higher incremental charge. FERC allows for
negotiated rates, which would insulate existing shippers from
those costs. He added that there are many events that can cause
rates to go up, and an expansion is just one of them.
2:41:10 PM
CHAIR SEEKINS asked if someone could give him an idea of what
the cost of that initial expansion might be, or whether there
would be an actual reduction in costs as a result. He said it
seemed that compressor expansion could actually drive costs
down.
MR. SHEPLER replied yes, that should reduce rates.
2:41:48 PM
MR. WAGONER asked if access and expansion were the only issues
that the committee should be considering.
MR. SHEPLER responded that access is a fundamental issue that
comes under the Basin Control heading, but it may not be the
only issue.
MR. HARPER said he recognized that Senator Seekins was searching
for a broader understanding of the natural alignment of
interests or lack thereof. He admitted that he had not reached
any conclusions, but said he agreed with Mr. Shepler that the
producers should have incentives to keep costs down. He pointed
out however, that the three sponsors do not have enough gas to
fill the pipeline for its lifetime, so as owners they will be
dependent upon the independents as well as their own efforts.
SENATOR DYSON said he read in Mr. Shepler's paper that, if there
is reluctance to expand a producer-owned pipeline's capacity, it
might be due to upstream incentives. He asked if either of the
consultants could cite historical examples of how upstream
interests might work against expansion.
2:45:36 PM
MR. SHEPLER said that he was aware of only 6 small producer-
owned pipelines.
2:46:45 PM
MR. HARPER distinguished between a producer-affiliate of a
pipeline and a producer-owned pipeline. The size of this
project, and the fact that the three major participants control
so much of the product makes it unique. The non-standard nature
of this project causes him and Mr. Shepler to recommend
additional caution.
SENATOR WAGONER brought up liquids and the pipeline's capacity
to handle them. He noted that the contract does not address
liquids except to say that there will be a study done before the
date of sanction. He stressed that if the state does not address
the matter now, during contract negotiations, the engineering
will be done and it will lose the opportunity to process those
liquids in Alaska. He asked Mr. Shepler to comment on that with
regard to pipeline capacity.
MR. SHEPLER responded that he was not sure how to respond.
MR. HARPER said that it is a very important issue that, in terms
of Basin Control, has not been tabled. He agreed with Senator
Wagoner that it should be dealt with now, in the contract.
2:51:39 PM
CHAIR SEEKINS said that, if the market for the liquids were the
Far East, there would be a natural competitive advantage to
extract them in Alaska where it is closer to the market.
2:52:27 PM
MR. HARPER said that typically processing plants are more
closely aligned with field production than downstream, but
Alberta, Texas and Louisiana have huge infrastructures of
natural gas liquid removal, with whole industry and regulatory
structures surrounding them. He would be concerned about this
contract structure and want to make sure that the normal
economic drivers are in place.
2:53:57 PM
CHAIR SEEKINS commented that when he was a member of the
governor's advisory committee on North Slope natural gas, they
were told that there were enough liquids in that envelope to
accommodate two or more world-class liquid gas extraction
plants.
MR. HARPER said he doesn't doubt that, and noted that Senator
Wagoner's question about whether there is something attendant on
the design and size of pipe and the operating regimen specified
that would influence the outcome in some way, is a very good
one.
CHAIR SEEKINS wanted to go back to the discussion of the cost of
getting gas to market, and whether expansion would drive costs
down rather than up. He related a business analogy to illustrate
that cooperation between competitors to get a product to market
made economic sense as long as neither would lose market share.
2:55:46 PM
MR. SHEPLER said that the analogy was valid, but used another to
illustrate the independents' position regarding access. They are
concerned about being at the mercy of the producer-owners.
CHAIR SEEKINS said he appreciates their position, but would feel
more comfortable if he had a federal agency looking into that to
be sure the state is not placed in a non-competitive situation.
MR. HARPER said that he had no reason to doubt the veracity of
the sponsors, but he would recommend that the state pin down as
much as possible.
2:58:51 PM
MR. SHEPLER said that he recently read two articles that relate
to the point he made earlier today about the criticality of
timing. The articles describe proceedings initiated in 2004 and
2005 that are just now moving to FERC's enforcement division. If
a producer had a complaint related to expansion, waiting for the
federal agency would not be the preferred approach.
3:00:34 PM
MR. HARPER summarized by saying that, although this is a shift
structurally from the way the industry has operated in the past,
it has been allowed for and considered legislatively and
according to regulation. He cautioned that the state is treading
on new ground however, and he isn't comfortable recommending
that the state rely solely on federal oversight or remedy. To
the extent that the state can protect itself contractually
relative to expansion, it should do so. He also reminded the
committee that, in his opinion, the state should take delivery
of the gas at the terminus rather than upstream.
He directed the committee's attention to a supplemental report
that he had prepared, and to reports provided by Anadarko and BG
Gas.
3:06:12 PM
SENATOR WAGONER asked Mr. Harper about taking gas in kind, and
what the state might expect when marketing that gas.
MR. HARPER responded that he did not agree with the notion that
it aligns the interests of the state and the producers, because
at the point that the state markets the gas, it becomes a
competitor against some of the fiercest competitors in the world
in the areas of commodity marketing, transportation, capacity
management, futures, derivative products, and all the things the
state would have to understand to be successful. The producer-
owners also have broad portfolios that allow them to make
adjustments and marketing arrangements that the state cannot. It
is a heroic step and doable, but the state now benefits directly
from the sponsors' efforts and that would change the moment this
went into effect.
3:08:29 PM
CHAIR SEEKINS said that there are a lot of expansions going on
in the pipeline field and a lot of proposed expansion in re-
gasification plants across the country. He asked whether the
trend in regasification plants is toward producer-owned or
independently owned plants.
3:09:25 PM
MR. HARPER asked Senator Seekins if he meant LNG regasification.
CHAIR SEEKINS said yes.
3:09:45 PM
MR. SHEPLER said that he does not know, but that Dr. Finizza,
who did a memo for Econ One on LNG, would be part of the Port
Authority presentation later in the week and he is the guru on
LNG.
MR. HARPER concurred that Dr. Finizza is an LNG expert and would
be able to answer Senator Seekins' question. He added that he
believed the producers were taking significant positions in
regasification, but not in the pipelines downstream of that.
3:10:13 PM
CHAIR SEEKINS asked whether there are additional pipelines
contemplated to go with the re-gasification plants, or do they
feed into existing infrastructure.
3:10:46 PM
MR. HARPER apologized for not having an answer to that question,
and reiterated that the committee would get more complete
information on Thursday and Friday. He did say however, that it
is a combination of all of the above, and there is an incentive
to site regasification plants where there is already adequate
infrastructure.
CHAIR SEEKINS responded that he wondered whether a new trend is
developing in ownership of the infrastructure to get the gas to
market as well as to produce the gas.
MR. HARPER said he has not seen any indication that it is a mass
trend, and admitted that he is troubled because he does not
understand why these producers would want an ownership interest
in the pipeline. The returns are good, but not as great as they
are accustomed to get, so he does not understand their
motivation.
MR. SHEPLER added that the Alliance Pipeline is the only other
instance in North America of a large pipe that started out as a
producer-owned pipeline. There were nine owner-producers, but
over time they sold their interests and it is now owned and
operated by Enbridge.
MR. HARPER said that, in that case, there were more participants
holding fewer shares and no one else was prepared to undertake
the project, so something had to be done to "de-bottleneck" the
western sedimentary basin.
SENATOR BUNDE asked for clarification from Mr. Harper of his
comment that, if producers were to expand their holdings to
include a pipeline and then continued to hold it after
production started, it would depress their stock value.
MR. HARPER responded that the pipeline's regulated rate of
return would be below their expectation. There was a great
reluctance historically for major producers to own interstate
pipelines, because they did not want to give federal regulators
too much access to their operations.
3:17:04 PM
SENATOR BUNDE said that he was curious to know why the sponsors
have expressed such an interest in building this pipeline if, as
Mr. Harper suggested, it might not be in their best interests to
do so.
MR. HARPER said he just could not come to terms with why they
would want to own the pipeline, since the rate of return is
below traditional profiles.
3:18:07 PM
CHAIR SEEKINS said that a 14 percent return risk-free sounds
pretty good.
CHAIR SEEKINS called a 5 minutes recess at 3:18:37 PM
3:27:16 PM call to order
SENATOR ELTON said he would ask one question in 3 parts, and
hoped to draw upon Mr. Harper's previous experience as a gas
pipeline executive. He asked for Mr. Harper's reaction to
whether the contract is sufficient in its definition of
diligence, whether it is normal when constructing a pipeline
that parties would be restricted from seeking redress on
contract terms through the court, and whether, as a former
pipeline executive, he would have been comfortable signing a
contract without knowing what the LLC agreement was.
MR. HARPER responded that his written reports address the issue
of diligence at length, but went on to say that the diligence
standard in this agreement is not according to industry practice
and is a weak standard taken in conjunction with the limitations
the arbitrators would have to deal with in making their
determinations. He also pointed out that diligence, as defined
in this contract, is not akin to a prudent operator standard,
which is typically applied in the field, or a due diligence
standard.
He was even more concerned about the state's lack of recourse to
the courts, and the fact that consequential, punitive, and other
damages are waived.
With regard to signing a contract without having seen the LLC,
he said he would not and in fact did not feel entirely
comfortable advising them without having seen it.
CHAIR SEEKINS said that, in all fairness, no one had asked the
committee to ratify a contract without seeing the LLC, and that
he did not think any of them would consider that.
MR. HARPER agreed.
3:33:57 PM
SENATOR DYSON commented that he was not sure Senator Seekins was
correct in saying that no one was considering approval without
seeing the LLC. Some of the discussions in committee referenced
a pretty tight timeline in order to get the bill out before
November.
CHAIR SEEKINS responded that he might have over spoken, but that
he certainly was not interested in voting to ratify a contract
before he had seen the entire agreement.
SENATOR DYSON asked for clarification of the last line on page
15 of Mr. Shepler's comments, which says, "expansion does not
require installation of loops in excess of 100 miles...". He
observed that, given that the gas line will be 2500 or 3800
miles long, it seemed that expansion would occur in longer than
100-mile segments.
MR. SHEPLER responded that page 15 is a recitation of what is in
Article 8.7, and deferred to Mr. Harper for further comment.
MR. HARPER said that, based on his understanding of the overall
pipeline design, he could not explain that sentence.
SENATOR DYSON asked whether, in his experience, it was common to
limit the number of miles in an expansion loop.
MR. HARPER replied that he had not seen it before.
SENATOR DYSON asked whether expansion loops are often longer
than that.
MR. HARPER replied yes.
SENATOR DYSON referred to the first paragraph on page 17 of Mr.
Shepler's comments, and asked if he could explain it.
MR. SHEPLER said that this also was lifted directly from Article
8.7 of the contract. In the context of a state-initiated
expansion, if the sponsors file a proposal for expansion with
the FERC and the FERC certificates it but requires any changes,
this section allows the operator of the pipeline to reject the
certificate. If the FERC approves a certificate and the operator
rejects what was approved, it is not authorized to expand/build
a pipeline.
SENATOR DYSON asked whether that section was still referring to
state-initiated expansion.
MR. SHEPLER said yes.
SENATOR DYSON commented that, if the state initiates the
expansion (line 4, page 17), and the FERC certificates it, he
assumes that the FERC agrees with what the state wants to do;
but he wondered if Article 8.7 was saying that the project
entity must reject it.
MR. SHEPLER responded that he was not sure, but he understood
that if the entity files for state-initiated expansion using
incremental pricing, for example, and the FERC approves the
expansion but requires a different pricing method, this
provision authorizes the project entity to reject it. There
could be any number of other terms that the FERC might require
to be changed, but this is one scenario he could see coming up.
SENATOR DYSON asked whether, if the state initiated an
expansion, the other ownership partners would have to agree with
the state on it.
MR. SHEPLER responded that, according to Article 8.7, if a party
has been turned down for expansion and asks the state to
initiate an expansion under the contract, the contract obligates
the project entity to seek an expansion. This section gives the
pipeline company the authorization to reject the certificate, if
what was approved by the FERC is not exactly the expansion it
filed for.
MR. SHEPLER said that he had listed some of the many conditions
that really eviscerate any value 8.7 might have, including the
100 mile looping, no rate increase to existing shippers etc.
3:43:52 PM
SENATOR DYSON clarified that if the state decides to apply for
expansion on behalf of the party who was turned down...
MR. SHEPLER said that this provision does not give the state the
right to do a sole-risk expansion and 8.7 is not an alternative
way to create a sole-risk expansion.
SENATOR DYSON said that what he wanted to know was whether, if
the state decides to apply for expansion and the other partners
are not in agreement, the partners are required to file a joint
application for expansion with the FERC.
MR. SHEPLER said yes, under Article 8.7 they are, and that it
would be treated as a voluntary expansion.
SENATOR DYSON asked whether, if FERC found differently from the
application, the project entity must reject the FERC
certificate.
MR. SHEPLER replied that the wording in Article 8.7 is that the
project entity "shall reject", unless the difference is minor or
"all the members of the project entity vote otherwise." He said
that within 30 days of getting the certificate, the project
entity must file a notice of acceptance, or must reject any
certificate that comes back different from what was applied for.
SENATOR DYSON observed that seems to impugn the idea that FERC
is looking out for the greater good for all and can over rule
for a larger purpose.
MR. SHEPLER responded that, as had been explained, the FERC puts
out their certificate order subject to specific terms and
conditions, and normally there are many conditions attached to a
FERC certificate. The applicant can look at that and decide
whether or not he is in agreement with it.
SENATOR ELTON stated that, as he understands it, assuming the
state initiates an expansion and the FERC agrees, if the FERC
makes any substantive change, it isn't the "project entity" that
must reject the certificate, if any single part of the project
entity objects, it must be rejected. So all parties in the
project entity must agree or it must be rejected.
MR. SHEPLER replied yes.
SENATOR ELTON observed that if one party were reluctant, it
could encourage a certificate with a change so it would have
veto power as a member of the project entity.
3:50:31 PM
SENATOR WAGONER asked if Mr. Shepler or Mr. Harper have ever
seen any system as rigorous as what is set out in 8.7.
MR. SHEPLER said that he is not aware of any other agreements in
which the parties have had occasion to enter into anything like
Article 8.7. His concern about Article 8.7 is that it is so much
more restrictive than the FERC mandated expansion and covers
circumstances in such a narrow window, that he doesn't see it as
providing much relief for any producer.
MR. HARPER agreed and said that is the fundamental basis for the
alarm they sounded over Basin Control.
SENATOR DYSON noted that in the contract, on page 94, it states
that the "amicable resolution process does not apply to dispute
resolution under Article 8.7".
MR. SHEPLER said Mr. Loeffler explained that, in this context,
they did not want to take the time to go through intermediate
dispute resolution and this provision would get the matter to
arbitration more quickly.
MR. HARPER said that there has been some concern in the context
of Basin Control about current gas prices, so he wanted to
provide the committee with a tool to reference how the industry
would normally view characterization of current prices. The
industry usually looks at 12 months prices on the NYMEX
(NYMEX.com, Natural Gas Futures Prices) as an indicator of what
the market is doing.
SENATOR WILKEN said that it has been suggested that what the
committee has before them is the "trust me" model contract. He
wanted to go back to the issues of diligence and lock-in,
because he was concerned that the state would sign a contract
that is replete with "side boards". He recognized that the
people of Alaska expect the state to give up some things in the
contract, but if there are real reasons why this pipeline cannot
or should not be built, the committee needs to know that timely,
and know what other directions it can take.
He said that, regarding "lock in", gas contracts usually are
written with a 20-year term, and wondered whether it is possible
to include a "re-opener", or review period based on events, so
the state is not locked in for 20 years if circumstances change.
He asked if the contracts are as "hands off" as the committee
has been told they are.
MR. HARPER confirmed that "trip wire" events are customary.
4:02:23 PM
MR. SHEPLER said that he wanted to focus on the shipping
contract, which is the one that will pay for the pipeline.
Shipping contracts are typically long term and have no re-
openers. The FERC regulates the rates, terms and conditions
under which the service is provided. He speculated that what
Senator Wilken was referring to was the gas sales contract or,
more importantly, the underlying fiscal contract, which is like
a construction contract. These do tend to have trip-wire events
associated with them.
4:04:10 PM
SENATOR WILKEN asked whether, if someone who is marketing
Alaska's gas enters into an agreement to supply gas to a buyer
for 20-years, anything that happens to effect the cost of that
gas can affect the agreement.
MR. SHEPLER clarified that the 20-year term generally applies to
the shipping contract rather than the gas sales contract. Gas
sales contracts are usually not long-term fixed-price sales
contracts any more.
MR. HARPER agreed and said they are more often market-based and
market sensitive.
SENATOR WILKEN said the FT (firm transportation contract) is a
part of the pipe within the pipe.
MR. SHEPLER confirmed that an FT gets you space in the pipe.
He said that the state's marketing entity would probably have a
whole portfolio of sales contracts that would affect the value
the state gets for its royalty-in-kind (RIK) volumes, but the
contracts to move those volumes through the pipeline would be
20-year contracts.
SENATOR WILKEN said that the committee needs help pre-gas to
define in the contract what the state will give up and what it
will get in return, rather than trusting that it will get a gas
pipeline.
4:07:45 PM
CHAIR SEEKINS asked if the long-term commitment is to send a
specified amount of gas down the pipe every day, or pay as if it
had been sent.
MR. SHEPLER said yes, you pay whether you ship or not.
MR. HARPER added that what the state would be dealing with is a
two-part rate with a demand and a commodity component in the
rate structure. The state would pay the demand charge whether or
not it moved any gas. Typically all the fixed-cost components of
the pipeline are loaded into the demand structure and then you
pay variable costs based on when you ship the gas.
MR. SHEPLER added that the variable costs are insignificant. The
demand charge is 99 percent of the rate.
4:08:49 PM
SENATOR WILKEN said he found it interesting that Mr. Harper was
perplexed about why the producers would want to participate. He
quoted some numbers from Mr. Shepler's presentation illustrating
that the equity return that the producer-owners would receive
would be only in the $.20 to $.25 per Mcf of capacity range, as
opposed to the netback of perhaps $3.00 per Mcf (assuming a
market price of $5.50), about $8.50 at today's price. He asked
if what Mr. Harper was saying was part of what Mr. Shepler was
talking about on page 12 of his presentation.
MR. HARPER said yes, it's a question of what business you are in
and what risk profile you have. Typically companies like
ExxonMobile, BP and ConocoPhillips are looking for a higher-
risk, higher-return potential profile and they have been very
successful at that.
4:10:57 PM
CHAIR SEEKINS said maybe he'd ask the sponsors why they want to
own the pipeline.
SENATOR WAGONER said when the Legislative Budget and Audit
Standing Committee met in Anchorage a few weeks ago, someone
made the statement that the state had made no concessions in the
pipeline contract. He believed they meant that for every
concession the state has made, the sponsors have made one of
equal value. He said that he sent a letter to the governor
outlining the value of the concessions that the state has made,
and wondered if it was logical to ask the governor's office, or
the sponsors, or both, to provide written documentation of what
the sponsors have given up in concessions to equal the value of
the state's.
MR. HARPER and MR. SHEPLER agreed that it was logical and was
his job to ask for that information.
CHAIR SEEKINS welcomed the sponsors back and asked them why they
want to build and own the pipeline.
4:13:27 PM
MARTIN MASSEY, Joint Interest Manager for U.S. Operations,
ExxonMobil Production, said that a lot of what Mr. Harper said
was true, that Exxon isn't in the pipeline business, and the
returns are not as high as they are usually after, but it comes
down to what is the best course to make this project
commercially viable. Owning the pipe gives it the best chance
for several reasons: first, Exxon is going to pay for it anyway
because it is going to make the FT commitment; second, it is a
matter of economics, how do you value giving that FT to someone
else; third, this is a huge, risky project and will have
enormous impact on everyone if it isn't done correctly, so
ExxonMobile feels it should manage and own it, at least until
the pipeline is built.
4:15:39 PM
DAVID VAN TUYL, Commercial Manager, Alaska Gas Group, British
Petroleum (BP), agreed with the statement that Mr. Shepler made.
That is, a general assertion that an independent pipeline
company is primarily motivated to put steel into the ground
because that expands their rate base. He said, because of that
an independent pipeline company doesn't have an incentive to
reduce the rate base, and that is primarily why the producers
want to build this pipeline. It is certainly a prime motivation
for BP.
He noted that Senator Wilken had referenced page 12 in Mr.
Shepler's comments, and said that the producers' game is to
target the $3.00 notional netback. That is right. BP's game is
to insure the highest netback possible, and to do that it needs
to ensure the lowest capital cost project. BP has a unique
motivation to do that and is actually aligned with the state in
that regard. It would consider owning pipelines that are basin-
opening projects to monetize its resources, and that is the case
here.
4:18:41 PM
He reminded the committee of BP's previous experience in the
Arctic and elsewhere and went on to say that, once the pipeline
is up and running, ownership becomes a portfolio choice. He
referenced the Alliance Project and said that today there is
zero producer ownership in that project. The portfolio choice
was to dilute after it got up and running.
4:19:33 PM
WENDY KING, Director of External Strategies, ANS Gas Development
Team, ConocoPhillips Alaska, Inc., said that, as Mr. Massey and
Mr. Van Tuyl highlighted, the producers ultimately will pay the
cost of this project through those shipping commitments that say
to the pipeline, whether or not we ship gas on the pipeline, we
will be paying a demand charge. And the way that the FERC will
allow us to recover any actual costs in the pipeline tariff
ensures that the shippers that sign the FT commitments are going
to be carrying the risk of cost overrun. ConocoPhillips also
offers skills that we feel can help mitigate the cost overrun
risks. It is a shipper-owner in both the Mackenzie Delta and the
Rockies Express pipeline projects and has experience on Alaska's
North Slope.
4:21:14 PM
MR. MASSEY said he understands why someone might be suspicious
of their desire to own the pipeline, but it isn't driven by
Basin Control and he thinks those concerns have been adequately
addressed.
4:22:31 PM
SENATOR WAGONER said he keeps going back to TAPS (Trans Alaska
Pipeline System) and what it was supposed to bring in. That
doesn't bother him too much because Alaska wasn't an owner or
partner in the TAPS line; but now, as 20 percent owner of the
gas pipeline, how far does that 20 percent go. The accrual of
additional costs to build the pipeline could put the state in a
position it didn't intend.
4:23:56 PM
MR. VAN TUYL said that BP's management is well aware of the TAPS
experience also, and learned a lot from it. A key lesson learned
is not to become schedule driven. That was one of the things
that resulted in the cost overruns on that project. TAPS was
also the project that pioneered the EIS process. The joint study
that BP completed in 2002 defined the regulatory process
associated with this project, to help ensure that it doesn't
repeat some of the lessons that occurred then.
MR. VAN TUYL pointed out that although it may seem counter-
intuitive, direct state ownership reduces the commercial impact,
or commercial exposure to cost overruns, because in a Royalty-
in-Value (RIV) world the state is exposed 100 percent to the
cost of the project through time, through the tariff. The state
effectively pays that tariff in the netback that is realized by
the producers. As a direct owner in the pipeline, the state also
recovers that capital cost through the tariff. So the state
actually hedges its overrun risk by being a direct owner.
MS. KING added that the state, through the contract, has some
payments in lieu of taxes that are independent of commodity and
are set up on a throughput basis. The state wanted to maintain
those regressive tax features to be there in the event of a
lower netback scenario. Payment in lieu of state corporate
income taxes is another that is based upon an apportionment of
formula, based upon worldwide income, so there are going to be
differences in revenue sources to the state of Alaska from this
project than there will be to the producers. Also, the state
will not be paying federal income tax on the project, as the
producers will
SENATOR WAGONER agreed with Mr. Van Tuyl about the problem of
being too schedule-driven. He also said that in a workshop that
he attended in Anchorage on mega-projects, he was told that one
of the things that causes new projects to fail more often than
anything else is using new technologies. He thought about that
when the producers were talking about using a 52-inch pipe.
4:28:02 PM
SENATOR WILKEN said that his office has been using information
from the FERC website and trying to get an estimate of capacity
and expected first gas for all of the projects in various stages
of completion around the country. He was specifically trying to
deal with the issue of "the window" and all of the "hurry-up" on
this project. If the state signed a contract immediately it
would be five years to sanction and another five years to build,
plus 15 years cap on cost recovery. He asked Ms. King whether,
based on the fact that the Canadian pipeline will go before
ours, this window would close more quickly than we would like
because we have to wait for Canada to finish.
MS. KING replied that she does not work on the Mackenzie Valley
project or follow it on a day-to-day basis, but that
ConocoPhillips has teams working in Canada and there is some
learning they can apply to this project. This is an independent
project and she believes the timeline is realistic.
SENATOR WILKEN said we have an estimated timeline of about
5/5/15 years on this pipeline and asked whether the Mackenzie
Valley project has a similar timeline.
MS. KING replied she doesn't have that information available
now, but there should be a Preliminary Information Packet (PIP)
on the Mackenzie Valley project website.
CHAIR SEEKINS said he heard that their anticipated first gas
date has changed from 2011 to 2012.
4:32:46 PM
SENATOR WILKEN said he is concerned that this project is going
to be delayed waiting for steel and people while they finish in
Canada, and that would move it out to 2020. By that time, all
the projects listed on the FERC website could be completed and
there might not be a market for the gas.
SENATOR WAGONER said that he was going to keep harping on gas
liquids, and while he had three oil representatives at the
table, he wanted to ask them if they have any plans at this time
for those gas liquids, other than shipping them down the
pipeline to market.
4:34:09 PM
MR. VAN TUYL said that BP does not. In a study completed in
2001-2002 there was the assumption of a NGL Plant, (Natural Gas
Liquid Plant) in Alberta, where there is an existing
infrastructure for processing those gas liquids, an existing
pipeline structure for transporting the liquids, and existing
gas storage capacity, all three of which are essential for that
sort of activity.
He also said that sort of a processing facility can be located
anywhere along the pipeline theoretically, but the liquids
leaving the North Slope are too rich to meet the Bruener Tips
specifications in the lower 48 market, so at some point along
the line they have to be removed. BP has not made any specific
plans as far as marketing of its liquids.
The question came up earlier about the capacity of the line or
the ability of the line to carry gas liquids beyond the take-off
point, and maybe that needs to be designed in early on because,
if we take those liquids off in Fairbanks or anywhere in Alaska
versus further down stream, the design might be different.
He noted that the current pipeline design is what's called a
"dense phase," which means the fluid that is in the pipeline
isn't really liquid and it isn't really gas, it's super-
critical. That is actually the most efficient way to transport
gas and, as such, the performance of the pipeline downstream of
the liquid take-off point is not significantly modified.
SENATOR WAGONER said that he was told in confidence by an
individual at the same meeting Chairman Seekins attended, that
the Yukon Territories, BC, and Alberta are all battling for the
opportunity to process the gas liquids because of the jobs that
will create. He said he wants those jobs in Alaska if at all
possible, because it needs those long-term, well-paid, technical
and engineering jobs so the people of Alaska can come back home
after they finish college and go to work.
MR. VAN TUYL responded that the state made that point to the
producers during the course of negotiations, and that is why
Article 9.5 contains a commitment to complete a study of NGL
processing before the open season starts, so people will have a
sense for what the business opportunity is and what the cost
associated with developing that infrastructure might be.
4:38:10 PM
SENATOR WAGONER pointed out that by the time that study is
completed the contract will already have been signed by the
Governor and approved by the legislature, so if there isn't
something definitive in the contract other than a study, the
state has lost its chance. The expectation in Canada is that the
gas liquids are going to go to Canada, and at least a portion of
them should be processed in the State of Alaska.
4:39:37 PM
MS. KING said the NGL business has been very volatile and, over
the past five years, it has actually been a cost to the project
to extract some of the products such as ethane. The producers
have to look at the volatility of that business and see if it is
going to be a value add or a cost burden to the project.
She also pointed out that there is a clear statement in Article
24.1F, that says the hydrocarbon liquids delivered to the state
at each delivery point must be of the same composition as
hydrocarbon liquids delivered to the producers at each delivery
point. So whatever volume of liquids are in the stream, the
state will have the same proportionate composition as they would
have with a 20 percent gas. She then drew the committee's
attention to Article 9.5 again, which says "before the
commencement of the open season, the mainline entities shall
conduct a feasibility study for NGL processing and summarize it
in the project summary". The project summary is the public
document and is not confidential.
4:41:23 PM
CHAIR SEEKINS said he knew that there might be other questions
that have been raised today, so he would be happy to entertain
some of them tomorrow. The intent is to work on the stranded gas
amendments tomorrow, but the committee can start the day with
some brief comments regarding the discussions of today.
4:43:21 PM Adjourned
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