Legislature(2013 - 2014)BUTROVICH 205
02/12/2014 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB138 | |
| Alaska North Slope Royalty Study | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 138 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX
3:31:46 PM
CHAIR GIESSEL announced SB 138 to be up for consideration and
that they would hear from the companies today.
3:31:53 PM
TONY PALMER, Vice President, Major Projects Development,
TransCanada Pipelines Limited, said they supported SB 138 with
regards to the taxation of natural gas, but that is not their
primary interest. In their view, the bill is intended to
establish a legislative framework to implement the principles
set out in the Heads Of Agreement (HOA) and the Memorandum of
Understanding (MOU) between TransCanada and the State of Alaska.
3:33:05 PM
He noted support of the following elements of the bill:
1. It expands the mandate of the Alaska Gasline Development
Commission (AGDC) to enable it, through an appropriate
subsidiary, to participate as an equity holder in the
liquefaction component of the AKLNG project and potentially in
the midstream component, if the state elects to exercise its
equity option on the TransCanada component of the project.
2. It establishes a large diameter natural gas pipeline project
fund and the appropriations would be used to fund the planning,
financing, acquisition, maintenance, construction, operations of
the project by the state.
3. It also authorizes the Department of Natural Resources (DNR)
commissioner to participate in the negotiation of certain
contracts relating to the projects and such contracts to be
brought back to the legislature for approval.
4. It also authorizes the DNR commissioner to enter into certain
short term contracts relating to certain project services
contemplated in the project. This provision is intended to cover
the precedent agreement (PA) that is referred to in the MOU.
MR. PALMER said it's important to understand that there are lots
of stages in this process and that they continue to be
appropriately processed by the legislature and all parties. He
said TransCanada will continue to work with the administration
to continue alignment on the bill.
3:34:55 PM
SENATOR BISHOP asked him to summarize the best value TransCanada
brings to the project.
MR. PALMER answered TransCanada brings a number of values to the
table:
1. TransCanada's credentials, experience, and expertise. This
project contemplates building a $10 billion pipeline across
Alaska in summer and winter conditions and across a significant
mountain range. TransCanada has worked on this project now for
40 years; so in addition to its experience and expertise
elsewhere in North America they bring tremendous knowledge of
this particular project. TransCanada owns 40,000 miles of big-
inch natural gas pipeline in North America - 10,000 in the U.S.
and 30,000 in Canada. They have been completing projects of this
nature for 60 years: the first three gas pipeline across the
Andes in South America, a pipeline across the Rockies in Canada,
and they are now constructing pipelines in Mexico in similar
mountainous terrain.
2. TransCanada brings assets directly to the project that were
developed by ExxonMobil and TransCanada under the Alaska Gasline
Inducement Act (AGIA). Under the MOU and HOA those assets will
be contributed and available to the state with adoption of SB
138. Timing is another advantage in that it has taken a year to
negotiate the HOA and the MOU.
3. This is a smooth and amicable transition out of the AGIA
structure and into the new contemplated structure that both the
state administration and TransCanada are willing to work with.
3:38:47 PM
SENATOR FAIRCLOUGH said her opinion is that his company is
outstanding and that the state paid TransCanada and its
shareholders up to $300 million for AGIA work that took gas to
North America, but some Alaskans have questions about
TransCanada's involvement in this LNG project and the AGIA work
that may not be valuable to it.
3:40:25 PM
MR. PALMER answered that any of the work completed north of
Livengood is clearly applicable and valuable to this project as
is the work on the gas treatment plant (GTP) as well as some of
the overall analyses completed on design work - pipeline
integrity and strength that are clearly valuable for the entire
project, not solely for the mileage south and south east of
Livengood. Some say maybe 30 - 50 percent of the work is
directly applicable, but it's challenging to give that a direct
number. The state has invested in those dollars as have
TransCanada and ExxonMobil shareholders, because the
reimbursement covered only a portion of the costs that were
expended on the entire work.
MR. PALMER said he thought the change in overall gas market
primarily caused the AGIA structure to not see a pipeline built.
Six years ago shale gas production in North America was in the
order of 3-5 bcf/day; today it's 25 bcf/day (about five AKLNG
projects) and parties contemplate that will go to 50 or 60
bcf/day, which benefits consumers but not the producers or the
producing states.
He explained that North America produces in the order of 80
bcf/day and six years ago gas prices were contemplated being $6-
8, but unfortunately they are more like $3-4, or in the order of
$4/mcf/day. That's equal to $300 million/day being transferred
from what folks thought would be coming to producers and
producing states to what is going to consumers and that is what
has made it very challenging to build a pipeline from Alaska
down to the Lower 48.
3:44:04 PM
PAT FLOOD, Supervisor, Alaska North Slope Gas, ConocoPhillips
Alaska, Anchorage, Alaska, supported SB 138. He said
ConocoPhillips believes there are four key areas where it is
important to get legislative input to continue advancing the
project as envision in the HOA:
1. The state must decide that it wants to participate in the
project.
2. The state needs to decide what share of the gas the state
would have, which would set the state's participation share.
3. The legislature needs to define a production tax (taken as
gas molecules), which, with the existing state royalty (also
taken as gas molecules) would provide the state's overall gas
share that would support the state participation share. This
state gas share needs to be consistent with and support the
state's participation share.
4. The legislature needs to give the administration the
necessary tools to confidentially work through all the various
arrangements and contracts required to move the project ahead as
is outlined in the HOA.
MR. FLOOD said ConocoPhillips thinks overall that the proposed
legislation, as general law, effectively addresses these key
areas. He said in its sectional analysis this past Friday, the
administration broke the proposed legislation into three groups;
the first dealt with AGDC's scope, powers and structure. The
second group dealt with the DNR commissioner's powers and duties
with respect to contract negotiations and oil and gas leases;
and the third group dealt with the tax statutes. Today he would
address his comments in the same three groups.
The first group of sections address AGDC and its potential role
with regards to an LNG project and ConocoPhillips supports AGDC
managing the state's participation share in an LNG project and
realizes that there are ongoing legislative discussions about
the structure being proposed. Ultimately, the details of AGDC's
structure and authority are a decision for the state and
ConocoPhillips simply supports AGDC as a viable way for the
state to participate in an LNG project.
3:46:41 PM
MR. FLOOD said the second group of sections in Title 38 relates
to the DNR commissioner's flexibility in negotiating changes to
the oil and gas leases from which gas could be committed to a
larger project and for the myriad other agreements that would be
required in order to manage the state's role in such a project.
He explained that the LNG business requires numerous contracts
covering nearly all the aspects of the value chain and for the
state to effectively participate in a large natural gas project,
such as the AKLNG project, with other private co-venturers the
commissioners of both DNR and Department of Revenue (DOR) need
to be able to negotiate, confidentially, the details of these
many agreements in a way that doesn't compromise the commercial
positions. The commissioners need this authority in order for
the state to effectively participate in a project with other
parties.
3:48:19 PM
The final set of sections deals with the tax statutes in Title
43. These provisions set a fixed gross value production tax at
10.5 percent with the ability of the state to accept payment of
this tax in gas molecules. Effectively, the choice of the tax
rate when combined with the existing royalty percentage would
set the state's gas share for participation in a natural gas
project such as the LNG project contemplated in the HOA. He said
that ConocoPhillips does support the provisions that allow for a
fixed gross production tax, payable in gas. The 10.5 percent
rate the administration has proposed yields a combined royalty
plus production tax in the range of the 20-25 percent that is in
the HOA.
Overall, he said, ConocoPhillips supports the legislation,
recognizing that it contains some significant policy decisions
the legislature needs to make when contemplating the state's
role in a large natural gas project, including the LNG project
contemplated in the HOA. He offered to help by providing
information or perspectives on those issues.
3:49:56 PM
SENATOR BISHOP asked how many other agreements he meant when he
said "myriad agreements."
MR. FLOOD answered that he couldn't give him a head count; the
types of agreements he could think of are an LNG marketing
agreement between any one of the producers and administration,
and any of the project agreements that will be required.
3:51:26 PM
SENATOR FRENCH asked if a fiscal stability contract was one of
those.
MR. FLOOD replied that ConocoPhillips has said for many years
that durability of fiscal terms is a very important and vital
part of this project and that is something they contemplate
requiring, although terms had not been discussed yet. Those
terms would have to come back to the legislature for
ratification.
SENATOR MCGUIRE asked if the following were important to
ConocoPhillips:
1. A subsidiary of AGDC manages the state's share rather than
the corporation itself.
2. Sections 1-7 have specific requirements as to how that
subsidiary will be managed with the idea that it will be only a
portion of the board and that the finances will be kept
separate.
3. Share a broader view of how the producers might view working
on this project through AGDC, which was empowered through HB 4
with fairly specific direction to keep working on a Plan B,
which at some point could possibly compete with the AKLNG
project.
3:53:55 PM
MR. FLOOD answered the key thing from ConocoPhillips'
perspective is that the state participate in the project. It
needs to participate in a way that is consistent with a very
large project of this magnitude. How and with whom is a state
matter. As to the AGDC structure, ConocoPhillips didn't have any
objections to what is in the current legislation.
In regards to AGDC's role in HB 4, he said ConocoPhillips has no
comment as to whether that is an issue or not. They support AGDC
and recognize it has an obligation to also advance the ASAP
project.
SENATOR FAIRCLOUGH said section 5.3 on page 10 of the HOA says
"The state would participate in an AKLNG project at a
participating interest share in the Alaska LNG project
components consistent with the state's gas share in these
components," and asked if that was accurate.
MR. FLOOD answered yes.
SENATOR FAIRCLOUGH said she wanted to know now if anyone had a
problem with any of the three individual pieces that were being
reviewed. The HOA talks about protecting and maximizing the
value of the state's mineral interests. It tries to improve
alignment between the state and the producers and tries to
create transparency for the administration, so that the state
can act in a proprietary manner. It makes sure that access and
pro-expansion principles are available to those that want to
produce LNG, and creates an opportunity to deliver gas to
Alaskans as well as an opportunity for the state to get
additional revenues. She thought the HOA was solid, but it "sort
of rocks" on the issue of if the state should have an equity
interest equal to what it is investing and she wanted to hear
from any Alaskan if they had questions about it.
4:00:07 PM
BILL MCMAHON, Senior Commercial Advisor, Alaska Gas Development,
ExxonMobil Production Company, said ExxonMobil supported SB 138
and is committed to pursuing commercialization of Alaska natural
gas and being a part of the AKLNG project. The HOA and SB 138
are critical steps towards successfully bringing the natural gas
resources of Alaska's North Slope to market through this
project. It makes a significant step towards allowing the state,
the producers, AGDC and TransCanada to work together to progress
the project and to establish a process to develop the fiscal and
project framework that is essential for advancing this project
to completion.
If SB 138 passed the legislature, he said that ExxonMobil will
be ready to move forward with pre-FEED work activities, a
necessary step that has never been taken before. Three things
contemplated by SB 138 are state participation, state percentage
of the gas, and a process to negotiate project enabling
agreements and they are encouraged that the legislature is
looking at it so early in the session.
4:03:31 PM
SENATOR MCGUIRE asked if all the statutory references needed for
enactment of the HOA and the MOU are in SB 138.
MR. MCMAHON replied yes for the HOA, but he couldn't speak
directly about the MOU, because that was between the state and
TransCanada.
SENATOR MCGUIRE stated that it would be helpful now to hear if
there someone might want to amend SB 138, because that might
affect the HOA and might in turn would affect the MOU.
4:06:16 PM
SENATOR FRENCH asked if he thought would be possible to agree to
exclude any linkage to oil taxes from the future contracts with
respect to the HOA and the MOU. Would it be possible to build a
pipeline together as partners without having embedded oil taxes
in that contract and do it just through the royalty in kind
(RIK) on our gas and tax as gas with respect to our production
taxes?
MR. MCMAHON answered that they all face a tremendous challenge
with this project and they are faced with putting together
project enabling contracts that are going to be sufficient to
allow investors to put up the capital for it: to allow investors
to have the assurance that they will get the returns expected,
and lenders will the assurances they need that they will get
repaid, and most importantly that the buyers of LNG will be able
to sign long term contracts that they can count on so that
Alaska resources can fuel their economy for decades to come. He
couldn't answer how stability of oil taxes would play into it
and that is why he liked SB 138; it sets out a process to find
the solutions to move the project forward.
4:08:59 PM
SENATOR BISHOP said when they write the history books, everyone
wants to make sure they are on the right side of history. From a
poker player's perspective, he thought of the producers as three
excellent professional poker players and himself as a novice,
and he didn't want to be left owing them a bunch of IOUs at the
end of the day. He urged them to help build trust with the
people of Alaska going forward.
4:10:23 PM
DAVE VAN TUYL, Regional Manager, BP Exploration Alaska, Inc.,
supported SB 138. He said BP believes that the HOA, AGDC, DOR
and DNR - all seven parties - are critical to successfully
advancing the AKLNG project. Therefore, the key question for
examining SB 138 is simple: is SB 138 faithful to the HOA? And
for BP the answer is yes. SB 138 moves all the parties together
as envisioned in the HOA.
The first of the three Ps is participation and SB 138 provides
for state participation through AGDC and authorizes the state to
negotiate contracts consistent with the terms of the HOA. The
second P is percentage and the bill provides a percentage for
tax as gas that when added to the state's RIK share puts the
state at the table with 20-25 percent again consistent with the
terms of the HOA. Third is process and the bill lays out a
process for negotiations to occur and provides transparency to
the legislature as outlined in SB 138, and BP believes that is
the winning way. This really needs to be done together.
4:12:38 PM
An area of particular interest to BP was ensuring that the newly
formed AGDC subsidiary is established by tax and finance
professionals in an efficient and timely and using due diligence
so that pre-FEED can start ramping up once the bill is enacted.
That efficiency includes the appropriate sharing of staff
between the new subsidiary and the AGDC parent.
MR. VAN TUYL said the language requiring various administrative
determinations should be clearer and consistent with the HOA and
that would reduce uncertainty for all the parties, avoid
unintended consequences, and enable a timely and efficient ramp
up with pre-FEED activities. Other technical corrections may be
inevitable, but he didn't see the need for any substantive
changes to the bill.
4:14:21 PM
SENATOR FAIRCLOUGH asked if anything in the bill was
structurally inconsistent with the determinations in the HOA
versus the subsidiary being created.
MR. VAN TUYL said the HOA is fairly broad in terms of the
state's involvement through AGDC and he hadn't noted any
inconsistencies, but the devil is in the details and that is why
he recommended the necessary due diligence. It is an opportunity
for AGDC's skilled staff to work where those skills are best
used and that can be done through subsidiaries.
4:15:31 PM
SENATOR MICCICHE said everyone is consistent in feeling that
state participation is key and no one seems to care who it goes
through for that participation or if it has a partner, and asked
him the most important reasons for BP that the state
participates.
4:16:21 PM
MR. VAN TUYL replied that it's not that uncommon for the host
government to have a role in big LNG projects around the world
just because of the magnitude of a project and the nature of
that roll varies with the regime. He said BP does care who the
state chooses to partner with. The HOA sets out the state
participation and the manner of participation is what is dealt
with in the MOU. They want to make sure that whoever comes into
their joint venture has the requisite financial strength and
technical capabilities, which TransCanada does, but it is the
state's choice.
The reason state participation is so critical is because
"Nothing aligns like equity," Mr. Van Tuyl said. Having the same
equity investment in a project means they all have the same
commercial interest in seeing problems get solved in the right
way and partners will tend to agree more and when investing $65
billion, agreeing is pretty important because they want the
project to run efficiently. State participation provides for
that sort of alignment like no other lever they can think of.
4:19:00 PM
SENATOR FRENCH said Article 8 of the HOA talks about royalty and
gas taxes, but doesn't mention oil taxes as being part of the
negotiations of a contract that would spring to life if this
legislation passed and asked if he saw oil taxes as being art of
that conversation.
MR. VAN TUYL answered with passage of SB 21 last year BP and
others have had new activities on the North Slope and that kind
of healthy oil business is important to have for building a gas
project on top of, because it will disperse some of the costs it
takes to operate the North Slope. This is a multi-decade project
that has to be robust and it's important that the contract works
for everybody.
SENATOR BISHOP asked if anything precludes more equity from
coming into this project.
MR. VAN TUYL answered that it's not unusual for another party to
come into a big project like this one and typically a framework
provision for transfers makes sure the party is credit worthy
and technically capable. Nothing precludes that from happening
now.
4:22:40 PM
SENATOR BISHOP asked if he could partner up with his $10
billion.
MR. VAN TUYL replied that the bill envisions a process that
would result in an actual agreement.
SENATOR FAIRCLOUGH asked if that process would be developed at
the next step of the game, because if someone brings $10 billion
to the table, they have to be able to buy someone else's
interest.
4:23:56 PM
MR. VAN TUYL answered that those sorts of terms will be included
in the actual joint venture agreements that will be worked on
with the state at the able through the pre-FEED and the FEED
processes.
SENATOR FAIRCLOUGH asked if the legislature could add intent
language or make recommendations.
4:25:09 PM
MR. VAN TUYL said he thought they could add a letter of intent
providing direction in the manner in which the state should be
exercising its equity participation in the project.
SENATOR FAIRCLOUGH said she was trying to find a way for the
legislature to guide the process in future agreements that are
going to be negotiated in confidentiality and without having 60
people in the room. They might think about what is valuable
within a joint venture and articulate that, so when it came up
for review again they could tell if it was accomplished.
4:26:26 PM
SENATOR DYSON said he thought at some point they should state
their intent and clear understanding that nothing in these
agreements lock in oil taxes.
SENATOR MICCICHE said he valued all that industry has created in
terms of jobs and wealth in Alaska, but because folks in Alaska
fear having the top corporations in the world in front of them
now walk away from this agreement all rubbing their hands
together feeling good about "what you pulled over on the people
of Alaska," and asked what the value of SB 138 is for the state
in their eyes.
MR. VAN TUYL answered that SB 138 enables a number of very
important elements of value for the state:
1. This is the best opportunity to commercialize North Slope
gas. This is a shared interest that will bring in new long term
revenues to the state.
2. Getting gas to Alaskans is a critical element for a
successful project, and AGDC participation ensures that will
happen.
3. Opportunities for massive creation of jobs during
construction and operation of facilities for decades to come.
He said it's not BP's intent to enter an agreement where one of
the parties disagrees or feels like it isn't a square deal; that
is not the bedrock of a long term commercial agreement, which is
what they want. They want an agreement that will be robust for
decades and that is what the HOA and SB 138 are based upon.
4:32:35 PM
SENATOR MICCICHE commented that in his experience the best
negotiation is when both sides walk out of the room equally
unhappy and asked what he thought would be a pitfall the
legislature should watch for.
MR. VAN TUYL said he was involved in the HOA but not development
of SB 138. One thing springs to mind in terms of pitfalls and
that is to not foreclose options. A near term decision could
change over time and become a hasty decision in retrospect. One
of the bits of genius about the HOA is it has high level
principles that everyone can stand behind allowing the details
to be developed over time.
4:35:24 PM
DAN FAUSKE, President, Alaska Gasline Development Corp. (AGDC),
said he didn't have testimony but was available for questions.
SENATOR FAIRCLOUGH asked about the nature of creating the
subsidiary within AGDC and if it would work to the benefit or to
the detriment of AGDC as a corporation and why.
MR. FAUSKE answered that this subsidiary is unique in that it's
a separate entity with a new board and structure and the current
management of AGDC would not be involved with it. He had created
other subsidiaries - the Alaska Housing Finance Corporation
(AHFC), the Northern Tobacco Securitization, the Alaska Capital
Corporation, and the Corporation for Affordable Housing - that
have all been successful; so, there is a precedent that if done
properly subsidiaries bring an extreme benefit. They can take on
a specific piece of business, build a border around it that is
structured towards that type of activity and service and help
the parent corporation in widening its business scope in the
work that it needs to do.
CHAIR GIESSEL, finding no further questions, thanked everyone
for their participation.
^Alaska North Slope Royalty Study
Alaska North Slope Royalty Study
4:39:14 PM
CHAIR GIESSEL announced that they would next hear the rest of
Black & Veatch presentation that had concluded on slide 34,
fiscal framework.
4:39:36 PM
JASON DE STIGTER, Senior Consultant, Black & Veatch, Management
Consulting Division, said he had been working on some version of
marketing natural gas for the State of Alaska for the past six
years. He was one of the main modelers for the royalty study and
had performed a big part of the analysis. His background is in
financial and economic analysis and he specializes in risk
analysis for Black & Veatch.
PETER APT, Managing Director, Fuels Practice, Black & Veatch,
Management Consulting Division, said he would be addressing
specifically the LNG markets and supply chain elements of the
royalty study.
4:41:50 PM
DEEPA PODUVAL, Principal, Black and Veatch Management Consulting
Division, said is an economist and engineer by training and had
been involved with Alaska natural gas since before AGIA. The
analysis they did looked at how the AKLNG project compares to
fiscal structures of other successful projects and ways the
state could incentivize the AKLNG project.
Slide 36 showed projects worldwide that are either in operation
or have achieved FID and are under construction. The government
take from these projects ranged from 40 to 85 percent, but most
of the large capital projects were on the lower end of the
government take ratio.
Slide 37 showed government take for the AKLNG project under SB
21 without any changes to the fiscal structure and an assumed
capital cost of $45 billion, at 70-80 percent, depending on
whether one is looking at undiscounted cash flows or from an MPV
perspective. Ms. Poduval said this would be considered a fairly
aggressive government take for a project that is as large and as
complex as this one is. And unlike a lot of the other projects
there is an almost-fixed element that is hard to move, the
federal government IRS take of 35 percent.
She said slide 38 tries to demonstrate straightforward ways of
incentivizing the AKLNG project and first they took away royalty
and production tax completely to see how much the project's
attractiveness could be improved. The producers' return is a
little less than 15 percent under base case assumptions and
taking away the royalty moved their return up by 1 percent;
taking away the production tax moved it up by 1.5 percent.
4:47:49 PM
They found that any transfer of value designed in this way from
the state towards the producers is constrained by the fact that
35 percent is transferred to the federal government in the form
of corporate income tax.
They next looked at the state's choices with respect to its
royalty share, mainly trying to understand what the value would
be of going RIK instead of royalty in value (RIV). Slide 39 laid
out some advantages and disadvantages relative to the two
alternatives. RIK can be attractive to the producers, because it
reduces valuation disputes and commercial uncertainty for the
project. It creates some disadvantages for the state because it
requires marketing expertise, especially in the LNG case, that
the state doesn't have.
The state is familiar with RIV having administered it on much
greater volumes than RIK, but disadvantages would be a lack of
transparency and not having access for third parties into the
project.
4:51:25 PM
Risks to the state from going to RIK would be that some elements
get included in RIV that may or may not be included in RIK -
whether GTP costs would be considered as a deduction and whether
upstream field cost allowances would change going between RIK
and RIV - and some of that is just not clear yet. But she
highlighted the biggest risk is the state's inexperience in
marketing LNG if it went to RIK. In that case it would be
competing with the producers who are some of the best marketers
in the world and it would run the real risk of being
disadvantaged in negotiating deals that could result in a
discounted price relative to the value it would receive just by
taking a percentage of the price that the producers are able to
negotiate. The state could lose as much as 75 percent of the
value relative to RIV.
4:53:00 PM
SENATOR FRENCH asked how GTP costs would be treated differently
under RIV versus RIK.
MS. PODUVAL said some of this is still uncharted and that now
only Prudhoe Bay is allowed to deduct GTP costs for royalty
calculations.
SENATOR FRENCH asked if that is captured in the tax code.
MS. PODUVAL replied that she thought it was captured in the
royalty settlement agreements.
4:54:54 PM
JOE BALASH, Commissioner, Department of Natural Resources (DNR),
Juneau, Alaska, said she was correct; only Prudhoe Bay has a
settlement agreement pertaining to gas.
MS. PODUVAL said slide 41 highlighted the additional risks the
state would face going to RIK. First, it would have to build its
own marketing organization and she had just talked about how
complex global LNG markets are, and they are not transparent. It
would have to face competition from producers with well-
established LNG marketing expertise as well as global
portfolios. And being counterparty to the various agreements
would open the state to default by any of the counterparties.
Taking RIK would cause the state to make firm capacity
commitments along the LNG supply chain and entering into sales
commitments without controlling the upstream is risky, because
the state might not be able to meet its sales obligations. It
would have to lean on the producers or a third party that has
experience in dealing with these market uncertainties as well as
the global LNG markets to help address these risks.
4:57:35 PM
SENATOR FRENCH asked why the counterparty risk and would fall on
the state.
MR. ABT explained that the counterparty is the party the state
would enter into the long term sales and purchase agreements
with: for example, an Asian buyer or a Japanese utility. The
counterparty risk is the credit risk or the performance risk of
that party to honor the terms and conditions of the long term
sales and purchase agreement. "Counterparty risk" refers
specifically to an ability to perform under the terms of a
contract. For example, if LNG was delivered as per the contract
and for whatever reason the buyers are not able to pay for it -
due to bankruptcy or some other credit issue - that would be a
risk the state would assume. If the buyer couldn't physically
take the gas for whatever reason (perhaps they didn't have
capacity in the regasification terminal to receive the LNG),
they would still have an obligation to pay us, and it's possible
that they wouldn't. The state would then need the ability to go
sell that volume in the open market to another buyer.
SENATOR FAIRCLOUGH asked if that scenario could be reversed if
the state marketed its own gas and was not able to deliver.
MR. ABT answered yes.
5:01:50 PM
SENATOR FRENCH asked where the LNG price would be that the state
would be experiencing negative royalties.
MS. PODUVAL answered if the midstream tariff is $10 and if the
global LNG price falls below $10 - because we've moved to a
Henry Hub-type price - the state could find itself facing
negative royalties.
SENATOR FRENCH stated that could be put more simply by saying
"the state could lose money if the LNG price is too low."
5:03:10 PM
MS. PODUVAL said slide 42 summarized the key findings from
examination of the fiscal framework:
1. Government take at 70-85 percent is high for a project of
this complexity and an estimated IRR of approximately 15 percent
may be insufficient for producer investment relative to their
alternatives.
2. Well-designed incentives to lower project costs (especially
reducing leakage to the federal government) and modifying fiscal
structure can help make the AKLNG project competitive in the
market place.
3. The state taking RIK could result in a substantial increase
in risk and potential loss of value if it is not managed
prudently. The producers have more experience managing
associated risks.
SENATOR FAIRCLOUGH asked if the state could really lose money,
or just get a subpar return on an investment, or a combination
of both.
5:05:16 PM
MS. PODUVAL replied that it could be a combination of both. If
global prices truly fall below capacity commitments, in an RIK
world without equity participation, the state could see negative
cash flows. With equity participation it would appear as subpar
return on investment.
CHAIR GIESSEL, finding no further questions, said they would
break until tomorrow at 8:00 a.m. [SB 138 was held in
committee.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 138 Supp Letter Cobb Navarre Brower Hopkins 20140211.pdf |
SRES 2/12/2014 3:30:00 PM |
SB 138 |
| SRES Black&Veatch Presentation Revised 201402010.pdf |
SRES 2/12/2014 3:30:00 PM |
|
| SB 138 Written Testimony ConocoPhillips 20140212.pdf |
SRES 2/12/2014 3:30:00 PM |
SB 138 |