Legislature(2013 - 2014)BUTROVICH 205
02/20/2014 08:00 AM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB138 | |
| 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
8:04:47 AM
CHAIR GIESSEL announced that the only order of business would be
SB 138 and the presentation from Enalytica.
JANAK MAYER, Partner, Enalytica, Anchorage, Alaska, presented
information on "Competitiveness, Project Structure & Cash
Exposure." said it was his third year working with the
legislature on energy issues.
NIKOS TSAFOS, Partner, Enalytica, Anchorage, Alaska, presented
information on "Competitiveness, Project Structure, & Cash
Exposure" and said his background is in natural gas and
consulting.
8:06:05 AM
MR. TSAFOS said he would address the question of whether Alaska
will be in the money or out of the money and how that related to
"in kind" or "in value," the mid-stream options in the MOU and
address the state's cash exposure. He showed a chart of places
around the world that have LNG noting that Alaska is competing
in a world with many choices. However, many of those resources
have considerable risks. The key element in looking at this
chart was to reassure Alaska and to draw a key distinction
between an expensive project, a project that is out of the
money, and a project that doesn't get built.
8:08:31 AM
MR. TSAFOS showed a similar map of LNG sites in the mid to late
2000's and began with Trinidad that had just brought on a train
in 2005 and were proposing another. At some point Venezuela laid
out plans for three separate LNG facilities, Nigeria had just
brought train six on line and it had a number of other proposed
projects. (But if Nigeria built everything it said it was going
to build it would overtake Qatar.) Equatorial Guinea in 2007 had
just brought on a project and in 2008 and 2009 people were
working on a second train. North Africa was "really opening up"
and Algeria was very aggressive. Libya had just opened up the
deal with Kaddafi that brought in ENI, Shell, and BP that all
had proposed projects there. Egypt had just started up, Norway
was bringing on line a project, Russia had a just finalized a
project with partners, Qatar had placed a moratorium on new
projects, but Iran was still going. Myanmar at some point was
thinking about exporting gas by pipeline or LNG, but Australia
was moving very slowly and Russia obviously had a lot of gas,
but at huge costs.
The reason he showed them this chart with all the projects on it
was because none of them ever happened - none! Algeria finally
built some projects, but they basically offset some old
facilities they had but were shut down. Everything happened in
Australia and the reason was because everything else had failed.
So, when companies were looking for supplies, when you start
crossing everything off the list, whatever remains is the place
you go. The key element he wanted to point out is that Australia
was "by no means" the low-cost choice. All the cheap stuff never
materialized. The reason he says that is because it is important
to distinguish between an expensive project, a project that is
out of the money, and a project that does not get built. Just
because there are a lot of other projects out there that may be
cheaper than Alaska doesn't mean that all are going to happen or
that Alaska can't compete in that market. At the end of the day
what really matters is whether Alaska can sign contracts for a
price that make the buyers and the sellers happy.
8:12:09 AM
SENATOR FRENCH asked about the Snofit expansion in 2005, because
their Black & Veatch Royalty study says it went on line in
October 2007.
MR. TSAFOS agreed that the first train went on line in 2007, but
an expansion was proposed. The reason he said this is because
yes, Alaska is an expensive project, but it doesn't mean that
it's an impossible project. Alaska, in particular, has a number
of attractions; folks in Japan are getting excited about
Alaska's potential. Compared to the shale gas revolution in the
Lower 48, the route from Alaska to Japan is not only closer, but
it does not cross any "choke points:" territorial waters of any
country that Japan is concerned about. A lot more than price
determines what Japan gets built, because they worry about the
Strait of Malacca, the South China Sea and other problem areas.
8:14:32 AM
His graph was a simplified version of what the four options - by
no means exhaustive options - and would look at how the MOU
changes that structure when going through the numbers for each
option.
8:16:16 AM
MR. MAYER explained the by going to the status quo - taking
royalty and production tax in value - that far from insulating
the state from price exposure actually increases it in many
ways. The reason for that is that by solely looking at the
wellhead for value you have this enormous fixed cost component
(the $66-odd dollars of tariff) that would apply to all of the
different midstream elements combined that would actually
amplify the effect of movement in price.
He asked them to think (abstractly) about the impact, for
instance, of another fixed claim: the mortgage that is a fixed
claim on the portion of the value of one's house. For instance,
if you buy a $100,000 house, put down $10,000 and have a $90,000
mortgage, and then the value of the house appreciates by
$10,000, the fixed claim remains that same, but your investment
has doubled. If the value of the house depreciates by $10,000
the fixed claim remains the same, but your entire investment is
gone. So the 10 percent change in value of the house can give
one 100 percent change either way in the value of his
investment. So, leverage in that sense increases exposure to
price risk.
The idea that any form of fixed claim, whether it's a loan from
the bank or having another party build some piece of
infrastructure and pay them a tariff for that - those are all
fixed claims that are a form of leverage - would increase the
state's exposure to price. So, taking value by solely taxing the
wellhead even though the state isn't directly paying a tariff
itself, by calculating the wellhead value on the basis of that
implied tariff is essentially economic leverage, and that
increases the state's exposure to price and price risk.
8:19:00 AM
SENATOR DYSON asked him to explain the tariff piece on the
graph.
MR. MAYER explained that in comparison to the world of oil where
the tariff combined for TAPS, marine transport and everything
else is maybe $10, here the tariff is as much as $66/BOE. This
means if you take the approach of simply taxing the well head
value that is the same as saying this part of the stream -
regardless of what the price is - is always going to get its
return first. The state would take what's left over after that
in the same way as the bank is always going to get its money
first.
8:20:22 AM
MR. MAYER said they ran their model looking at the world of
royalty and production tax in kind as 25 percent gas share with
a corresponding equity share with the idea that it's
counterintuitively reducing the state' price exposure rather
than increasing it (precisely because they are removing a
substantial part of that element of leverage from the equation).
8:21:09 AM
SENATOR FRENCH went to the Black & Veatch study and asked if
their model took into account the B&V warning that the state
could lose up to 70 percent of the value of the royalty gas by
taking it in kind. Is there any reduction in the value of the in
kind gas because of the marketing issues and the other factors
that the study pointed out?
MR. MAYER answered that was an excellent question and they had
assumed parity. And if one were to say there is a specific
impact on the state that it receives a poorer price than others,
it wouldn't change the slope of the line, but it would bring it
down.
SENATOR FRENCH requested a slide of the state losing 25 percent
in the translation from value to in kind to get a better idea of
what might be our first or second years' experience.
MR. MAYER agreed.
CHAIR GIESSEL noted the arrival of Senator McGuire.
8:22:59 AM
MR. MAYER continued to explain that the slope of the line
depends on a range of other factors: one is the tariff through
taxing at the wellhead or the physical tariff one has by having
other parties build the infrastructure and paying them for it.
It is a fixed claim that increases the exposure he stated. There
will be other forms of leverage as the project develops. These
assumptions from Black & Veatch assume a 70 percent equity
capital structure behind the project. That means that the state,
if it's a 25 percent participant, is only on the hook for direct
cash for 30 percent of its total capital call for its share of
the project and the bank has first claim on the cash flows from
the project, increasing the price exposure.
This represents the pure in kind world that the actuary sets out
before getting into the detail of the MOU and the question of
what goes to TransCanada. If there is a third party participant
in some portion of the midstream you are again bringing back in
some element of a fixed claim and the question then becomes what
is the ideal way of juggling that. Because by going with that
world you are reducing the state's initial upfront cash outlay
exposure (which is important to manage), but that also gives
someone else first cash call. There is a balancing act between
what you are doing in that participation versus the decisions
one is making further down the track on things like overall
level of debt and equity in the project. These could balance
each other out. For example, a bigger share for TransCanada
could mean the state needs to take a little less debt in doing
this to even out the risk reward that goes with the price
exposure. It's a question of thinking about all fixed claims as
a form of leverage that can be balanced against each other to
achieve a degree of price exposure that the state is comfortable
with.
8:25:38 AM
MR. MAYER noted that they had corrected the slide they presented
last time that had an error and also updated the model to
reflect a few additional things: factoring in the fact that
under SB 138 costs from production tax purposes remain claimable
against oil taxes regardless of whether they come from oil or
gas expenses. To that extent, they talked about the state having
a 25 percent share in the entire midstream from gas processing
down to the LNG facility but not having to front other cash for
upstream development. In fact, effectively by having those costs
be deductible against oil taxes there is an after-tax state
contribution towards upstream expenses and those numbers are
reflected in this slide.
8:26:45 AM
SENATOR FRENCH asked about the overall government take of the
project. Black & Veatch says it's from 70-85 percent and it
seems like they are splitting the net present value 50/50
between the state, the feds and producers.
MR. MAYER said they would like to discuss that with Black &
Veatch in a little more detail to understand their modeling,
because it looks like there is a slight discrepancy.
SENATOR FRENCH quipped that they might have different ideas
about the word "slight," because they're talking about $20 or
$30 billion.
8:27:48 AM
MR. MAYER said the MOU starts off with the overall 25 percent
share across the midstream that the HOA entails and then has a
number of possibilities; option 1 would be that the state
exercises its right to purchase a share of the TransCanada
vehicle that is responsible for the state's 25 percent of the
gas processing plant and the pipeline. If that were exercised to
the full 40 percent envisioned in the MOU, the state would end
up with a 10 percent stake in that portion of the midstream, but
still 25 percent share in the liquefaction project.
The alternative is if the state has no stake in the upstream or
in the pipeline and only retains the 25 percent stake in the
liquefaction project. The next slide would show what that would
mean to the state in terms of overall project cash flows and
what the state is on the hook for, particularly in the years of
construction.
8:29:24 AM
MR. MAYER showed a graph of the pure world of the SOA 25 percent
stake in gas treatment and processing, pipeline and LNG and the
effect on total cash flows of TransCanada having 100 percent of
gas treatment and pipeline on one line (red) and if the state
exercises its equity option and TransCanada only has 60 percent
of that 25 percent share the effect on the cash flow is another
line (yellow). Obviously having an additional partner in this
decreases the cash exposure in the early years and
correspondingly means that one takes less of the cash in later
years. He said it was easier to compare cash flows to what one
might get from another investment.
8:31:19 AM
SENATOR MCGUIRE asked if he had a position on the 7.1 percent
that TransCanada wants to assess the state (because it's an
equity loan). Is that fair market value?
MR. MAYER said that was an excellent and relevant question. It's
a fixed claim on the cash flows of the project. Under the MOU
there is a 12 percent cost of equity and a 5 percent cost of
debt; a 70/30 percent split between those two in weighted
average cost of capital is 7.1 percent during construction, and
for any subsequent expansions once the pipeline is in service is
a 75/25 percent split.
The MOU also has the rate tracker differential that gets set at
the time of final investment decision, so they know what the
actual rate is depending on how the 30 year treasury has moved
between now and the time of final investment decision. There is
risk in both directions, but he suggested primarily upward risk
in where that may move over the next several years, but that
decision can also be made based on conditions at that time.
MR. MAYER said there are a number of questions: one what
limitations there are on the state's total ability to carry debt
for such a project and the difference in that sense between
TransCanada doing this versus the state doing it through debt
and all the other issues they have talked through in previous
sessions in terms of having a professional pipeline operator
that makes its money by moving molecules, not by selling them.
However, he said, you can't look at this only in cash terms have
a stake in the project. TransCanada brings a premium to the
table that one needs to weigh.
8:34:41 AM
SENATOR BISHOP said you can't lose sight of the leverage (having
a lower tariff rate for instate use of gas to Alaskans) by
having TransCanada able to negotiate it. Alaskans want to see
something else out of this project besides cash to the treasury
as direct cash back in their pocket at the burner tip. That
value is here and it's not showing up. But if that was modeled
over 40 years it would equal a real number.
MR. MAYER said that was true, but the counterpoint is whether
the state could take that 25 percent stake itself and (arguably
charge a very low tariff) and also be a good pipeline manager,
particularly when it comes to expansions. If it is a sole
partner in an expansion, does it really want to get into a
business like that in the future by itself?
8:36:36 AM
MR. MAYER addressed what the state is potentially "on the hook
for" saying they looked solely at net cash flow out in the first
years of a project's lifespan in a number of different
scenarios. The first thing they noticed was that even in the in-
value/no equity world there is negative cash out. That comes
back to the question he mentioned previously: because costs are
deductible against oil production tax as well as both state and
federal corporate income tax, simply from their being investment
(in this case) in the upstream there is effectively a negative
cash impact of that to the state. Investment, particularly at
this level by itself creates an implicit liability to the state.
The state could have close to $3.5 to $5 billion in total cash
call for the capital outlay in a 25 percent equity across the
value chain. The path of the MOU reduces that by up to $1-1.5
billion by having another partner to share some of that capital
burden with.
He said this shouldn't be taken as gospel in terms of how cash
is actually spent through the project; those plans are a long
way off and it's hard to know how they will look. Enalytica is
trying to be conservative as possible by saying that maybe 30
percent of the cash could be spent in one year, which is how you
get to the negative $1.5 billion in 2023.
8:39:24 AM
SENATOR FRENCH said he liked the slide, but he imagined David
Teal, a legislative financial analyst, sitting in the audience
and developing a big stomach ache as he envisioned the State of
Alaska spending $1.2 billion in 2023 on a project in a year when
they will be looking at deficits and worrying about how long our
savings will last. The public should be thinking about where the
money will come from in these long out years.
8:40:21 AM
SENATOR MICCICHE said what the slide covers is the variation in
the potential cash outlay depending on what deal gets entered
into and he asked Mr. Mayer to talk a little bit about the
sliding scale of the lowest to the highest potential outlay in
those years on this slide.
MR. MAYER explained that there is always some outlay even in a
case of not participating in kind at all. So, in a peak year
that could be half a billion or just over that in a peak year of
construction versus $1.5 billion in the case of equity at a 25
percent level throughout the value chain. By having another
partner, TransCanada as proposed in the MOU, that $1.5 billion
peak spending annual exposure could then be clawed back to $1.1
to $1.2 billion.
8:41:41 AM
SENATOR MICCICHE said with all due respect to Senator French it
sounded like a scary statement; the reality of it is that
Alaskans would like gas available so that their futures could
look a little brighter and they could have some potential
industrial activity. But there is a cost all the way across the
value chain no matter how the state chooses to participate. This
discussion is about if we want to share on some of the upside or
sit back and have it all sort of be outside of our control.
CHAIR GIESSEL said the other implication is if the state doesn't
participate if the project would even go forward at all.
8:42:33 AM
MR. TSAFOS added that the other part they have talked about in
previous presentations is there is nothing that prevents the
state from offloading part of that 25 percent along the way if
it gives heartache to too many people. The state could think a
little more strategically; it may make sense to have 25 percent
share today and for the first one, two, three years before the
project has momentum, but the state could also decide at that
point that it's a lot of money to invest. He opined that there
would be a lot of companies that would be happy to take some of
that share off our hands and that there are multiple ways to
mitigate the state's cash exposure.
8:43:53 AM
SENATOR MICCICHE said he assumed that in most of the analyses
the state's cost of capital is 6 percent and the cost of capital
from TransCanada at 7.1 percent.
MR. MAYER asked him what he meant by the state's cost of
capital.
SENATOR MICCICHE said he meant our Triple A rating where the
cost of our capital is lower than TransCanada's.
MR. MAYER answered the cost of debt entailed in the MOU for
TransCanada will cost the state 5 percent and come up to 7
percent when blended with the 12 percent cost of equity. The
modeling in their recent slides looked at the returns rather
than the cash outlays in the early years. For simplicity's sake
they went with a 5 percent cost of debt for their analyses, but
they could use other numbers.
8:45:49 AM
SENATOR MICCICHE asked what he would call a realistic scale for
the cost of capital over the next 30 years.
MR. MAYER said 6 percent could be called the state's opportunity
cost of capital, but it can borrow capital at substantially less
than that.
SENATOR MICCICHE said it is important to really understand that
in comprehending the full value of TransCanada's relationship.
MR. TSAFOS agreed. The way they look at it, the state has two
numbers: what it can borrow (cost of debt) and its opportunity
cost (alternative uses for funds). They will definitely work
through that analysis. That is why chart 11 shows bigger
variations. They are not assuming that it's just a 1.1 percent
difference. He underscored the difference between opportunity
cost and borrowing cost.
8:48:02 AM
MR. MAYER concluded with a slide showing that 70/30 percent
debt/equity ratio would be 30 percent of the corresponding
capital call. This is simply to say what the maximum in a base
cost scenario would look like what if the state decided that it
wanted to reduce price risk and do this all through equity.
8:49:12 AM
SENATOR FRENCH said he appreciated the "base case," because if
there are 20 percent cost overruns, everything gets multiplied
by 20 percent. He asked if that would be from the $60 billion
figure.
MR. MAYER replied $45-65 billion cost of the midstream including
$3-4 billion in upstream costs above that (GTP, Pipeline, and
LNG plant).
8:49:47 AM
SENATOR MICCICHE asked if the initial outlay is higher going in-
kind if the state would gain more downside protection.
MR. MAYER said that was correct. There are many ways to change
that red line.
SENATOR MICCICHE asked if slide 11 cash flows for the state
between the two cases of in value and in kind were fairly
substantial for the long term.
MR. MAYER responded particularly if one is looking solely at the
undiscounted cash flows. If one looks at the net present value
of what the state is giving up, they could present some analysis
on that, but it is a relatively small piece of the total value
of the project. It is a significant reduction in the upfront
capital required, but it's a significant reduction in the total
cash flows for the project (it's giving a piece of the midstream
to a third party in the in kind world).
CHAIR GIESSEL held SB 138 in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SRES enalytica 20140220.pdf |
SRES 2/20/2014 8:00:00 AM |
SB 138 |