Legislature(2013 - 2014)BUTROVICH 205

02/10/2014 03:30 PM RESOURCES


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03:30:05 PM Start
03:30:29 PM SB138
03:35:35 PM Alaska North Slope Royalty Study
05:12:37 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 138 GAS PIPELINE; AGDC; OIL & GAS PROD. TAX TELECONFERENCED
Heard & Held
Black & Veatch, Alaska North Slope Royalty
Study by Deepa Poduval
Department of Natural Resources
Department of Revenue
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
         SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                     
                                                                                                                                
3:30:29 PM                                                                                                                    
CHAIR  GIESSEL announced  continued consideration  of SB  138 and                                                               
that today they  would hear from Black and Veatch  on the work it                                                               
did that  advised the administration  and the departments  on how                                                               
to proceed on the gas pipeline issue.                                                                                           
                                                                                                                                
3:30:54 PM                                                                                                                    
SENATOR MICCICHE joined the committee.                                                                                          
^Alaska North Slope Royalty Study                                                                                               
                                                                                                                                
                Alaska North Slope Royalty Study                                                                            
                                                                                                                                
DEEPA PODUVAL,  Principal, Black & Veatch,  Management Consulting                                                               
Division, said she  had been working in the  energy industry with                                                               
a focus  on natural gas for  the last 13 years.  Black and Veatch                                                               
is  a privately  held corporation  with 10,000  employees in  100                                                               
offices  around the  world; they  specializing in  critical human                                                               
infrastructure: energy,  water, and telecommunications.  A fairly                                                               
large division also supports the  federal government. She and her                                                               
partners  have  a long  history  of  working  with the  State  of                                                               
Alaska; she  has led the team  supporting the state for  the last                                                               
eight   years  focused   on  economic   analysis,  markets,   and                                                               
commercial  support; she  would  lead the  presentation with  the                                                               
help of her colleagues.                                                                                                         
                                                                                                                                
3:35:35 PM                                                                                                                    
PETER  ABT, Managing  Director,  Oil and  Gas  Strategy, Black  &                                                               
Veatch,  Management Consulting  Division, said  he had  been with                                                               
this company for  eight months or so. Prior to  that, he spent 10                                                               
years working for  Gazprom helping them develop  their global LNG                                                               
strategy   focusing   on   commercial   structures,   negotiating                                                               
commercial  and  terminal  use  agreements,  sales  and  purchase                                                               
agreements of LNG. He had also  spent time working in the oil and                                                               
gas   development,  exploration   and  production   drilling  and                                                               
completing wells. He spent time  in pipeline line development and                                                               
had run  trading organizations and  had a deep knowledge  of U.S.                                                               
natural gas  business, the  global LNG  business, and  the issues                                                               
the AKLNG project faces.                                                                                                        
                                                                                                                                
3:37:02 PM                                                                                                                    
JASON DE  STIGTER, Senior Consultant, Black  & Veatch, Management                                                               
Consulting Division,  said he  had been  working on  this project                                                               
with  Ms. Poduval  since  2008  and was  deeply  involved in  the                                                               
modeling  effort. Most  of his  client  engagements focus  around                                                               
economic, financial, and risk analysis.                                                                                         
                                                                                                                                
CHAIR GIESSEL acknowledged that Commissioner Balash was on line.                                                                
                                                                                                                                
MS. PODUVAL noted these facts:                                                                                                  
                                                                                                                                
The Alaska North Slope Royalty  Study was undertaken between June                                                               
2013 and November  2013 and, hence, preceded  finalization of the                                                               
Heads  of Agreement  ("HOA") between  ExxonMobil, ConocoPhillips,                                                               
BP, TC Alaska, AGDC, and the  State Administration as well as the                                                               
Memorandum   of   Understanding   ("MOU")   between   the   State                                                               
Administration and TransCanada.                                                                                                 
                                                                                                                                
While  the   study  informed  the  State   Administration  as  it                                                               
negotiated the HOA and the  MOU, the study, and this presentation                                                               
summarizing it,  do not analyze  the specific terms  within these                                                               
agreements or their  impacts on the competitiveness  of the AKLNG                                                               
project.                                                                                                                        
                                                                                                                                
The  study  pointed out  several  factors  that were  taken  into                                                               
consideration by the administration  and addressed where possible                                                               
within those  agreements, like the risks  associated with royalty                                                               
in kind (RIK)  and procuring access and control  in a potentially                                                               
integrated LNG project.                                                                                                         
                                                                                                                                
3:39:59 PM                                                                                                                    
After  the  royalty  study  summary,  supplemental  analysis  was                                                               
included  that  summarizes  some  ongoing  work  that  looked  at                                                               
specific  terms in  the  MOU and  HOA and  their  impacts on  the                                                               
state, and  she looked forward  to presenting  some of it  to the                                                               
committee  and  to  work with  legislative  consultants  to  pull                                                               
together an analysis related to the specific decisions at hand.                                                                 
                                                                                                                                
In the  interests of  time Ms. Poduval  said they  had summarized                                                               
the royalty  study at a  high level; she said  a lot of  work had                                                               
been  done  that was  not  included,  including various  detailed                                                               
analysis. They ran more than  100 separate scenarios and continue                                                               
to analyze  various issues.  The Administration  has looked  at a                                                               
significant body of work to get to this point.                                                                                  
                                                                                                                                
Executive summary:                                                                                                              
                                                                                                                                
The Alaska  Liquefied Natural Gas  (AKLNG) project is  a proposed                                                               
project to liquefy Alaska North Slope  (ANS) gas and export it as                                                               
LNG,  primarily to  Asian markets.  The project  is comprised  of                                                               
three main components:                                                                                                          
-Gas treatment plant (GTP)                                                                                                      
-Pipeline                                                                                                                       
-Liquefied natural gas (LNG) plant                                                                                              
                                                                                                                                
The total estimated capital cost  of the three components of this                                                               
project  is  $45  billion  falling  within  a  range  of  $39-$54                                                               
billion.  She clarified  that the  $45-$65 billion  estimate they                                                               
hear about  includes the investments in  the upstream, especially                                                               
at Pt. Thomson. Natural gas  to supply the project is anticipated                                                               
to come  from the proven  reserves at  the Prudhoe Bay  and Point                                                               
Thomson  units  on  the  Alaska  North  Slope.  The  key  project                                                               
sponsors are Exxon  Mobil, ConocoPhillips and BP  (referred to in                                                               
this  study   as  Producers)  with  potential   participation  by                                                               
TransCanada  and  the  State  of  Alaska.  The  Final  Investment                                                               
Decision (FID) for  the project is assumed to  be 2017-2018, with                                                               
the project achieving commercial operation around 2023-2024.                                                                    
                                                                                                                                
3:44:01 PM                                                                                                                    
MS. PODUVAL  said the  study had two  main objectives;  the first                                                               
was to  provide information that  can help the state  protect its                                                               
royalty interest  and maximize its  value from this  project. The                                                               
second was  to understand  what the state  can do  to incentivize                                                               
and impact the  success of the AKLNG project in  its role as land                                                               
owner of the oil and gas resources on the Slope.                                                                                
                                                                                                                                
3:44:55 PM                                                                                                                    
The team included  Black and Veatch as well  as the international                                                               
expertise of Daniel  Johnston, and the study  was conducted under                                                               
the leadership of the Department  of Natural Resources (DNR) with                                                               
support  and consultant  from Department  of  Revenue (DOR)  DOR.                                                               
Inputs   and  assumptions   provided   by   the  Producers   were                                                               
considered, as well. A lot  of uncertainty surrounds this project                                                               
at  this  point, because  it  is  significantly large  with  many                                                               
complex variables that cannot be perfectly foreseen.                                                                            
                                                                                                                                
3:45:58 PM                                                                                                                    
SENATOR FAIRCLOUGH joined the committee.                                                                                        
                                                                                                                                
3:46:09 PM                                                                                                                    
Given that they have tried  to make the best assumptions possible                                                               
while  being conservative  and recognizing  that many  reasonable                                                               
scenarios can  be created  to look at  this project,  Ms. Poduval                                                               
said they  were presenting their view  of the market and  it will                                                               
not necessarily be the official view of the administration.                                                                     
                                                                                                                                
3:47:17 PM                                                                                                                    
She skipped the key findings and  went on to conclusions on slide                                                               
15,  saying bottom  line, it's  their assessment  that the  AKLNG                                                               
project  can be  feasible  and competitive  with  changes to  the                                                               
project's cost  structure and the state's  fiscal framework. From                                                               
an  incentive perspective  fiscal and  non-fiscal incentives  can                                                               
improve  the  commercial  attractiveness of  the  project.  These                                                               
include:                                                                                                                        
-a reduction in government take, either royalty or taxes                                                                        
-ways to share the cost of  the project, which are expected to be                                                               
significant                                                                                                                     
-non-fiscal   terms   such   as  stabilization   provisions   and                                                               
modifications to existing lease terms,  such as the state's right                                                               
to  switch between  royalty in  kind (RIK)  and royalty  in value                                                               
(RIV).                                                                                                                          
                                                                                                                                
They anticipated  that the AKLNG  project would be  an integrated                                                               
project   like  several   large  LNG   projects  are   worldwide.                                                               
Integrated project  ownership of AKLNG by  the Producers presents                                                               
the risk of misalignment wherein  project revenues could be moved                                                               
between  the upstream  and the  midstream components  to maximize                                                               
value to the  Producers. These decisions could  potentially be to                                                               
the detriment of the state.                                                                                                     
                                                                                                                                
3:49:39 PM                                                                                                                    
MS.  PODUVAL said  one of  the study's  findings was  that fiscal                                                               
structure changes  beyond stand-alone  royalty share or  tax rate                                                               
modification  can   help  in  improving  project   economics  and                                                               
creating  alignment. One  way  to achieve  that  would be  direct                                                               
participation by  the State  in the  project in  conjunction with                                                               
establishing a  gross share of  the gas  that would allow  for an                                                               
alignment of  the share of  the gas  as well as  potential equity                                                               
participation in the project.                                                                                                   
                                                                                                                                
3:51:23 PM                                                                                                                    
Direct state equity participation in  the project can provide key                                                               
benefits to the state and include:                                                                                              
-creating alignment of interests                                                                                                
-creating  transparency  through  the midstream  portion  of  the                                                               
supply  chain  for the  state  entity  that participates  in  the                                                               
project                                                                                                                         
-having the ability to facilitate  third-party access to the mid-                                                               
stream                                                                                                                          
-potentially  increasing the  state's  cash  flows and  improving                                                               
producer economics.                                                                                                             
                                                                                                                                
She  said that  establishing  a gross  share of  gas  in lieu  of                                                               
production tax  and marrying that  with equity investment  in the                                                               
project  may  provide  the needed  alignment  for  a  competitive                                                               
project as  well as allowing the  state to maximize the  value of                                                               
its resources.                                                                                                                  
                                                                                                                                
3:53:17 PM                                                                                                                    
MS. PODUVAL noted that this is  not a strategy without risks, and                                                               
the state  has the  ability to  lessen those  as well  as achieve                                                               
objectives  of transparency  and open  access for  third parties,                                                               
but  will need  to  weigh those  opportunities circumspectly  and                                                               
with carefully defined state's rights and obligations.                                                                          
                                                                                                                                
3:54:14 PM                                                                                                                    
MIKE  PAWLOWSKI,  Deputy   Commissioner,  Department  of  Revenue                                                               
(DOR), said it was important  to remember that these conclusions,                                                               
one being the commercial agreements  and another being the access                                                               
for third  parties, are a  review of the royalty  study completed                                                               
prior  to the  finalization  of the  Memorandum of  Understanding                                                               
(MOU)  with TransCanada  and the  Heads Of  Agreement (HOA).  The                                                               
administration looked at  these as key concerns  and managed some                                                               
of  those risks  in  the  HOA or  articulated  them  as areas  of                                                               
concern  they  will  continue  to  work on.  This  study  is  the                                                               
foundation  on  which  the  state   built  its  response  in  the                                                               
discussions with the Producers.                                                                                                 
                                                                                                                                
3:55:26 PM                                                                                                                    
MR. ABT took over the Black  & Veatch presentation and began with                                                               
the LNG market on slide 18. He focused on three primary tasks:                                                                  
-providing  an overview  of how  LNG is  traded in  value in  the                                                               
various markets that are available to the AKLNG project                                                                         
-undertaking  an analysis  of historical  and  future global  LNG                                                               
pricing trends                                                                                                                  
-providing  some   discussion  around   the  supply   and  demand                                                               
projections  in the  LNG market  and  the potential  implications                                                               
that will have on the AKLNG project                                                                                             
                                                                                                                                
Current LNG market realities on the demand side:                                                                                
-the LNG market is highly concentrated                                                                                          
-7 countries account for 70 percent of demand                                                                                   
-Asia Pacific accounts for 70 percent of global trade                                                                           
-demand is growing rapidly, about 8 percent per year                                                                            
                                                                                                                                
Current LNG market realities on the supply side:                                                                                
-LNG  supply  is  also  highly  concentrated  among  8  exporting                                                               
countries that provided 85 percent of global LNG exports in 2012                                                                
-liquefaction  capacity,  or  trains,   are  very  expensive  and                                                               
financed on  long term sales  and purchase agreements  (SPA) with                                                               
LNG buyers.                                                                                                                     
-gas  quality varies  by project  and between  buyers with  Asian                                                               
buyers preferring higher btu gas                                                                                                
-long term contracts of 20 years  or more dominate the market and                                                               
are expected to continue doing so in the future                                                                                 
-no  liquid  market to  provide  price  markers for  LNG  (unlike                                                               
natural gas or crude oil)                                                                                                       
                                                                                                                                
3:58:25 PM                                                                                                                    
MR. ABT  said the price  structures of  the SPAs need  to provide                                                               
certainty over the long term to  support the cost of the projects                                                               
and  the underlying  reserve developments  that are  necessary to                                                               
provide the feed gas to the  LNG terminals. In the past, he said,                                                               
LNG contracts  have typically been  structured with an  oil price                                                               
linkage.                                                                                                                        
                                                                                                                                
SENATOR FAIRCLOUGH asked if that  price linkage had been standard                                                               
since 1970 and if it was true in an Asian market also.                                                                          
                                                                                                                                
MR. ABT  answered yes;  that is clearly  the price  preference in                                                               
the Asian  market. They have  been the predominant buyers  of LNG                                                               
since the 70s; there is no natural  gas market per se in Asia, so                                                               
everything has  been linked  to crude since  that time.  With the                                                               
recent development  of U.S. Gulf  Coast export projects  they are                                                               
trying  to delink  some LNG  prices away  from crude  oil, but  a                                                               
majority of  LNG prices  are still linked  to oil  contracts. The                                                               
period of 2002  - 2006 saw some  lower-price oil-linked contracts                                                               
signed by  Chinese/Japanese buyers,  but that  was mostly  due to                                                               
prevailing  economic conditions  at the  time and  some pressures                                                               
that project developers were under  to get project financing, and                                                               
in 2008 there was a severe world recession.                                                                                     
                                                                                                                                
MR. ABT  said the  recent emergence of  Henry Hub  linked tolling                                                               
agreements  in the  U.S. Gulf  Coast has  created an  alternative                                                               
price structure  that the  Asian buyers  are very  interested in.                                                               
These structures in current market  conditions are lower than the                                                               
oil-linked  prices  for  delivery  into the  Asian  markets.  But                                                               
buyers  in Japan  and Korea  are aggressively  seeking Henry  Hub                                                               
linked  contracts  now  and are  entering  into  traditional  oil                                                               
contracts. He anticipated  that condition will not  last for much                                                               
longer and a limited amount of  U.S. volume will be exported from                                                               
the  Gulf Coast.  Once those  projects have  been identified  and                                                               
final  investment decisions  have  been taken,  the Japanese  and                                                               
Korean  buyers will  likely be  back in  the market  pursuing oil                                                               
linked contracts once again.                                                                                                    
                                                                                                                                
4:01:56 PM                                                                                                                    
SENATOR FRENCH  said this  seems like an  area of  potential risk                                                               
for the state,  because if it turns out that  the Henry Hub model                                                               
becomes  dominant over  the  next  few years  it  could lose  out                                                               
because those contracts pay less than the oil linked contracts.                                                                 
                                                                                                                                
MR. ABT responded  that the Henry Hub-linked  price contracts are                                                               
targeted  to entering  the market  place in  about the  2017-2020                                                               
timeframe, but there will be a  time when demand goes beyond what                                                               
the Gulf  Coast can  provide. The  underlying assumption  is that                                                               
the Gulf Coast will have a limited amount of export volumes.                                                                    
                                                                                                                                
There are twenty-odd  projects that have applied  for approval to                                                               
sell  LNG  sourced  in  the  U.S.  to  non-free  trade  agreement                                                               
countries,  but  he  didn't  anticipate  all  of  those  projects                                                               
receiving approval  nor did  he anticipate  that if  they receive                                                               
approval that they will ultimately get constructed.                                                                             
                                                                                                                                
4:03:36 PM                                                                                                                    
MS. PODUVAL added another factor that  will come into play is the                                                               
desire of the  Asian buyers to have  diversification within their                                                               
LNG supply portfolio. There are  concerns about being too heavily                                                               
dependent on shale  gas from the U.S. as well  as passage through                                                               
the Panama  Canal to get  Gulf Coast  LNG over to  Asian markets.                                                               
So,  they  anticipate  projects  like AKLNG  that  have  a  well-                                                               
established resource  base, a  stable political  environment, and                                                               
proximity  will be  attractive to  Asian buyers  even outside  of                                                               
price considerations.                                                                                                           
                                                                                                                                
SENATOR  FRENCH  said he  asked  whether  or  not the  Henry  Hub                                                               
pricing scheme  would pay  us less  than a  crude-linked contract                                                               
would and neither presenter answered it.                                                                                        
                                                                                                                                
MR.  ABT  apologized and  said  it  is  possible that  the  AKLNG                                                               
project  could  be  priced  through   a  Henry  Hub-type  pricing                                                               
mechanism,  but the  fixed price  element of  the contract  would                                                               
need to be  determined in order to make the  project economic and                                                               
that has not been a part of this analysis.                                                                                      
                                                                                                                                
SENATOR  FRENCH said  it's  in  the analysis  before  him and  he                                                               
didn't know why neither analyst would  say on the record that LNG                                                               
prices  Henry Hub-linked  tolling  agreements are  less that  oil                                                               
linked contract prices.                                                                                                         
                                                                                                                                
CHAIR GIESSEL  said Ms.  Poduval had  noted that  transport costs                                                               
through the  expanded Panama  Canal were not  known and  that the                                                               
distance is much  greater than between Alaska and  Asia, and that                                                               
they had not,  therefore, analyzed that scenario.  But they could                                                               
certainly think about it and respond later.                                                                                     
                                                                                                                                
4:06:44 PM                                                                                                                    
MR. PAWLOWSKI  said he would  be happy  to work back  through the                                                               
committee to  Senator French's question.  He thought Mr.  Abt was                                                               
trying  to  say  that  the  Henry Hub  linked  contracts  have  a                                                               
variable component, which is the  Henry Hub price, and then there                                                               
is a  fixed component, which is  for recovery of the  cost of the                                                               
infrastructure,  and without  knowing what  that fixed  component                                                               
looks like it's difficult to compare them.                                                                                      
                                                                                                                                
SENATOR  DYSON  said  the  most recent  contracts  have  a  14-15                                                               
percent effective slope and asked if it was a btu equivalent.                                                                   
                                                                                                                                
MR. ABT answered  that the slope is what was  used to convert the                                                               
LNG price from  a crude oil price  to an LNG price.  In Asia it's                                                               
typically 14-15  percent. In simple  terms, if a barrel  of crude                                                               
oil is $100, the equivalent LNG price is $14-15/mmbtu.                                                                          
                                                                                                                                
4:09:50 PM                                                                                                                    
SENATOR MICCICHE  said he thought  the slide20 was  incorrect and                                                               
that "mcf" should be "mmbtu."                                                                                                   
                                                                                                                                
MR. ABT  said that  was correct.  With respect  to the  Henry Hub                                                               
pricing versus  oil-linked pricing,  in today's market  the Henry                                                               
Hub price is  at a level that is lower  than the crude oil-linked                                                               
price. So,  Gulf Coast projects,  if they were in  service today,                                                               
at Henry Hub prices would be lower than the oil-linked price.                                                                   
                                                                                                                                
4:10:38 PM                                                                                                                    
SENATOR  MICCICHE asked  if was  safe to  say that  if those  two                                                               
relationships were plotted over the  last 20 years and likely the                                                               
next 30 years that they would be all over the place on value.                                                                   
                                                                                                                                
MR.  ABT  said  yes,  that   was  a  fair  statement.  Tremendous                                                               
volatility has been  seen in natural gas prices  in North America                                                               
that would have suggested the  Henry Hub-based price versus crude                                                               
oil would  be very  similar, in some  instances even  higher than                                                               
what the prevailing  crude oil-linked price would  have been over                                                               
the past 30 years.                                                                                                              
                                                                                                                                
4:11:25 PM                                                                                                                    
MR. PAWLOWSKI  inserted that the  full study is available  on the                                                               
DNR   commissioner's   website   under  "Priorities,"   and   the                                                               
consultants are  in a  video link describing  some of  the issues                                                               
the committee is wrestling with.                                                                                                
                                                                                                                                
4:12:29 PM                                                                                                                    
MR.  ABT went  to  the bottom  of  slide 20  and  said non  price                                                               
features are typically  negotiated into the long  term SPAs; they                                                               
include duration of contracts, the  nature of commitment (take or                                                               
pay provisions),  delivery terms (ability  to pull the  cargo and                                                               
take it to a higher value market  or not take the cargo and allow                                                               
the seller  to take it to  an alternative location), and  the LNG                                                               
specifications that he mentioned earlier.                                                                                       
                                                                                                                                
SENATOR DYSON  asked if  the buyer  can say he  does not  want to                                                               
take this  cargo and  the ship  can go to  another market  with a                                                               
better price.                                                                                                                   
                                                                                                                                
MR. ABT  responded that  a lot of  the provisions  are negotiated                                                               
depending upon  the actual demand that  a buyer may have  at some                                                               
point in  time or the  flexibility that the seller  would include                                                               
in its  ability to divert  a cargo.  Typically, if the  buyer has                                                               
purchased  the LNG  at  the  terminal -  freight  on board  (FOB)                                                               
purchase - the buyer would  control the flexibility of the tanker                                                               
on the  open water.  If they  did not  have sufficient  demand to                                                               
justify delivery  into the  target market,  they then  would have                                                               
the ability to divert that cargo to an alternative market.                                                                      
                                                                                                                                
4:14:52 PM                                                                                                                    
MR. ABT said the demand forecast  used by Black & Veatch for this                                                               
study and all their economic  analyses was labeled the "Reference                                                               
Case."  Slide 21  summarized several  forecasts of  projected LNG                                                               
demand growth over  the next 20 years; in 2020  the range will be                                                               
40 million tons  per annum, just over 5 bcf/day.  The forecast is                                                               
a  little  more   aggressive  through  2015  and   then  is  more                                                               
conservative   from  2015-2030.   The   difference  between   the                                                               
Reference Case  and the other  forecasts was due to  factors that                                                               
differ based on view of the  markets, for instance, Asia has more                                                               
aggressive demand growth  and they also believe  Europe will have                                                               
more demand  for LNG than  what they  see. They also  expect that                                                               
other  agencies  are forecasting  a  much  higher penetration  in                                                               
transportation  fuels for  trucking  and  marine facilities  than                                                               
what they used for the Reference Case.                                                                                          
                                                                                                                                
4:17:27 PM                                                                                                                    
SENATOR BISHOP  asked if the  Reference Case kept with  his theme                                                               
of "our  assumptions in  this study were  made in  a conservative                                                               
manner."                                                                                                                        
                                                                                                                                
MR. ABT answered yes.                                                                                                           
                                                                                                                                
4:18:03 PM                                                                                                                    
He  said slide  22  depicts  the breakeven  price  for the  AKLNG                                                               
project, and  added that  the breakeven price  has no  bearing on                                                               
the price of  LNG. It also depicts the buildup  of costs that are                                                               
necessary to  construct this  project and  breaks them  down into                                                               
components as follows:                                                                                                          
-upstream costs on the left                                                                                                     
-the cost of the LNG plant                                                                                                      
-the cost of the GTP and the pipeline                                                                                           
-shipping from  the terminus of  the LNG  plant to the  market in                                                               
Asia                                                                                                                            
-the  state's take  (taxes that  each agency  collects throughout                                                               
the entire supply chain)                                                                                                        
-the federal government's take                                                                                                  
-zero MPV for the producer (an assumption)                                                                                      
The breakeven  price is $12.30/mmbtu  and takes into  account the                                                               
capital and  operating costs  of the  midstream (assuming  an 8.5                                                               
percent discount rate).                                                                                                         
                                                                                                                                
Key  factors  that  can  cause  the  breakeven  price  to  either                                                               
increase or decrease  include a lower ambient  temperature at the                                                               
LNG facility,  which would cause  the ability to generate  LNG to                                                               
fluctuate; but perhaps  the biggest factor is  a projected change                                                               
in  the  capital  costs,  which  already have  a  great  deal  of                                                               
uncertainty.                                                                                                                    
                                                                                                                                
A  decrease in  capital costs  or increased  efficiencies through                                                               
the labor  markets would  result in a  decrease in  the breakeven                                                               
price. One other factor that  might influence the breakeven price                                                               
downward  is  negotiating  with the  producers  and  having  them                                                               
accept lower returns  than what they typically look  for in their                                                               
midstream investments (assuming an  8.5-10 percent discount rate,                                                               
and the producers would look for something higher than that).                                                                   
                                                                                                                                
4:21:52 PM                                                                                                                    
SENATOR MICCICHE asked  if he was not using  a particular ambient                                                               
temperature range for liquefaction conditions in his analyses.                                                                  
                                                                                                                                
MR. ABT  said that was  correct at this  stage, but they  had not                                                               
got into any of the  detailed engineering that would optimize the                                                               
plant design.                                                                                                                   
                                                                                                                                
4:23:05 PM                                                                                                                    
On  slide 23  he compared  the breakeven  analysis for  the AKLNG                                                               
project  to all  the  other  proposed LNG  projects  that have  a                                                               
projected  in-service  date after  2014  and  developed a  global                                                               
supply curve.  The breakeven  price of  the various  projects was                                                               
plotted  on  the vertical  line;  each  slice on  the  horizontal                                                               
access represented  an individual  LNG project that  is currently                                                               
under  development.  The  relative  capacity  of  each  of  these                                                               
projects  was determined  by  the width  of  the respective  line                                                               
along the horizontal axis.                                                                                                      
                                                                                                                                
The  box  in  purple  represented  the  amount  of  new  capacity                                                               
necessary to  meet their projected  demand in 2025.  He explained                                                               
that the  curve tells  them that the  AKLNG project  as currently                                                               
configured in  the current fiscal  structure is out of  the money                                                               
and that projects  with lower breakeven prices  than Alaska's can                                                               
provide about 340 million tons of  new supply, which is more than                                                               
what is required to meet  the projected demand of 250-300 million                                                               
tons   in  2025.   So,  the   AKLNG  project   faces  significant                                                               
competition.                                                                                                                    
                                                                                                                                
4:25:15 PM                                                                                                                    
MR.  ABT said,  however,  due to  many factors,  not  all of  the                                                               
projects under development are going to  be in service by 2025 or                                                               
even after,  including many  that are  on the  left of  the AKLNG                                                               
project.  Many  include  the  U.S. Gulf  Coast  green  field  LNG                                                               
projects  that are  still seeking  export authorization  and have                                                               
yet to file for authorization  from the Federal Energy Regulatory                                                               
Commission (FERC) to construct their  facilities. So, it's highly                                                               
likely that many, if not all,  of the green field projects in the                                                               
U.S. Gulf Coast will not  be constructed. In addition, several of                                                               
the  projects  located to  the  left  of  the AKLNG  project  are                                                               
located in  relatively unstable areas  throughout the  world. So,                                                               
the likelihood  of those projects getting  developed for multiple                                                               
reasons is also questionable.                                                                                                   
                                                                                                                                
SENATOR FRENCH asked  what units of measurement he used  on the Y                                                               
axis.                                                                                                                           
                                                                                                                                
MR. ABT replied  dollars per mmbtu, similar to the  axis on slide                                                               
22.                                                                                                                             
                                                                                                                                
SENATOR FRENCH asked if the  $12.30 breakeven figure was the same                                                               
for both.                                                                                                                       
                                                                                                                                
MR. ABT answered  yes, for the AKLNG project. He  added that they                                                               
had evaluated  all of the  projects throughout the world  and the                                                               
relative value  was depicted on  the curve, the point  being that                                                               
there  are many  projects  at  a breakeven  price  less than  the                                                               
Alaska  project  that have  the  ability  to meet  the  projected                                                               
demand in 2025.                                                                                                                 
                                                                                                                                
4:28:24 PM                                                                                                                    
SENATOR DYSON said  as Asian countries - Taiwan,  South Korea and                                                               
Japan - have  talked to them about  gas and oil, he  always had a                                                               
sense  that one  of the  things that  makes Alaska  attractive is                                                               
political stability and  that we are one of the  few countries in                                                               
the world that could protect supply routes that ships use.                                                                      
                                                                                                                                
MR. ABT  agreed that there was  a great deal of  concern over the                                                               
Suez  Canal and  the emergence  of  the Panama  Canal as  primary                                                               
water ways  that are necessary  to transport  LNG from the   U.S.                                                               
Gulf Coast to  Japan and the markets in  that region. Uncertainty                                                               
surrounds whether there  will be additional costs  on ships going                                                               
through the  Panama Canal. So,  having supply sources  that don't                                                               
rely  on  those  types  of shipping  logistics  are  particularly                                                               
attractive to the buyers in Asia.                                                                                               
                                                                                                                                
SENATOR MICCICHE asked  what causes the gap  between where Alaska                                                               
is  and the  other projects  in of  projects being  more economic                                                               
(slide 23). Is  it the liquefaction plant costs  or the midstream                                                               
costs?                                                                                                                          
                                                                                                                                
MR. ABT  answered that  it is a  combination of  costs throughout                                                               
the project; one of the  disadvantages that the AKLNG project has                                                               
are the costs  associated with the pipeline and the  GTP that are                                                               
necessary to  take the gas from  the North Slope down  to the LNG                                                               
terminal.  Typically, LNG  projects  developed  around the  world                                                               
don't have  a large pipe  component in their cost  structure, and                                                               
although some treating  is required it's not to  the magnitude of                                                               
this project.  Chevron's Gorgon project  in Australia has  a high                                                               
GTP cost,  but they  don't have a  high pipeline  cost associated                                                               
with it.                                                                                                                        
                                                                                                                                
SENATOR MICCICHE  said that  the cost  of the  gas can  really be                                                               
isolated to the extreme cost of the pipeline.                                                                                   
                                                                                                                                
MR. ABT said that's a big component of the gap.                                                                                 
                                                                                                                                
SENATOR FAIRCLOUGH  asked if  Alaska being  in the  red indicated                                                               
the volume of  LNG that will be available to  markets compared to                                                               
the size of the other projects (slide 23).                                                                                      
                                                                                                                                
MR.  ABT replied  that  the AKLNG  project is  one  of the  wider                                                               
rectangles on that  graph and depicts that it is  a large project                                                               
that  will  produce  large  volumes  of  LNG  relative  to  other                                                               
projects they evaluated.                                                                                                        
                                                                                                                                
SENATOR  FAIRCLOUGH  asked  when  other markets  are  looking  at                                                               
Alaska, if  they might  think of  it as a  prize, because  it can                                                               
provide gas for longer term.                                                                                                    
                                                                                                                                
MR. ABT  replied that  typically an LNG  project will  have about                                                               
20-25  years of  producible  reserves, because  that  is what  is                                                               
necessary  to  make  the  economics   work.  The  AKLNG  reserves                                                               
position  clearly helps  the  project, but  he  wasn't sure  that                                                               
gives it a significant competitive  advantage over other projects                                                               
that are also competing to serve the markets in Asia.                                                                           
                                                                                                                                
4:36:35 PM                                                                                                                    
He moved on  to slide 24 that addressed project  factors that can                                                               
influence the  price the  AKLNG project might  be able  to obtain                                                               
for  the production.  Factors  that would  drive  a higher  price                                                               
environment,  for  example,  would  include  the  North  American                                                               
projects, particularly  the Gulf  Coast projects  being permitted                                                               
at a  very slow pace,  perhaps like now  or even slower.  If that                                                               
were to occur, then the  non-North American conventional supplies                                                               
(Australia, Africa  and Russia) would  then compete to  serve the                                                               
remaining  demand, Alaska  being one  of those  projects. Another                                                               
factor that  could drive favorable  pricing for  Alaska obviously                                                               
would be  for Asian demand  to grow  much more rapidly  than what                                                               
they had depicted in their Reference Case.                                                                                      
                                                                                                                                
Were  all of  this to  occur, Mr.  Abt said,  the very  high cost                                                               
projects  in  Australia and  Russian  would  become the  marginal                                                               
supplies,  and Alaska  is positioned  very favorably  relative to                                                               
those  projects. And  if there  isn't an  abundance of  U.S. Gulf                                                               
Coast supply, sellers  would be in a strong  position to continue                                                               
demanding the  high-sloped, oil-linked contract terms  as opposed                                                               
to  having to  sell under  Henry Hub  pricing. In  that case,  he                                                               
would anticipate LNG selling for somewhere between $14-18/mmbtu.                                                                
                                                                                                                                
Under the low  price scenario, North America LNG  supply would be                                                               
unconstrained, all  of the proposed projects  would get developed                                                               
and would all compete for markets in Asia. The low cost non-                                                                    
North  American  conventional  supplies  would  have  to  compete                                                               
directly  with  those  projects,  and  in  many  cases  would  be                                                               
unfavorable  and uneconomic.  Under  this  situation, Henry  Hub-                                                               
linked prices become the price setter  for all Asian LNG into the                                                               
future. That would be an obvious  down side scenario with a price                                                               
in the $10-14/mmbtu range.                                                                                                      
                                                                                                                                
MR.  ABT said  in  both  scenarios there  is  an opportunity  for                                                               
Alaska  to  compete, but  obviously  in  the higher  price/higher                                                               
demand scenario there is a much better opportunity.                                                                             
                                                                                                                                
4:40:01 PM                                                                                                                    
SENATOR  DYSON asked  the decline  rate  for nonconventional  gas                                                               
fields in North America.                                                                                                        
                                                                                                                                
MR.  ABT answered  the decline  rate is  very significant  in the                                                               
early years of  production and then it stabilizes  over time. The                                                               
underlying assumption  for the unconventional production  is that                                                               
those  wells  will  continue  to   be  drilled,  as  there  is  a                                                               
tremendous  inventory of  prospects  that will  get drilled  over                                                               
time  if the  price signals  are  sufficient to  justify it.  Rig                                                               
efficiency has improved, so more  wells can be drilled with fewer                                                               
rigs and  in fewer  days. So,  in spite  of declining  rig count,                                                               
current levels  of production can be  maintained. The expectation                                                               
is that U.S. gas supply in the Lower  48 will be able to meet all                                                               
of the projected demand going forward  and, in fact, if the price                                                               
signal  is  strong enough,  additional  sources  of supply,  even                                                               
unconventional, can be brought on stream to meet it.                                                                            
                                                                                                                                
4:41:43 PM                                                                                                                    
He  said  the   LNG  market  segment  summary  on   slide  25  is                                                               
characterized  by  capital  intensive   projects  and  long  term                                                               
contracts.  All LNG  projects are  extremely  expensive. The  LNG                                                               
market  is illiquid  with very  few  players, which  is in  sharp                                                               
contrast to the oil market,  which is very transparent and highly                                                               
liquid. LNG  demand is  expected to grow  quickly over  the short                                                               
and  long   term,  but  supply   sources  are   also  developing.                                                               
Currently,  the AKLNG  project appears  to  be out  of the  money                                                               
within  the  global  LNG  supply   curve  under  the  status  quo                                                               
situation, although  cost and fiscal modifications  could enhance                                                               
its overall competitiveness.                                                                                                    
                                                                                                                                
4:42:49 PM                                                                                                                    
Slide 26 depicted  supply chain elements, he said,  and the study                                                               
provided an  overview of the  current capital cost  estimates for                                                               
the  AKLNG project  as  well as  a quick  review  of the  capital                                                               
structures  that  are  likely  to  apply  to  and  provided  some                                                               
comparative  projects   to  consider.  Then  they   assessed  the                                                               
commercial structures that might be applicable to the project.                                                                  
                                                                                                                                
Under slide 27  they were asked to look at  the expected cost for                                                               
the  project and  to  compare  it to  the  initial 2008  estimate                                                               
developed during  the Alaska Gas  Inducement Act  (AGIA) process.                                                               
Working with the  state's technical consultants, he  came up with                                                               
an estimate  of $45  billion. The Producers'  range for  the GTP,                                                               
pipeline, and  LNG project was  in the $37-54 billion  range (not                                                               
including upstream costs around Pt. Thomson.)                                                                                   
                                                                                                                                
MR. ABT  said what has  driven the  cost escalations in  the past                                                               
five  years have  been modifications  to  the project's  original                                                               
scope and  cost escalation in  labor and materials. In  2008, the                                                               
AGIA project  was focused  on building a  pipeline to  Canada; an                                                               
LNG project wasn't  the primary focus. From  the GTP perspective,                                                               
costs have  escalated from $5  billion to $10  billion, primarily                                                               
because the  scope got  much bigger.  The labor  costs associated                                                               
with   plant  construction   and  owner   costs  have   increased                                                               
significantly over time and going  forward, they expect continued                                                               
uncertainty around the scope, the  complexity of the project, and                                                               
the cost  of the skilled  labor that  will be necessary  to build                                                               
it.                                                                                                                             
                                                                                                                                
The estimated pipeline  costs have increased by  about 50 percent                                                               
to  $12 billion.  Like  the GTP,  the pipeline  has  had a  scope                                                               
change; initially it was scoped  as a lower pressure 48-inch line                                                               
and  now it's  a much  higher  pressure 42-inch  pipeline with  a                                                               
significant  amount  of  additional compression  than  originally                                                               
estimated. The  costs in addition  to the scope change  have been                                                               
due to  an increase  in material (globally)  and labor  costs and                                                               
those could still increase more.                                                                                                
                                                                                                                                
For the LNG  plant, the costs have also  risen significantly from                                                               
2008.  Liquefaction costs  have risen  globally over  that period                                                               
and  now range  from $1200/ton  of LNG  to $2500/ton.  Here their                                                               
estimate  is  $1350/ton. Given  the  challenges  of developing  a                                                               
project in Alaska, specifically  with respect to labor shortages,                                                               
material requirements and the logistics,  he expected these costs                                                               
will be under continued pressure going forward.                                                                                 
                                                                                                                                
4:47:42 PM                                                                                                                    
Slide  28  provided  a  brief  summary of  some  of  the  capital                                                               
structures to  show how  they vary from  project to  project, and                                                               
depend  on the  risk  profiles and  the  partner preferences.  It                                                               
depicted  capital  structures of  a  few  projects and  each  one                                                               
includes a partner in the AKLNG project.                                                                                        
                                                                                                                                
He  said  that most  LNG  projects  have  some level  of  project                                                               
finance, although there are exceptions,  and for projects of this                                                               
magnitude, long  term sales and purchase  agreements with credit-                                                               
worthy counterparties are essential  to secure the financing. For                                                               
this study, they assumed a debt/equity ratio of 70/30.                                                                          
                                                                                                                                
The projects are:                                                                                                               
-The  PNGLNG  project in  Papua  New  Guinea is  currently  under                                                               
construction  and scheduled  to  commence  operations later  this                                                               
year.  It  is led  by  ExxonMobil  and  has a  70/30  debt/equity                                                               
capital  structure;  it  has some  Japanese  partners  as  equity                                                               
participants, which has  enabled this project to  secure low cost                                                               
financing.  The PNGLNG  consortium is  responsible for  marketing                                                               
the LNG  from the project, and  long term SPAs have  been entered                                                               
into with  Sinopec, Osaka  Gas, Tokyo Electric  Power and  SPC in                                                               
Taiwan.                                                                                                                         
                                                                                                                                
-The Australia  Pacific APLNG  is a  fully integrated  project in                                                               
which ConocoPhillips plays a lead  role in the development of the                                                               
LNG plant. The  project is also under construction  and first LNG                                                               
is  expected  in  2015.  It   has  a  70/30  debt/equity  capital                                                               
structure.  Sinopec is  a minor  partner, but  they are  also the                                                               
major off taker of the LNG  accounting for some 85 percent of the                                                               
LNG produced. They have also  entered into a contract with Kansai                                                               
Electric Power Company in Japan  that has provided the assurances                                                               
necessary to the banks, so they were able to secure financing.                                                                  
                                                                                                                                
-Gorgon  LNG  is 100  percent  equity-financed  from the  balance                                                               
sheets of  the partners (Chevron,  Shell. and ExxonMobil).  It is                                                               
currently  the  world's largest  integrated  LNG  project and  is                                                               
expected  to  cost  over  $53  billion.  It  is  currently  under                                                               
construction with  first LNG expected  in 2015. Each  partner has                                                               
retained  its  own  equity  lifting   rights,  so  each  will  be                                                               
responsible  for selling  LNG from  their respective  portfolios.                                                               
Several SPAs have been entered into already.                                                                                    
                                                                                                                                
4:51:09 PM                                                                                                                    
This  project is  the  most  similar to  the  AKLNG project.  The                                                               
Producers preference  is equity  lifting rights  and in  an ideal                                                               
world they  would like to finance  it with 100 percent  equity as                                                               
well.                                                                                                                           
                                                                                                                                
4:51:29 PM                                                                                                                    
Slide  29  depicts the  various  commercial  structures that  are                                                               
available to State of Alaska and most LNG projects.                                                                             
                                                                                                                                
Three typical projects are looked at:                                                                                           
-Integrated:   aligned   interest,   cost   and   risk   sharing,                                                               
concentrated control amongst the partners                                                                                       
-Merchant: less  capital requirement for the  individual sponsors                                                               
and separation of control between upstream and LNG project                                                                      
-Tolling:  contractually assured  fees and  returns, accommodates                                                               
supply from multiple  upstream sources, no market  upside for LNG                                                               
project in and of itself                                                                                                        
                                                                                                                                
MR. ABT said each structure  affects the operations and financing                                                               
costs of  the GTP, pipeline,  and the  LNG plant, and  it impacts                                                               
key  criteria  important  to  State;  those  being  open  access,                                                               
expandability, and transparency across the supply chain.                                                                        
                                                                                                                                
Slide 30 details the advantages/disadvantages of each structure:                                                                
                                                                                                                                
-Integrated Structure Advantages:                                                                                               
•  Equity owners  may or  may not  act together  to sell  the LNG                                                               
product from an integrated structure                                                                                            
• Control over production                                                                                                       
• Aligned interests between owners                                                                                              
• Cost sharing and potential tax benefits                                                                                       
                                                                                                                                
Disadvantages:                                                                                                                  
• Capital requirements are high and span the supply chain                                                                       
•  Concentrated  control  makes   expansions  and  entry  of  new                                                               
participants difficult                                                                                                          
                                                                                                                                
Merchant Structure Advantages:                                                                                                  
•  Lower capital  requirement  if sponsors  of  upstream and  LNG                                                               
Project Co are different                                                                                                        
• Meets tax requirements for separate P&L center                                                                                
• Comply  with local  laws for  government ownership  of upstream                                                               
project                                                                                                                         
•  Less  control  by   upstream  participants  over  liquefaction                                                               
facilities                                                                                                                      
                                                                                                                                
Disadvantages:                                                                                                                  
• Less flexibility for equity participants in production of gas                                                                 
and selling LNG - sold uniformly by LNG Project Co                                                                              
• Commodity price risk exposure for LNG Project Co                                                                              
• Can  be mitigated  with variations of  the merchant  model, for                                                               
example,  by  selling  LNG  back  to  project  owners'  marketing                                                               
affiliate to insulate the project from risk                                                                                     
• Exposure to negotiating power of upstream owners                                                                              
                                                                                                                                
4:55:11 PM                                                                                                                    
Tolling Structure Advantages:                                                                                                   
• Contractually assured fees and  returns to service contractor -                                                               
Low market risk to LNG Plant Co                                                                                                 
- Mitigates upstream supply risk for LNG Plant Co                                                                               
• Potential tax benefits if title transfers are taxed                                                                           
• Accommodates supply from multiple sources, entities                                                                           
• Ability  to attract other  investors/owners to project  - lower                                                               
capital requirements                                                                                                            
•  Facilitates  project   financing  since  liquefaction  project                                                               
revenues are not directly exposed to market risks                                                                               
                                                                                                                                
Disadvantage:                                                                                                                   
•  No  upside  to  commodity price  escalation  for  the  service                                                               
provider as the  party paying for the toll does  not realize this                                                               
benefit.                                                                                                                        
                                                                                                                                
4:55:56 PM                                                                                                                    
MS. PODUVAL  took up  the presentation working  off of  slide 31:                                                               
how the risk  of misalignment could play out and  result in lower                                                               
revenues for  the state. For instance,  the Producers controlling                                                               
the upstream and the midstream  could create a "closed black box"                                                               
that could place risk on  the state's expected revenues from this                                                               
project. Producers could shift revenues  between the upstream and                                                               
midstream  segments  as a  way  of  increasing their  take,  thus                                                               
impacting the  state's take.  For example,  a scenario  where the                                                               
LNG  plant service  rates are  established  using an  equity-rich                                                               
financing  structure and  assuming  a relatively  high return  on                                                               
equity as well.                                                                                                                 
                                                                                                                                
This also  looks like it would  be an integrated project  and one                                                               
that  may  not  be  project  financed, and  any  financing  on  a                                                               
company's balance  sheet may not  be transparent related  to this                                                               
project. So, the actual capital structure  as well as the cost of                                                               
the  financing and  the equity  that  is claimed  by the  company                                                               
could be an area of misalignment and potential dispute.                                                                         
                                                                                                                                
Slide 32 demonstrated three scenarios  in which the tariffs could                                                               
potentially be set  for the AKLNG through the GTP,  pipe, and the                                                               
LNG  plant,  and the  chart  on  the  right  looked at  what  the                                                               
corresponding  state   revenues  would   be  in  each   of  those                                                               
scenarios.   The  Reference Case  on the  left assumed  a capital                                                               
structure of 70/30  debt/equity. Assuming a 12  percent return on                                                               
equity  (ROE) would  result in  a tariff  on the  LNG plant  of a                                                               
little  over  $6.70.  The  middle scenario  was  an  extreme  and                                                               
assumed the  capital structure  is 100 percent  equity with  a 14                                                               
percent ROE.  This could impact the  tariff that is claimed  as a                                                               
deduction  for the  purpose of  calculating net  back on  the LNG                                                               
plant; it's  close to  $11. The third  scenario examines  a 30/70                                                               
debt/equity assumption and still using the 14 percent ROE.                                                                      
                                                                                                                                
5:00:17 PM                                                                                                                    
MS. PODUVAL said the point is  that the capital structure and the                                                               
ROE can  have a  significant impact  on what  the net  back price                                                               
would be  for the natural  gas itself and, therefore,  impact the                                                               
state's  revenues, which  could  drop from  $150  billion in  the                                                               
Reference Case down to $110 billion.                                                                                            
                                                                                                                                
5:01:09 PM                                                                                                                    
She   said  some   potential  safeguards   can  be   provided  by                                                               
regulations and  guidelines on  how the tariff  would be  set and                                                               
what acceptable  capital structures  would be  and they  could be                                                               
benchmarked,  but that  still wouldn't  solve  the potential  for                                                               
misalignment including the state's  need for transparency, having                                                               
open  access, low  tariffs, and  being able  to facilitate  other                                                               
third parties to explore and develop  the North Slope and be able                                                               
to monetize the gas.                                                                                                            
                                                                                                                                
5:01:38 PM                                                                                                                    
Transparency within a producer-owned  project and cost allocation                                                               
will be  an ongoing  challenge for the  state, Ms.  Poduval said.                                                               
So,  creating  alignment  between  the  state  and  producers  is                                                               
critical  for the  state  to  receive full  value  for the  AKLNG                                                               
project and to have access to information.                                                                                      
                                                                                                                                
SENATOR FRENCH asked about shifting  of revenues between upstream                                                               
and midstream on  slide 31 and how that relates  to the charts on                                                               
slide 32, which  seems to depict different  financing options and                                                               
their effect on the LNG tariff, mainly.                                                                                         
                                                                                                                                
MS.  PODUVAL  explained that  one  example  of value  shift  from                                                               
upstream to  midstream could  be if the  project is  financed not                                                               
just  for the  GTP, pipeline  and the  LNG plant  separately, but                                                               
including capital  costs associated with Pt.  Thomson thrown into                                                               
the mix. In that case, it  would be difficult to wade through the                                                               
web of  information to understand  what would be  associated with                                                               
upstream  financing versus  midstream  and downstream  financing.                                                               
Some of  the potential risk  from the capital structure  that the                                                               
slide 32 shows might be realized including the upstream as well.                                                                
                                                                                                                                
5:03:50 PM                                                                                                                    
SENATOR FRENCH  asked for  a specific  example, because  there is                                                               
discussion about the construction of  a pipeline from Pt. Thomson                                                               
to Prudhoe Bay to get gas into  the system. And it sounds like it                                                               
might make a big difference to  whether that capital cost for the                                                               
pipeline was  included in the  midstream element or  the upstream                                                               
element as to how it affects the state's returns.                                                                               
                                                                                                                                
MS. PODUVAL said  that was correct and she made  a note to create                                                               
an example demonstrating that.                                                                                                  
                                                                                                                                
5:04:32 PM                                                                                                                    
MR. PAWLOWSKI said  just to be clear on the  left was the project                                                               
tariff that Senator French was  representing correctly and on the                                                               
right were the  SOA cash flows. Those colors break  out into blue                                                               
as royalty,  green as  production tax,  gray as  corporate income                                                               
tax, and  the yellow as property  tax. One can see  the financing                                                               
shift correspondingly.  For example,  in the Reference  Case, one                                                               
can  see $38.6  billion in  royalty dropping  in the  100 percent                                                               
equity, 14  percent ROE for  the LNG  plant down to  $24 billion.                                                               
That is  actually the  quantifiable impact  going on  between the                                                               
increase in  the cost and the  effect on the upstream  and coming                                                               
in  at the  reduction in  the state  revenues. He  again reminded                                                               
them that this was not an  analysis of the project going forward,                                                               
but an  analysis of what issues  and risks the state  was looking                                                               
at going into  the HOA and the  MOU, and the drafting  of SB 138.                                                               
In upcoming discussions he would  show them how those issues were                                                               
addressed.                                                                                                                      
                                                                                                                                
MS. PODUVAL said slide 33  summarized the section on supply chain                                                               
elements and  that the  capital costs for  the AKLNG  project are                                                               
likely  to  remain  uncertain  through  the  development  of  the                                                               
project. Total  midstream project  cost estimates from  the AKLNG                                                               
project sponsors range from $37-$54  billion and they are working                                                               
with  the Reference  Case  assumption of  $45  billion. She  said                                                               
complex  LNG projects  typically  have  an integrated  commercial                                                               
structure  to  give  sponsors  maximum   control.  The  AKLNG  is                                                               
expected  to  have  an integrated  structure  and  that  ensuring                                                               
alignment  of  interests  between  the  State  and  Producers  is                                                               
challenging  and   critical  with  a   Producer-owned  integrated                                                               
project.                                                                                                                        
                                                                                                                                
5:07:49 PM                                                                                                                    
She said  the third main  scope item the royalty  study addressed                                                               
related  to the  fiscal framework  and its  implications for  the                                                               
AKLNG  project.   Specifically,  they   looked  at   what  fiscal                                                               
structures relevant  to LNG projects  are worldwide and  how they                                                               
compared  to the  AKLNG project,  and what  incentives the  state                                                               
could provide  to facilitate the  project, and then  assessed how                                                               
Alaska   could   leverage   its   royalty   ownership   position,                                                               
specifically using RIK versus RIV.                                                                                              
                                                                                                                                
CHAIR  GIESSEL said  it seemed  like  they were  entering into  a                                                               
"pretty hefty section"  and asked if it would be  a good stopping                                                               
point.                                                                                                                          
                                                                                                                                
MR. PAWLOWSKI  said it was  a good spot  to pause as  it deserved                                                               
fresh eyes and ready attention.                                                                                                 
                                                                                                                                
5:10:41 PM                                                                                                                    
CHAIR GIESSEL  highlighted that  the short  videos on  this issue                                                               
were available on  the DNR website and included  this section and                                                               
the next. [SB 138 was held in committee.]                                                                                       

Document Name Date/Time Subjects
SRES Black&Veatch Presentation Revised 20140210.pdf SRES 2/10/2014 3:30:00 PM
SB 138