Legislature(2013 - 2014)BUTROVICH 205

02/12/2014 03:30 PM RESOURCES

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

Document Name Date/Time Subjects
SB 138 Supp Letter Cobb Navarre Brower Hopkins 20140211.pdf SRES 2/12/2014 3:30:00 PM
SB 138
SRES Black&Veatch Presentation Revised 201402010.pdf SRES 2/12/2014 3:30:00 PM
SB 138 Written Testimony ConocoPhillips 20140212.pdf SRES 2/12/2014 3:30:00 PM
SB 138