Legislature(2013 - 2014)BUTROVICH 205

02/13/2014 08:00 AM RESOURCES

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08:07:23 AM Start
08:08:06 AM SB138
08:09:10 AM Alaska North Slope Royalty Study
08:54:25 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Uniform Rule 23 Waived
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
Uniform Rule 23 Waived
         SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                     
8:08:06 AM                                                                                                                    
CHAIR GIESSEL  announced SB  138 to be  up for  consideration and                                                               
that  Black &  Veatch  would finish  presenting  its North  Slope                                                               
Royalty Study starting on slide 43.                                                                                             
^Alaska North Slope Royalty Study                                                                                               
DEEPA PODUVAL,  Principal, Black & Veatch,  Management Consulting                                                               
Division,  said   after  reviewing   the  fiscal   framework  and                                                               
comparing  it to  other successful  LNG  projects they  concluded                                                               
that Alaska's  government take  is high. She  said there  is room                                                               
for  reducing  that  take  or providing  some  incentive  to  the                                                               
project and  they looked at  some traditional ways of  doing that                                                               
by reducing royalty or production  tax, but concluded the neither                                                               
one moved the needle as much as  they had expected. A lot of that                                                               
has to do  with the big capital  expense at the front  end of the                                                               
8:09:10 AM                                                                                                                    
So, she  started looking at  equity participation as  a potential                                                               
alternative for  the state, especially  if it reduced  leakage to                                                               
the  federal government.  She said  there  are significant  risks                                                               
associated  with this  project whether  or  not the  state is  an                                                               
equity participant,  prices being a significant  risk factor, and                                                               
it's hard  to say what they  will be 40 years  out. Capital costs                                                               
and scheduling have been demonstrated  as being significant risks                                                               
for large  LNG projects  currently under  way worldwide  and this                                                               
project is no different. The  cost for financing this project for                                                               
all the  parties involved, as  well as the cost  escalations over                                                               
time, all add to its risk profile.                                                                                              
8:10:44 AM                                                                                                                    
She looked  at the impacts  of these  risk factors from  both the                                                               
producers' perspective  and the state's perspective,  Ms. Poduval                                                               
said, and the  biggest factors impacting net  present value (NPV)                                                               
either  to the  state or  the  producers were  prices and  costs.                                                               
Depending  on  how prices  move,  the  state's  NPV could  be  50                                                               
percent less  or 80  percent more and  the producers  are exposed                                                               
equivalently to these factors.                                                                                                  
8:12:04 AM                                                                                                                    
These  risks could  be managed  by concentrating  project control                                                               
through   an  integrated   structure,  meaning   single-ownership                                                               
through the  entire value chain.  Market risk could  be mitigated                                                               
by securing  Pre-FID commitments  through sales  contracts (which                                                               
are typical) and by having  the buyers participate in the project                                                               
with 5 percent  or less (typically). Risk for  this large project                                                               
could also be managed with state participation.                                                                                 
8:15:46 AM                                                                                                                    
The  tangible benefits  for the  state with  equity participation                                                               
     -To the  extent that the  State transfers value  to the                                                                    
     Producers through a modification  of fiscal terms as an                                                                    
     incentive for  the AKLNG  project, obtaining  an equity                                                                    
     interest in  the project in exchange  for that transfer                                                                    
     of value is more beneficial  to the State than a simple                                                                    
     reduction in fiscal take                                                                                                   
     -Greater  alignment of  economic interests  between the                                                                    
     State and Producers                                                                                                        
     -State  ownership lowers  the upfront  capital cost  to                                                                    
     Producers creating potential economic uplift                                                                               
     -Allows for TCPL equity  participation and operation of                                                                    
     the pipeline and GTP                                                                                                       
     -Equity   in  all   phases  could   facilitate  greater                                                                    
     transparency in the AKLNG Project                                                                                          
     -Allows State to influence access  for third parties in                                                                    
     the   most  critical   potential  bottlenecks   of  the                                                                    
     project, the pipeline and marine terminal                                                                                  
     -Equity investment in the  supply chain, while allowing                                                                    
     SOA a seat  at the table, does  not necessarily provide                                                                    
     for a vote in the decision making process                                                                                  
     -Joint Venture Agreement structuring is critical                                                                           
These  are very  attractive  reasons  for the  state  to have  an                                                               
equity  position, she  said, but  it  is very  involved with  the                                                               
devil being in the details.                                                                                                     
8:18:30 AM                                                                                                                    
JASON DE  STIGTER, Senior Consultant, Black  & Veatch, Management                                                               
Consulting  Division,  described  three  alternatives  for  state                                                               
equity participation  as a  way to make  the project  more viable                                                               
for all.                                                                                                                        
     1. State taking a position  in the project that matches                                                                    
     its RIK and what its tax as gas would be                                                                                   
     2. State  owning 100  percent of  the pipe  and passing                                                                    
     the tariff through to producers                                                                                            
     3.  State  matching  12.5 percent  ownership  with  its                                                                    
     corresponding 12.5 percent royalty share                                                                                   
He  graphed  the  implications  of  those  three  cases  for  the                                                               
state/federal/producers stakeholders  on slide 49. He  looked for                                                               
cases  in  which the  state's  participation  and the  producers'                                                               
participation stayed about the same  or in which the state stayed                                                               
the  same and  was able  to induce  the producers  with a  larger                                                               
share of the project.  Of the six cases he ran,  only two cases -                                                               
the 35 percent state gas share  and the state owning the pipeline                                                               
with 100 percent debt - show  the state maintaining its value and                                                               
the producers increasing their share.                                                                                           
8:22:30 AM                                                                                                                    
The Royalty  Study came up  with a reference case  (15-35 percent                                                               
range)  for state  participation  but it  could have  significant                                                               
deviations,  so he  looked  for  a more  accurate  range for  the                                                               
equity alternative and came up  with 22 percent [slide 51]. While                                                               
there are significant benefits with  an equity alternative, there                                                               
still are some  risks and one was the capital  costs going higher                                                               
in the midstream  component. There is also upstream  risk in that                                                               
the state doesn't  have control over the volumes  that will enter                                                               
the project. And there is market risk downstream.                                                                               
8:25:31 AM                                                                                                                    
MS.  PODUVAL  said   there  are  risks  to   the  Alaska  project                                                               
regardless of whether the state  is an equity participant or not.                                                               
Equity participation  can benefit all  the parties, but  it needs                                                               
to  be  designed  right  to protect  the  state's  interests,  to                                                               
achieve transparency and  access objectives, and to  truly have a                                                               
seat at the table.                                                                                                              
8:26:48 AM                                                                                                                    
The Study found  that equity participation along  the value chain                                                               
equalizing the  share of gas  with equity would be  an attractive                                                               
way for the  state to incentivize the project, to  get some value                                                               
for  the incentive  it  is  providing to  the  producers, and  to                                                               
achieve the  chief objective  of opening up  the North  Slope for                                                               
future explorers.                                                                                                               
MS.  PODUVAL  said   the  decision  for  the   state  to  involve                                                               
TransCanada as a way of  optimizing that equity participation was                                                               
a separate decision  and she looked at how that  could impact the                                                               
state and found:                                                                                                                
     1.  It   shifts  initial  project  capital   burden  to                                                                    
     TransCanada  by transferring  the state's  equity share                                                                    
     in the GTP and pipeline  to TransCanada with what looks                                                                    
     like   a   very   favorable   debt/equity   ratio   for                                                                    
     transportation services. The state  also has the option                                                                    
     of buying  back 40 percent  of the equity stake  in the                                                                    
     GTP and pipeline at the FEED stage.                                                                                        
     2.   It  secures   favorable   debt/equity  ratio   for                                                                    
     transportation services.                                                                                                   
     3. It makes expansions  more likely given the structure                                                                    
     contemplated in the HOA.                                                                                                   
8:28:13 AM                                                                                                                    
MS.  PODUVAL stated  that this  analysis is  ongoing and  some of                                                               
their high level assumptions were:                                                                                              
-State participating at a 20 and 25 percent level,                                                                              
-State  owned  all of  it  and  did  not  transfer a  portion  to                                                               
-TransCanada held on  to the GTP and pipeline and  the state does                                                               
not exercise its 40 percent buy back option,                                                                                    
-state  transfers   a  portion  of   the  GTP  and   pipeline  to                                                               
TransCanada and exercises a portion of its 40 percent buy back.                                                                 
8:30:14 AM                                                                                                                    
MR. DE STIGTER said slide  58 showed the state's investment under                                                               
several different scenarios. The  LNG plant is approximately half                                                               
the cost of  the whole project and exercising the  option to have                                                               
TransCanada own the GTP and pipeline  saves the state half of the                                                               
necessary  capital.  Slide 59  looked  at  the cash  calls  (blue                                                               
sections  on  slide  58).  His   analysis  also  incorporated  an                                                               
opportunity cost  for the funds the  state would have to  use for                                                               
the cash  calls and, therefore, funds  it could not use  in other                                                               
MIKE  PAWLOWSKI,  Deputy   Commissioner,  Department  of  Revenue                                                               
(DOR),  clarified   that  this   analysis  was  limited   to  the                                                               
TransCanada case  and did  not include  other sources  of revenue                                                               
coming to the state from the project.                                                                                           
MR. DE  STIGTER said it was  correct that the cash  flows such as                                                               
property tax and state corporate  income tax on the upstream were                                                               
not  in this  analysis. Slides  60-67 graphed  NPV and  different                                                               
cash flow scenarios.                                                                                                            
8:36:23 AM                                                                                                                    
SENATOR MCGUIRE joined the committee.                                                                                           
8:37:18 AM                                                                                                                    
Slide  68 analyzed  what  sort of  additional  benefit the  state                                                               
would  receive  from  expansion  of  the  project  and  slide  69                                                               
outlined the key assumptions for that analysis:                                                                                 
-1  LNG  train  expansion  after five  years  of  operation  (the                                                               
original project has 3 LNG trains)                                                                                              
-a corresponding expansion of the GTP (modular)                                                                                 
-adding compression to the pipe                                                                                                 
MR. DE STIGTER said there  are significant cost efficiencies with                                                               
an  expansion  of  a  pipe  project, because  it  already  has  a                                                               
diameter; all that's needed is  to add compression and that would                                                               
cost  $10  billion (compared  to  $45  billion for  the  original                                                               
project),  which would  result in  a 30  percent additional  cash                                                               
flow for the state (slide 70).  Slide 71 showed the specific cash                                                               
flow forecasts. Slide 72 bar  charts represented the sums of each                                                               
of the years in slide 71.                                                                                                       
Slide 73 looked at things from  a 10 percent discounted cash flow                                                               
perspective and  that resulted in  a $2 billion increase  for the                                                               
state (20 percent over the  original project). So, he said, there                                                               
are  significant   advantages  with  an  expansion,   along  with                                                               
significant increase in volumes.                                                                                                
8:40:57 AM                                                                                                                    
MR. PAWLOWSKI said  the majority of what the  committee heard was                                                               
foundational  to  the work  the  state  did and  not  necessarily                                                               
conclusions.  The   risk  identification  by  Black   and  Veatch                                                               
informed how they  worked on the HOA, in particular,  and some of                                                               
the work the TransCanada MOU.                                                                                                   
8:41:54 AM                                                                                                                    
CHAIR GIESSEL opened committee questions.                                                                                       
SENATOR  FRENCH asked  how  he  got the  same  return for  wildly                                                               
different cash  outlays on slide  62. He  got part of  the answer                                                               
from Commissioner  Rodell earlier  who explained that  this graph                                                               
envisions not  just making  an investment  in each  scenario, but                                                               
taking  the  other  cash  and investing  it  somewhere  else  and                                                               
combining the  returns - as if  the state "had a  bottomless well                                                               
of money  with which  to work"  - but really  the state  would be                                                               
running out  of cash in 2020-21.  So, he asked to  see that chart                                                               
performed as if the state didn't have the other money to invest.                                                                
MR. PAWLOWSKI said he would work on it.                                                                                         
8:43:45 AM                                                                                                                    
SENATOR  BISHOP asked  what 20-25  percent  participation in  the                                                               
project would do to the state's credit rating.                                                                                  
MR. PAWLOWSKI answered  that was a key part of  the analysis that                                                               
the  department's debt  manager would  testify on  in the  Senate                                                               
Finance  Committee, but  he added  that  what drove  some of  the                                                               
analysis was the debt capacity of  the state in terms of the cash                                                               
8:45:08 AM                                                                                                                    
SENATOR MICCICHE  said his biggest interest  was in understanding                                                               
the risk  associated with  the project and  he hadn't  heard them                                                               
talk  about efficiencies  lost on  costs, resources,  scheduling,                                                               
and permitting by splitting the  gas-to-liquids and pipeline from                                                               
the  liquefaction  plant  and asked  how  efficiencies  could  be                                                               
MS.  PODUVAL answered  that a  5-6 year  construction period  was                                                               
built into  the project  schedule and 4-5  years is  more typical                                                               
for a  project of  this size. But  that is one  way to  allow for                                                               
unanticipated delays. Also, participants  like ExxonMobil, BP and                                                               
ConocoPhillips  bring a  lot of  expertise  in efficiencies  with                                                               
them and their  project management plan would  work through those                                                               
SENATOR MICCICHE  clarified that  what is  unusual is  having the                                                               
gas-to-liquids  pipeline being  separated  from the  liquefaction                                                               
MR. PAWLOWSKI said  he would be happy to work  with the committee                                                               
to talk about the importance  of having an integrated project and                                                               
integrated project management.  A delay in one  piece will affect                                                               
the others.                                                                                                                     
8:48:29 AM                                                                                                                    
SENATOR MICCICHE said he wanted to  see the net present values on                                                               
slide  49 overlaid  against  a risk  profile  (price and  capital                                                               
costs) for each selection.                                                                                                      
MR.  DE  STIGTER  responded  that  slide 51  looked  at  that  in                                                               
relation to  the 15 and  35 percent  cases, and whenever  one has                                                               
lower Capex with assumed prices,  specifically if you look at the                                                               
base prices,  as the Capex increases  the necessary participation                                                               
in an  equity alternative position  is less  than if one  were to                                                               
stay in  a status  quo position.  The reason for  that is  as the                                                               
costs of  the midstream component  increase under the  status quo                                                               
methodology the net  back price at the North  Slope is decreased.                                                               
That's why  it decreases  the value of  returns from  an upstream                                                               
perspective; whereas in an equity  alternative world some of that                                                               
risk is shielded because the  state would be directly selling the                                                               
gas (RIK)  and therefore not  needing to have those  higher costs                                                               
incurred on the upstream (because  there is no direct royalty-in-                                                               
value  or production  tax). Therefore  the state's  risk is  more                                                               
aligned with the price side.                                                                                                    
SENATOR  MICCICHE  said his  interest  was  in demonstrating  the                                                               
value of the TransCanada partnership.                                                                                           
8:51:31 AM                                                                                                                    
SENATOR FRENCH went back to the  escalation factor on slide 45 to                                                               
make that same point; it seemed  to indicate making more money as                                                               
price, Opex,  and Capex went up  and losing money when  they went                                                               
down, but  she was saying  it was the  opposite and he  asked why                                                               
that was.                                                                                                                       
MS. PODUVAL  answered here they  were seeing the  combined effect                                                               
of  cost  and  price  escalation  recognizing  that  the  markets                                                               
generally  move together  for those  factors. The  analysis shows                                                               
that the increase in price is more beneficial than the                                                                          
detrimental effect of the increase in costs to this project.                                                                    
SENATOR FRENCH asked if by price she meant oil or LNG price and                                                                 
by cost, the cost of the steel and other material elements.                                                                     
MS. PODUVAL answered yes.                                                                                                       
8:53:19 AM                                                                                                                    
SENATOR MICCICHE said it would be interesting to see expansion                                                                  
gas coming from an OCS project plotted on slide 73, as opposed                                                                  
to state ownership.                                                                                                             
MS. PODUVAL answered that they had done those analyses and would                                                                
get those to him.                                                                                                               
[SB 138 was held in committee.]                                                                                                 

Document Name Date/Time Subjects
SRES Black&Veatch Presentation Revised 201402010.pdf SRES 2/13/2014 8:00:00 AM