Legislature(2013 - 2014)BUTROVICH 205

02/14/2014 03:30 PM RESOURCES

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* first hearing in first committee of referral
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Heard & Held
Department of Natural Resources
Department of Revenue
-- Testimony <Invitation Only> --
Heard & Held
-- Testimony <Time Limit May Be Set> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
         SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                     
3:32:56 PM                                                                                                                    
CHAIR GIESSEL  announced that the  first order of  business would                                                               
be SB 138.                                                                                                                      
JANAK  MAYER, Partner,  Enalytica,  Anchorage, Alaska,  presented                                                               
information on  the "Gas  Pipeline: AGDC;  Oil &  Gas; Production                                                               
Tax." He shared  his work history working on oil  and gas issues,                                                               
oil  tax  reform, and  transition  to  gas  issues. He  lead  the                                                               
Enalytica's team at  PFC Energy focused on  upstream economic and                                                               
financial evaluation, constructing  economic and financial models                                                               
of   projects,  assets,   transactions,   portfolios  for   large                                                               
international companies  to small independent players  to private                                                               
equity firms.                                                                                                                   
NIKOS TSAFOS,  Partner, Enalytica, said his  chief responsibility                                                               
was heading  the global gas  consulting practice of the  firm and                                                               
that he had  worked with some of the world's  largest oil and gas                                                               
companies on a number of  themes: helping companies that have gas                                                               
figure  out how  to  sell  it, helping  companies  that want  gas                                                               
figure  out how  to buy  it, and  helping companies  try to  make                                                               
sense of  what is  happening in the  market and  thinking through                                                               
possibilities and  scenarios. His core expertise  is natural gas,                                                               
natural gas markets, and commercialization strategies.                                                                          
3:35:17 PM                                                                                                                    
MR.  TSAFOS began  with  a focus  on the  need  for alignment  in                                                               
making  the  decisions  embodied  in  SB  138.  He  said  it  was                                                               
complicated, but  he would try  to explain  LNG in terms  of oil.                                                               
The Department of Revenue's (DOR)  fall 2013 Revenue Sources Book                                                               
forecasted the value  of oil for FY2015 to  be about $105/barrel,                                                               
minus $20  for the mid-stream and  $46 for the   deductible lease                                                               
expenditures; that  ends up being worth  $49 at the well  head on                                                               
the North Slope (slide 4).                                                                                                      
3:38:41 PM                                                                                                                    
MR. TSAFOS  said the  price of  gas isn't quite  as clear  as the                                                               
price of  oil; it's  less transparent,  because you  can't really                                                               
pick up  the Wall Street  Journal to see  what the LNG  price is.                                                               
It's  not  consistent  and  it is  variable  by  destination  and                                                               
contract. He explained  the same project could be  selling gas to                                                               
five different  people at five  very different prices.  The price                                                               
of gas is likely  to be linked to oil and likely  to be linked to                                                               
the Japan  Customs Cleared price  (JCC) or  what is known  as the                                                               
Japanese Crude  Cocktail. It's effectively  the price  that Japan                                                               
pays for its  oil and that trades  at a 22 cent  discount to ANS.                                                               
So, for all intents and purposes,  if the state sells LNG that is                                                               
linked to the price of JCC, it is linked to the price of ANS.                                                                   
Lastly,  Mr. Tsafos  said, in  general, gas  trades at  a thermal                                                               
discount to oil. So, a $100-barrel of  oil does not lead one to a                                                               
$100-BOE. There are  a number of reasons for that,  the chief one                                                               
being, especially in targeting the  Asian market, there are still                                                               
consumers  that  would switch  to  oil  if  LNG were  higher  (by                                                               
declining to buy  a cargo of LNG because oil  is cheaper). So, in                                                               
some ways, oil places a little bit of a cap on the price of gas.                                                                
SENATOR MICCICHE asked for an explanation of BOE.                                                                               
3:41:59 PM                                                                                                                    
MR. TSAFOS explained that BOE  means barrel of oil equivalent and                                                               
it tries  to get  to the  question of  how much  energy different                                                               
fuel  agents -  oil, gas,  coal -  have. This  conversion process                                                               
tries  to turn  gas into  having the  same energy  as oil,  so in                                                               
theory a barrel  of oil and a BOE should  contain the same amount                                                               
of energy.                                                                                                                      
He explained that there are  two main differences between oil and                                                               
gas  in  the  midstream,  however;   gas  is  more  expensive  to                                                               
transport than  oil and the tariff  is not going to  be regulated                                                               
by FERC. Its price will be very  much driven by not just the cost                                                               
but  also   how  the  expected   return  on  the   investment  is                                                               
Slide 7 assumed a FY15 forecast  of almost 500,000 barrels of oil                                                               
(bbl) and  about 400,000 BOE  at $100 bbl/$81 BOE;  the midstream                                                               
is $10 bbl/$66 BOE.                                                                                                             
3:45:07 PM                                                                                                                    
Upstream oil  is about $6 and  about $9 BOE at  the wellhead. So,                                                               
if you're trying to tax at  the wellhead, you're kind of ignoring                                                               
the  largest  part  of  the  BOE, which  is  midstream.  Slide  8                                                               
indicated how a drop in ANS at $90  can wipe out that $9 BOE, and                                                               
at that point  you basically have no value up  on the North Slope                                                               
to tax. In  a different way, slide 9 hiked  the costs or tariffs,                                                               
not an extreme assumption, but that still ends up as zero.                                                                      
Slide 10  brought it all  together and allowed conclusions  to be                                                               
formulated. The big  picture is you want to get  a fair value for                                                               
your gas, but  how the midstream is structured is  a huge driver:                                                               
envision  the  litigation  surrounding $10/barrel  midstream  and                                                               
then  what  it  would  be  for  $66/BOE  midstream!  Upstream  is                                                               
important  but in  the grand  scheme  of things  it really  pales                                                               
compared  to   the  midstream;  35  percent   of  384,000  annual                                                               
production  at $81/BOE  would  result  in a  state  take of  $370                                                               
million, not a very big number.                                                                                                 
3:49:03 PM                                                                                                                    
MR. MAYER  showed an analysis of  $80 BOE with $10  (roughly what                                                               
one might  expect as a  sale price into Asia  in a $100  ANS West                                                               
Coast  world)  attempting  to  illustrate  that  returns  to  the                                                               
upstream, royalty,  and production tax  vary wildly if  those are                                                               
the principle sources of revenue for  Alaska. He said one can see                                                               
the potential benefits from equity  participation and taking RIK,                                                               
but that gives a lot of  exposure to local gas prices. Basically,                                                               
whatever  the state  does, it  is exposed  to risk  from quantity                                                               
prices and  royalty, and taking  RIV actually poses  the greatest                                                               
price risk  to the  state, because  of its  amplifying mechanism.                                                               
The reason being the construct of  the fixed tariff, which in the                                                               
oil world is a  very small portion of the overall  BOE, but it is                                                               
such a  large portion in the  LNG world that it's  like the state                                                               
guaranteeing a  particular rate of  return and taking a  share of                                                               
what  is left  over.  If that  fixed portion  takes  up the  vast                                                               
majority of the  BOE, what is left varies wildly  with very small                                                               
changes in  prices. So, a 10  percent drop in price  can mean the                                                               
difference between still substantial  revenue and tax take versus                                                               
none at all.                                                                                                                    
3:52:53 PM                                                                                                                    
SENATOR  FRENCH said  the  RIV  should be  fixed  at the  state's                                                               
royalty rate  of 12.5 percent,  so he  was assuming the  blue box                                                               
would be steady all the way down, but instead it was shrinking.                                                                 
MR. MAYER said the  point is that it's not 12  percent of $100 or                                                               
$110 in value; it's 12 percent  of $110 minus the tariff. That is                                                               
the reason  in talking  about alignment  that the  tariff becomes                                                               
critical. Small changes in capital  structure and rates of return                                                               
that set that  tariff can suddenly take away the  vast amounts of                                                               
the share of value for the  state. Price movements can also erode                                                               
the value  to the state  entirely. The counterintuitive  point is                                                               
that  in lots  of ways  gas, both  RIK and  tax in  kind, with  a                                                               
corresponding equity share offers  more rather than less downside                                                               
protection  for the  state,  and the  state  in this  environment                                                               
actually takes  a little less  on the upside. There  is potential                                                               
upside to the state in a  high price environment from the RIV but                                                               
more downside as well.                                                                                                          
He  said  his analysis,  unlike  the  previous analysis,  was  of                                                               
actual results from Enalytica's model  of an AKLNG project over a                                                               
30-year timeframe,  but using  general terms  like low,  mid, and                                                               
high prices rather  than specific price points. It  shows a world                                                               
in which the state takes (and the  HOA sets out) a range of 20 to                                                               
25  percent  share  of  gas  and  a  corresponding  equity  stake                                                               
throughout the  value chain. While  some of the  assumptions need                                                               
to  be refined,  the questions  are the  same: at  relative price                                                               
movements where  value to the  state is  at high and  low prices.                                                               
The analysis  showed that  the return to  the state  was greatest                                                               
for taking RIK  when prices are low but that  in return the state                                                               
gave up a little when the prices were high.                                                                                     
3:57:39 PM                                                                                                                    
SENATOR FRENCH asked  why the crossover point was  at a different                                                               
price for the producers than it  was for the state. He thought it                                                               
would be a mirror image.                                                                                                        
MR. MAYER  said there are more  variables at play than  just what                                                               
the state  and producers receive:  the other stakeholders  - like                                                               
the federal government and the debt holders in the project.                                                                     
SENATOR FRENCH  asked if TransCanada performs  identically to the                                                               
state in this scenario.                                                                                                         
MR.  MAYER answered  not necessarily,  but  this analysis  didn't                                                               
detail  TransCanada's   participation;  further,  he   said  that                                                               
involving a separate third-party midstream  player for any of the                                                               
state's share inherently brings  some fixed tariff component back                                                               
into the  equation -  not the  full $66, just  the tariff  on the                                                               
liquefaction and the pipeline, and  if the state were to exercise                                                               
its 40 percent  option the level under which it  would be subject                                                               
to that fixed obligation would be reduced further.                                                                              
MR. TSAFOS  added another reason  it is not identical  is because                                                               
the state's  share includes parts  of the chain  that TransCanada                                                               
is  not a  partner in:  the LNG  facility and  the upstream.  The                                                               
whole idea in  slide 11 was that RIV makes  the upstream the sole                                                               
price  absorber and  the fixed  nature  of tariff  in "in  value"                                                               
amplifies the impact of price movement on state returns.                                                                        
4:00:39 PM                                                                                                                    
MR. MAYER said  for this analysis he had both  parties sell their                                                               
LNG for the  same price, to help people understand  what a change                                                               
in either direction would do for  either party - all other things                                                               
being equal and  RIK participation versus RIV. The  state is more                                                               
insulated from price  movements taking less of  the downside with                                                               
less upside  exposure and  the producers,  counter to  that, have                                                               
greater  price  exposure  through   RIK  than  RIV.  The  federal                                                               
government also  has more  exposure to price  changes in  the RIV                                                               
world.  By  participating in  the  project  the State  of  Alaska                                                               
becomes  a  non-taxpaying  entity,   as  long  as  everything  is                                                               
structured properly (if  it owes any state taxes it  owes them to                                                               
itself and can discount them)  with the exclusion of property tax                                                               
which they had factored in as a state obligation.                                                                               
So the  project has  two components: a  producer component  and a                                                               
state component.  The producer component  with revenues  from the                                                               
sale  of LNG,  costs associated  with building  the upstream  and                                                               
different  midstream   components,  tax  obligations,   and  then                                                               
netting  all  those  out,  an  after-tax  cash  flow.  The  other                                                               
component, Alaska, has the revenues,  the same cost components or                                                               
at least  a 25  percent share  of them  (except for  the upstream                                                               
cost), and  no tax  obligations. That means  the state  is better                                                               
off in  low price  environments and  as the  non-taxpaying entity                                                               
that means the federal government is worse off.                                                                                 
4:03:38 PM                                                                                                                    
MR.  MAYER pointed  out  that just  because the  state  has a  25                                                               
percent share in  a project doesn't mean that it  gets 25 percent                                                               
of the overall value (slide  13). In most circumstances the state                                                               
is actually taking  substantially more than 25  percent and there                                                               
are a  couple of  reasons for  that, which  come back  to federal                                                               
government take:  while the  state foots 25  percent of  the bill                                                               
for the  midstream components  it doesn't foot  any of  the bills                                                               
for  the upstream  and  it's also  a tax  exempt  player in  this                                                               
project. So  the portion of value  it gets out of  its 25 percent                                                               
share is  very different than the  portion of the value  that the                                                               
other 75 percent get from their taxed portion.                                                                                  
Finally, there is an even  bigger difference with a substantially                                                               
different cost of  capital for the state than  what the producers                                                               
have.  He ran  his analysis  using the  same amount  for cost  of                                                               
capital for both  just to show the difference  federal take makes                                                               
to  state value.  Property tax  is a  fixed amount  based not  on                                                               
revenues but on the capital  value of the physical infrastructure                                                               
that producers  have built up  and that  takes up an  ever larger                                                               
portion of  the total pie that  the state is not  paying. So, the                                                               
state takes  more and more of  the net present value  of the cash                                                               
flows at low price environments and  at times that share is quite                                                               
substantial,  sometimes  a  majority  of the  value  the  project                                                               
4:08:18 PM                                                                                                                    
SENATOR BISHOP  asked because  of the  state's tax  exempt status                                                               
from  the  feds  if  its'   25  percent  participation  was  more                                                               
MR. MAYER answered  being tax exempt was the  primary driver, but                                                               
not sharing the upstream costs was another big factor.                                                                          
SENATOR BISHOP  asked if another  company had to be  formed under                                                               
AGDC to get that advantage.                                                                                                     
MR.   MAYER   said   that   was    his   understanding   of   the                                                               
administration's rationale.                                                                                                     
4:09:23 PM                                                                                                                    
MR.  MAYER  summarized  that  the  state  gets  a  greater  share                                                               
relatively speaking in lower price  environments (because less is                                                               
going  to the  federal government)  and more  that 25  percent at                                                               
almost any price range.                                                                                                         
4:10:28 PM                                                                                                                    
MR. TSAFOS turned to  slide 14 and said the path  laid out by the                                                               
HOA fosters the state and  oil companies caring about two similar                                                               
things:  the price  of  the  commodity and  making  sure it  gets                                                               
produced at the lowest possible cost.                                                                                           
He underscored  that just because  gas is indexed to  oil doesn't                                                               
mean it's the  same price. That indexation to  oil merely defines                                                               
a  relationship between  two commodities,  but the  price can  be                                                               
very different in  different contracts. Evidence for  this was on                                                               
slide  15  that  graphed  Taiwan's  three  long  term  suppliers:                                                               
Indonesia, Malaysia, and Qatar -  all three with prices linked to                                                               
oil. Taiwan has  two contracts with Indonesia, one  signed in the                                                               
late 1980s and the other signed  in the mid-1990s. The high slope                                                               
of the  two contracts ran in  tandem and indicated that  a $10-20                                                               
increase  in the  price  of oil  generates  a pretty  significant                                                               
increase in the price of gas.                                                                                                   
The Qatar contract  was signed in 2005 at a  time when the buyers                                                               
had the bargaining  power. That relationship, even  though it was                                                               
still linked to oil, was very  different. So, even though the LNG                                                               
prices  were  linked  to  oil,   the  contracts  were  signed  at                                                               
different  times in  different markets.  So the  price of  LNG to                                                               
Taiwan, for Indonesia was about $20,  for Qatar $7 or $8, and for                                                               
Malaysia $6  or $7.  But in 2008  when oil was  at $100  and they                                                               
were  paying the  Indonesians $19  and  $20, Qatar  got its  deal                                                               
MR. TSAFOS  said the  lessons to learn  are: first,  don't obsess                                                               
over  the link  to  oil  and, second,  that  new contracts  don't                                                               
impact existing deals.  The reality is that  most long-term deals                                                               
will  probably be  wrong  and all  contracts  have provisions  to                                                               
revisit things; the  state's lawyers should have  a strong review                                                               
clause in any  contracts they write. The standard  practice is to                                                               
have a price review  every 4 or 5 years and  once outside of that                                                               
cycle  if things  get  out  of hand.  A  contract  with too  much                                                               
flexibility won't  be worth anything  and a contract that  is too                                                               
rigid is likely to be taken over by events, he advised.                                                                         
4:17:04 PM                                                                                                                    
SENATOR MICCICHE  asked what  could trigger  a review  clause and                                                               
mentioned  a  scenario where  LNG  goes  from  $7.50 to  $16  and                                                               
shipping  goes up  as  well and  asked if  the  trigger could  be                                                               
caused by the price alone or the cost across the supply chain.                                                                  
MR. TSAFOS  responded that  a price  review is  usually exercised                                                               
for  two reasons:  the  first is  volatility  protection and  the                                                               
second   is  the   distribution   of   value  between   different                                                               
participants.  He  turned  to  slide  15  to  explain  volatility                                                               
protection: the  idea being a  shaky project can  find commercial                                                               
ways to  protect itself. The most  typical is an S-curve.  If you                                                               
don't have  an S-curve  you're like Indonesia:  the price  of oil                                                               
goes up  and the  price of  gas goes  up. The  S-curve says  I am                                                               
concerned that the price of oil may  go down and I might not make                                                               
a good return on my investment, so  I would like to slow down how                                                               
that  relationship plays  out  as  prices go  down.  I want  some                                                               
insurance; and  I want to  make sure I  earn $12 no  matter what.                                                               
You can  probably sign a  contract like that  as long as  you are                                                               
willing to give up on the upside.                                                                                               
He said these contracts were not  written to survive for the long                                                               
term  and  assume  that  at   times  the  world  will  no  longer                                                               
fundamentally  represent what  is in  them and  allow for  making                                                               
fundamental price  reviews. For instance,  if you were to  sign a                                                               
contract today  and oil went up  to $110 you couldn't  raise your                                                               
hand  and  call  for  a  price  review,  because  that  would  be                                                               
unreasonable. However  if it went  up to  $250, you could.  A big                                                               
part of price review is triggered by these clauses.                                                                             
MR. TSAFOS said  a second cause for price review  is triggered by                                                               
the distribution  of value between different  participants (slide                                                               
16). For instance,  Equatorial Guinea when it  was developing its                                                               
project thought its LNG was shipping  from its port to the United                                                               
States, so  it wanted  a netback  relative to  the U.S.  And just                                                               
like everyone  else who got  the U.S.,  wrong they did.  So, when                                                               
the U.S.  price tanked their  sales prices tanked, too.  That LNG                                                               
was then taken  by someone else at the port,  put on their ships,                                                               
and sold to Japan for $17. So, it  leaves the port at $2 and ends                                                               
up at  $17. When that happens  the company can say  the world has                                                               
changed because  they thought it was  going to the U.S.  When the                                                               
company, BG,  did that, the  sovereign was very  unhappy, because                                                               
they were taxing  the LNG at 2 percent. And  now the company, BG,                                                               
is  making voluntary  payments to  the  government of  Equatorial                                                               
Guinea; the point being you can upset governments only so much.                                                                 
He  said this  had also  happened in  Trinidad: they  had a  deal                                                               
where  they  thought they  weren't  sharing  the upside  so  they                                                               
fought to change the terms.   Yemen just recently concluded deals                                                               
to basically  strike out S-curves, because  they signed contracts                                                               
in 2006/7 that assumed a much lower oil price world.                                                                            
More often  it's the sovereigns  who try to  restructure, because                                                               
if you  are an oil company,  you actually buy the  gas from Yemen                                                               
at $5 and sell  it to Korea for $20: they care  about the $20 but                                                               
only get taxed on the $5,  and that's what creates tension. So it                                                               
does not  matter to the  oil company  where along the  chain that                                                               
value is distributed.  The bottom line for what  the state should                                                               
really care about when there is a  gas deal in front of it is its                                                               
exposure to risk  and if there are ways to  protect the downside,                                                               
and usually that can be done by foregoing some of the upside.                                                                   
The other thing critical to price  is that timing matters. If the                                                               
buyers have the  power, you won't get  as good of a  deal as when                                                               
the  sellers have  the  power.  And while  this  is pretty  self-                                                               
evident, the  reason he underscored  was because you get  tied to                                                               
that relationship.  So, Qatar is  still living in  the bargaining                                                               
power of 2005 not the bargaining power of 2014.                                                                                 
4:25:12 PM                                                                                                                    
MR. TSAFOS  said investors  care about the  price and  the costs,                                                               
and the costs are what are  essentially affected by what could go                                                               
wrong. In  the current scenario the  state is on the  hook for 25                                                               
percent of the liquefaction and for  a share of the 25 percent of                                                               
the  midstream, potentially,  depending  on  how the  TransCanada                                                               
deal works through the GTP and the pipeline.                                                                                    
He showed  some large complicated  projects showing what  kind of                                                               
cost  escalation  had  happened  to other  projects  (slide  16).                                                               
Sometimes they  come on line on  time and under budget,  but they                                                               
usually don't. Some  of the costs are global: the  price of steel                                                               
going up  and not much can  be done about that:  some are country                                                               
specific:  in Australia  a good  living  can be  made working  on                                                               
these projects, so  when the competition for labor  is so intense                                                               
because  there is  a once-in-a-generation  commodity boom  there,                                                               
the only  way to  secure labor  is to pay  up. The  last category                                                               
that could cause costs to go  up is very specific project issues:                                                               
an  accident, a  fire,  strikes, the  pipeline  route, and  other                                                               
things that can just  go wrong. It's not a shock to  have a 10 to                                                               
20 percent  cost overrun, he said,  and the slide showed  a range                                                               
of  projects with  cost overruns  ranging from  0 percent  to 120                                                               
4:29:23 PM                                                                                                                    
SENATOR MICCICHE  asked if a  project delay can be  beneficial in                                                               
terms of commodity price and value.                                                                                             
MR. TSAFOS answered  that he could think of  project delays where                                                               
the damage  was less than expected  but not what could  be called                                                               
beneficial.  Tying up  capital does  not make  sense. During  the                                                               
economic depression  of 2008/9 demand  cratered and at  that time                                                               
there were  projects going at  100 percent but they  slowed down,                                                               
because there was no reason to  pay people overtime to complete a                                                               
project to sell a commodity that  no one was dying to get. Things                                                               
like that  on the margin  can make  a difference, but,  again, so                                                               
much capital is  tied up in spending $40 billion  you really want                                                               
the money to start coming in.                                                                                                   
MR.  MAYER  answered that  question  this  way:  there is  a  big                                                               
difference between the delays they  are talking about here in the                                                               
FEED process,  and the  ones that really  count, which  are those                                                               
that happen post-FID.   Many projects have delays  for one reason                                                               
or another in terms  of the process, but at the  point of FID the                                                               
deals have been  done and that is when the  real money is getting                                                               
spent. Delays  after that  point add  up every  year in  terms of                                                               
tens of  billions of dollars  in NPV  lost along with  no revenue                                                               
coming in.                                                                                                                      
4:32:50 PM                                                                                                                    
SENATOR MICCICHE asked if he  was saying that after the contracts                                                               
have been  executed after FID  that every moment not  selling gas                                                               
is a delay and a hit to the bottom line, essentially.                                                                           
MR. MAYER responded  that maybe the contracts  have been executed                                                               
and include  a requirement  to have  gas to  sell, in  which case                                                               
that hurts; but  if market conditions improve  post-FID, there is                                                               
no benefit, because  the state will not be  signing new contracts                                                               
at a  better oil price  slope, and it  would get the  downside of                                                               
another  year's delay  and  another year's  interest  on tens  of                                                               
billions of dollars with no revenue coming in.                                                                                  
MR. TSAFOS said  the revenue might even  become negative, because                                                               
the state  might be obligated  to find  something to sell  if the                                                               
project is not on line. For  example, Indonesia had a low S-curve                                                               
structure and,  in fact,  one of the  operators was  shipping gas                                                               
from Egypt that  was previously fetching $17-18  for $3-4 because                                                               
they had to  meet some commitments. Things like  that could drive                                                               
the  value  of  the  delay;  it generally  tends  to  be  bad  in                                                               
different degrees of seriousness.                                                                                               
4:34:36 PM                                                                                                                    
SENATOR  BISHOP observed  that there  were four  projects in  the                                                               
billion-dollar  range  came  in  on   budget  and  with  no  cost                                                               
overruns,  but then  four other  projects in  the $37-60  billion                                                               
range  had  overruns   of  15.6  percent  to   45  percent.  That                                                               
underscored that value equals getting  the highest price possible                                                               
along  with the  lowest  cost of  construction possible,  because                                                               
they want  to get gas back  to Alaskans at the  cheapest molecule                                                               
price at the burner tip.                                                                                                        
SENATOR FRENCH  asked MR. Tsafos  to talk  about the risk  to the                                                               
state of  having only one  project to sell  at one time.  How can                                                               
Alaska  best protect  itself against  the  fact that  it is  just                                                               
going - in one 12-month window  - to the market to establish long                                                               
term contracts for all of the  gas going through the pipeline for                                                               
a 20-year period.                                                                                                               
4:36:26 PM                                                                                                                    
MR. TSAFOS  said first -  big picture  - everyone will  know what                                                               
kind of  deal it  is getting at  the FID and  if they  are fairly                                                               
similar between the players, but  if the market is timed wrongly,                                                               
the project  won't get built. Less  than 10 percent of  the total                                                               
cost is  spent before  the FID in  terms of  the administration's                                                               
time table.                                                                                                                     
However,  he said,  there are  other things  to consider.  One is                                                               
that selling the gas from a  project of this type is a multi-year                                                               
affair (2-3 years).  More important to appreciate  is that Alaska                                                               
has one asset but it is  targeting a marketing window that no one                                                               
else  is targeting  - no  one is  cutting LNG  deals for  2022 or                                                               
longer. Because  it is  taking so  long for  this project  to get                                                               
going, the window  is different and the state  might benefit from                                                               
the fact that  it is tapping into a need  for some companies that                                                               
are thinking  strategically long-term  that other  players aren't                                                               
necessarily  responding  to.  Before  coming  to  Juneau  he  had                                                               
conversations  with  some  of his  Japanese  colleagues  who  are                                                               
getting very excited  about Alaska, because they  are thinking it                                                               
is the  next tranche after  the Lower  48, after east  Africa and                                                               
western Canada, and that could be quite beneficial.                                                                             
Lastly, he said there is a  possibility for Alaska to sign up the                                                               
gas in  several blocks rather than  one big one. There  are three                                                               
trains and  they usually  come on line  maybe six  months between                                                               
one another  and Alaska may  still have  some gas to  play around                                                               
with. The  bottom line is if  the state is marketing  gas and the                                                               
responses from the buyers are  not good, don't worry; the project                                                               
just  won't go  forward and  the sizeable  money won't  be spent.                                                               
That's typically what happens in LNG projects.                                                                                  
4:41:28 PM                                                                                                                    
SENATOR  MICCICHE  said  his understanding  was  that  you  don't                                                               
necessarily have less  risk because you have  more projects. It's                                                               
not like Australia averages its  risks and the huge cost overruns                                                               
were largely  because of the amount  of projects in a  short time                                                               
and their associated labor cost overruns.                                                                                       
MR. TSAFOS answered  he was right; but some of  the risk also had                                                               
to do with the exchange rate  between the Australian and the U.S.                                                               
dollar. Because  of the  commodity boom,  international companies                                                               
earn U.S. dollars, but they  buy Australian dollars to pay labor.                                                               
Alaska may  not have the same  types of cost overruns.  The AKLNG                                                               
project is estimated  to cost $45-65 billion and  the $65 billion                                                               
is  the  overrun. That  is  how  companies are  presenting  their                                                               
projects now: as a range.                                                                                                       
SENATOR MICCICHE asked if the  AKLNG project's royalty production                                                               
tax  model  was  more advantageous  than  Australia's  individual                                                               
contractual model.                                                                                                              
MR. MAYER  answered that  there are  a number of  ways to  set up                                                               
appropriate  fiscal arrangements  and Australia's  is similar  in                                                               
some ways  to Alaska's. The  Australian system is a  profit based                                                               
tax as  is Alaska's:  for offshore  projects there's  no royalty;                                                               
for onshore projects  there is a royalty but it  is credited back                                                               
by the federal government. Contractual  arrangements apply to LNG                                                               
projects  in  places like  Qatar  and  Indonesia. But  one  thing                                                               
really stands about Alaska that is  not present in a lot of other                                                               
projects, which  is the sheer  size of the midstream  compared to                                                               
the upstream component. They talked  about Gorgon being similar -                                                               
with a very big difficult  costly upstream deep water development                                                               
being a big  portion of the value, along with  the pipeline and a                                                               
liquefaction project, whereas he couldn't  think of any other LNG                                                               
projects in  the $45-60 billion  ranger where almost all  of that                                                               
is in the midstream. In that  sense, a tax regime that is focused                                                               
entirely on the  upstream with value netted back  to the upstream                                                               
is less  likely to  be of  benefit to  the state  than something,                                                               
however   it's  structured,   that  focuses   on  getting   value                                                               
throughout the chain.                                                                                                           
SENATOR MCGUIRE said having alignment  in the equity share is the                                                               
best way  to go  forward. She  also appreciated  Senator French's                                                               
question as to what happens if no  one shows up and the fact that                                                               
the market takes  care of those things. For her  the last area of                                                               
risk for the  state was in the midstream and  not wanting to lock                                                               
into  something like  it  did  in AGIA  (paying  forward by  $300                                                               
million) that seemed  out of alignment with  basic economics. She                                                               
wanted  to  be  able  to  extricate in  a  place  that  isn't  in                                                               
alignment with fair business and  market principles. She said she                                                               
likes  this bill,  because  it  does make  sense,  and she  likes                                                               
TransCanada  as  a  partner,  but they  need  to  scrutinize  the                                                               
SENATOR GIESSEL said she had  asked the administration to clarify                                                               
where those off ramps are and what they will cost.                                                                              
CHAIR  GIESSEL thanked  the presenters  and  asked the  committee                                                               
members to submit amendments by Tuesday at 9 a.m.                                                                               
SENATOR FRENCH  said they hadn't  even heard the entire  bill yet                                                               
and wanted another day.                                                                                                         
CHAIR GIESSEL said  she would take that  under consideration. [SB
138 was held in committee.]                                                                                                     

Document Name Date/Time Subjects
SJR 5 vs A.pdf SRES 2/14/2014 3:30:00 PM
SJR 5 Sponsor Statement.pdf SRES 2/14/2014 3:30:00 PM
SJR 5 Fiscal Note.pdf SRES 2/14/2014 3:30:00 PM
Gov Parnell letter on OCS Revenue Sharing.pdf SRES 2/14/2014 3:30:00 PM
Gulf of Mexico Act Sec 5.pdf SRES 2/14/2014 3:30:00 PM
Petroleum News March 2 2008.pdf SRES 2/14/2014 3:30:00 PM
SRES, enalytica 20140214 UPDATED.pdf SRES 2/14/2014 3:30:00 PM
SB 138