Legislature(2013 - 2014)HOUSE FINANCE 519

03/19/2014 08:30 AM FINANCE


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08:33:21 AM Start
08:33:52 AM HB287
09:09:33 AM Overview of the Guidance Documents (heads of Agreement and Memorandum of Understanding)
10:13:49 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ HB 287 APPROVE TESORO ROYALTY OIL SALE TELECONFERENCED
Heard & Held
+ Definition of Terms / HOA & MOU Overview: TELECONFERENCED
- Dept. of Natural Resources
- Dept. of Revenue
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 19, 2014                                                                                            
                         8:33 a.m.                                                                                              
                                                                                                                                
8:33:21 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Austerman called the meeting to order.                                                                                 
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Alan Austerman, Co-Chair                                                                                         
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Mark Neuman, Vice-Chair                                                                                          
Representative Mia Costello                                                                                                     
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative David Guttenberg                                                                                                 
Representative Lindsey Holmes                                                                                                   
Representative Cathy Munoz                                                                                                      
Representative Steve Thompson                                                                                                   
Representative Tammie Wilson                                                                                                    
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Joe Balash, Commissioner, Department of Natural Resources;                                                                      
Angela Rodell, Commissioner, Department of Revenue.                                                                             
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Dan Riley, Tesoro, Sacramento                                                                                                   
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 287    APPROVE TESORO ROYALTY OIL SALE                                                                                       
                                                                                                                                
          HB 287 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
OVERVIEW OF THE GUIDANCE DOCUMENTS (HEADS OF AGREEMENT AND                                                                    
MEMORANDUM OF UNDERSTANDING)                                                                                                  
                                                                                                                                
HOUSE BILL NO. 287                                                                                                            
                                                                                                                                
                                                                                                                                
     "An  Act approving  and ratifying  the sale  of royalty                                                                    
     oil by  the State of  Alaska to Tesoro  Corporation and                                                                    
     Tesoro   Refining  and   Marketing  Company   LLC;  and                                                                    
     providing for an effective date."                                                                                          
                                                                                                                                
8:33:52 AM                                                                                                                    
                                                                                                                                
Co-Chair Austerman provided an introduction to HB 287.                                                                          
                                                                                                                                
JOE BALASH,  COMMISSIONER, DEPARTMENT OF  NATURAL RESOURCES,                                                                    
provided  an  introduction  of  the  bill.  He  stated  that                                                                    
Alaska, as owner of oil and  gas resources in the state, was                                                                    
entitled to  a royalty share.  The amount or percent  of the                                                                    
share  depended upon  the specific  lease term  in question.                                                                    
Generally, the state's  royalty share at Prudhoe  Bay and on                                                                    
the Alaska  North Slope (ANS)  was 12.5 percent  and higher.                                                                    
He informed  the committee that  the state would be  able to                                                                    
take  its royalty  in-value (RIV)  or in-kind  (RIK) selling                                                                    
the hydrocarbon produced to somebody  else. He reported that                                                                    
the  Department  of  Natural Resources  (DNR)  negotiated  a                                                                    
contract with  Tesoro for one  year. HB 287 would  allow the                                                                    
state to  enter into a  contract lasting longer than  a year                                                                    
with legislative approval. He  relayed that Tesoro expressed                                                                    
its  need for  additional deliveries  in recent  discussions                                                                    
with DNR,  hence, HB  287. He recounted  that the  volume of                                                                    
oil discussed  was relatively small;  between 5  thousand to                                                                    
15 thousand barrels of oil per day.                                                                                             
                                                                                                                                
8:37:43 AM                                                                                                                    
                                                                                                                                
Commissioner  Balash asserted  that part  of the  reason for                                                                    
the   limitation  on   volume  was   due  to   the  previous                                                                    
negotiations  with  Flint  Hills   for  18  thousand  to  24                                                                    
thousand barrels of oil per  day. The amount of royalty that                                                                    
the state  had available to  sell was limited  by production                                                                    
on the North  Slope. The state did not want  to oversell its                                                                    
oil. Relative  to the contract  sales seen with  Flint Hills                                                                    
there was a  marine differential of $2.15 in  the formula to                                                                    
ensure the state collected the full value for its royalty.                                                                      
                                                                                                                                
Commissioner Balash  continued that in the  contract between                                                                    
the state  and Tesoro  the differential  was $1.95,  a $0.20                                                                    
difference from its contract with  Flint Hills. He explained                                                                    
that  other   special  commitments  were  included   in  the                                                                    
agreement  with  Flint  Hills   relating  to  the  price  of                                                                    
gasoline in the interior  relative to Anchorage pricing. The                                                                    
state was  charging Tesoro a  slightly higher  price without                                                                    
the  same  or  similar  provisions.  He  noted  that  Tesoro                                                                    
employed approximately  200 Alaskans.  The Tesoro  plant was                                                                    
the oldest,  largest, and most  sophisticated in  Alaska. He                                                                    
cited  that  it  began  operations in  the  late  1960s  and                                                                    
manufactured low-sulfur diesel,  jet fuel, gasoline, heating                                                                    
fuel, and  asphalt. Tesoro expressed interest  in additional                                                                    
barrels of  ANS royalty. He  pointed out that the  state was                                                                    
not ready to commit to a long-term contract.                                                                                    
                                                                                                                                
8:40:46 AM                                                                                                                    
                                                                                                                                
Co-Chair Austerman  asked about  the terms of  the contract.                                                                    
Commissioner  Balash  replied  that  the  contract  extended                                                                    
through January 31, 2016.                                                                                                       
                                                                                                                                
Co-Chair Austerman  asked whether  the timeline  was normal.                                                                    
Commissioner  Balash  replied  that   HB  287  extended  the                                                                    
contract  by an  additional year.  He elaborated  that sales                                                                    
contracts  with  refineries  were   typically  one  year  in                                                                    
length.                                                                                                                         
                                                                                                                                
Co-Chair Austerman asked about the  term length of the Flint                                                                    
Hills contract. Commissioner Balash  responded that the term                                                                    
of the  Flint Hills contract  was five years. The  length of                                                                    
the prior agreement was ten years.                                                                                              
                                                                                                                                
8:41:38 AM                                                                                                                    
                                                                                                                                
Vice-Chair Neuman noted the ability  for the Tesoro refinery                                                                    
to produce  jet fuel. He  wondered if that would  affect jet                                                                    
fuel supplies  at Anchorage's  international airport  and at                                                                    
Fairbanks' airport.                                                                                                             
                                                                                                                                
Commissioner Balash replied that  jet fuel was currently one                                                                    
of Tesoro's products and confirmed  that the jet fuel supply                                                                    
in Alaska benefited  its people. He stated  that Ted Stevens                                                                    
International Airport  in Anchorage  was one of  the largest                                                                    
air cargo hubs  in the continent and had a  large demand for                                                                    
jet fuel. He  believed that all of  the refineries currently                                                                    
operating served  Anchorage's market. However,  he signified                                                                    
that market fundamentals created  a challenge for refineries                                                                    
in Alaska  because ANS  pricing was  higher than  feed stock                                                                    
available to  refineries on the  west coast and  the Pacific                                                                    
Rim.                                                                                                                            
                                                                                                                                
Vice-Chair  Neuman noted  the  need  for additional  holding                                                                    
tanks  for fuel  in the  Mat-Su region  and referenced  Port                                                                    
Mackenzie. He  directed his  attention to  Alaska's railroad                                                                    
and   mentioned  the   loss  of   revenue  from   no  longer                                                                    
transporting jet fuel from Fairbanks  to Anchorage. He asked                                                                    
about  the  possibility of  producing  enough  jet fuel  and                                                                    
transporting it  to Fairbanks to  keep its airport  full and                                                                    
the railroad busy.                                                                                                              
                                                                                                                                
Commissioner Balash  replied that Petro Star,  the remaining                                                                    
refinery in  Interior Alaska,  would continue  operating for                                                                    
another year.  However, it did  not produce  enough product,                                                                    
such as  jet fuel, gasoline,  and home heating oil,  to meet                                                                    
all of  the needs  of the Interior.  He detailed  that Flint                                                                    
Hills would become  a receiving terminal for  tanker cars of                                                                    
product  coming from  Anchorage  to the  Fairbanks area.  He                                                                    
elaborated that the volume of  product carried to North Pole                                                                    
would be  much smaller than  what was carried  to Anchorage.                                                                    
He  furthered  that  although   there  would  be  additional                                                                    
business  for  the railroad,  it  would  not equate  to  the                                                                    
amount of today's rail traffic out of the Fairbanks region.                                                                     
                                                                                                                                
8:45:16 AM                                                                                                                    
                                                                                                                                
Vice-Chair Neuman commented that  it was important the state                                                                    
supported the  railroad and airports because  of the crucial                                                                    
role they played in Alaska's commerce.                                                                                          
                                                                                                                                
Representative Gara  asked about RIK and  whether 25 percent                                                                    
of  the value  went  into the  Permanent Fund.  Commissioner                                                                    
Balash confirmed that RIK was considered royalty revenue.                                                                       
                                                                                                                                
Representative Gara asked for  clarity regarding the formula                                                                    
used  to determine  how much  money the  state received.  He                                                                    
understood  the ANS  spot price  but inquired  if it  varied                                                                    
from day-to-day. Commissioner Balash responded positively.                                                                      
                                                                                                                                
Representative Gara  asked if a  tariff was  subtracted from                                                                    
the total. Commissioner Balash answered yes.                                                                                    
                                                                                                                                
Representative  Gara asked  how the  tariff was  subtracted.                                                                    
Commissioner   Balash   referred   to   slide   5   of   the                                                                    
presentation: "Royalty  In-Kind Sale to Tesoro  Refining and                                                                    
Marketing  LLC"(copy on  file).  He explained  that the  RIK                                                                    
differential of  $1.95, which accounted for  marine costs to                                                                    
transport crude oil from Valdez  to different markets on the                                                                    
West  Coast, was  subtracted from  the ANS  spot price.  The                                                                    
tariff allowance  was then  subtracted for  pipeline tariffs                                                                    
to move the oil from  the North Slope to Valdez. Adjustments                                                                    
were also  included for Quality  Bank purposes and  for line                                                                    
losses.  The   $1.95  figure  was  negotiable.   The  actual                                                                    
deductions  made  by  the  lessee under  the  terms  of  the                                                                    
royalty  settlement   agreement  was   a  number   that  was                                                                    
currently higher than $1.95.  The commissioner reported that                                                                    
a smaller figure would bring additional revenue.                                                                                
                                                                                                                                
8:48:35 AM                                                                                                                    
                                                                                                                                
Representative Gara asked for  clarification about the $1.95                                                                    
marine differential  and inquired why  the state has  to pay                                                                    
for  it. Commissioner  Balash responded  that the  state was                                                                    
entitled  to  its  royalty  share under  the  terms  of  its                                                                    
leases.  The lessee  was entitled  to a  reasonable cost  of                                                                    
transportation to  move the  oil from  the field  to market.                                                                    
The $1.95 accounted for marine  transport which included the                                                                    
tanker  cost and  market location  differential. The  lessee                                                                    
was  also  entitled  to  a  Quality  Bank  adjustment  which                                                                    
accounted  for   the  differences   in  crude   quality.  He                                                                    
furthered that varying  qualities of oil go  into the Trans-                                                                    
Alaska Pipeline  System (TAPS) where they  blend together. A                                                                    
quality bank adjustment  was a mechanism to  ensure that the                                                                    
producers that  brought a higher quality  crude oil received                                                                    
a higher price for their product.                                                                                               
                                                                                                                                
8:50:33 AM                                                                                                                    
                                                                                                                                
Representative Gara asked why the  state would have to pay a                                                                    
portion of the  tariff for oil traveling  to Washington when                                                                    
it took  delivery of its  oil in Nikiski. He  referenced the                                                                    
$1.95 figure.                                                                                                                   
                                                                                                                                
Commissioner Balash  explained that  if the amount  was left                                                                    
in-value and  the state  relied on the  lessees to  take the                                                                    
oil  to  market, the  state  would  have  a netback  at  the                                                                    
Prudhoe Bay  or North Slope  fields at pump station  one. As                                                                    
long  as the  state was  able to  get the  netback price  or                                                                    
better, then  the state improved qualitative  aspects of its                                                                    
economy;  increasing  employment,  adding  to  property  tax                                                                    
values, etc. He stated that  the $1.95 was representative of                                                                    
a cost less  than what the state would otherwise  pay to the                                                                    
lessees for transporting its oil to market.                                                                                     
                                                                                                                                
Commissioner Balash  stressed that  RIK applied to  the sale                                                                    
of oil. The  transfer of title to the oil  took place at the                                                                    
field. He commented  that the state was  not responsible for                                                                    
obtaining   or   maintaining   capacity  in   any   of   the                                                                    
infrastructure.  The responsibility  fell on  the purchaser,                                                                    
such as Tesoro,  as outlined in all of  the state's existing                                                                    
RIK contracts.                                                                                                                  
                                                                                                                                
Co-Chair Austerman  commented that  the bill would  be heard                                                                    
again  and  that  there  would  be  time  to  ask  follow-up                                                                    
questions later.                                                                                                                
                                                                                                                                
8:53:07 AM                                                                                                                    
                                                                                                                                
Representative  Guttenberg asked  Commissioner Balash  for a                                                                    
copy  of   "Exhibit  A"  to  the   best  interest  findings.                                                                    
Commissioner Balash affirmed he  would provide copies to the                                                                    
committee.                                                                                                                      
                                                                                                                                
Representative Wilson asked if  there was a royalty contract                                                                    
with Tesoro for Cook Inlet  production. If so, she wanted to                                                                    
know if there was a price difference between contracts.                                                                         
                                                                                                                                
Commissioner Balash  informed the  committee that  the state                                                                    
did not have  any existing royalty contracts  for Cook Inlet                                                                    
oil  sales. He  stated that  Cook Inlet  oil production  was                                                                    
relatively  low; 20  thousand to  24 thousand  barrels-a-day                                                                    
range. He relayed that Tesoro  was the largest buyer of Cook                                                                    
Inlet production at present.                                                                                                    
                                                                                                                                
Representative  Wilson  asked  if  the  state  received  any                                                                    
royalty from Cook Inlet production.                                                                                             
                                                                                                                                
8:54:49 AM                                                                                                                    
                                                                                                                                
Commissioner  Balash   affirmed  that  the   state  received                                                                    
royalty  from  Cook  Inlet  production  but  emphasized  the                                                                    
volume of royalty was substantially smaller.                                                                                    
                                                                                                                                
Representative   Costello  asked   about  the   process  and                                                                    
decision criteria. She wondered if  the process was based on                                                                    
previous decisions.                                                                                                             
                                                                                                                                
Commissioner Balash  replied that all sales  of royalty were                                                                    
guided  by  the  statutes  affecting  DNR,  specifically  AS                                                                    
38.05.183.  The  department  was   required  to  follow  the                                                                    
statutes and  regulations and stated that  the criteria were                                                                    
the same for short-term  and long-term contracts. Generally,                                                                    
the state  favored competitive  sales but  occasionally made                                                                    
allowances   for  noncompetitive   sales.  In   the  current                                                                    
instance the state solicited  multiple buyers. However, only                                                                    
two parties  expressed interest: Flint Hills  and Tesoro. He                                                                    
furthered that  the statutory criteria had  to be considered                                                                    
by the  royalty board for  a contract longer than  one year.                                                                    
The  board  was  required  to give  notice,  hold  a  public                                                                    
hearing, and make a recommendation  to the legislature about                                                                    
the  approval  of a  contract.  Once  in  the hands  of  the                                                                    
legislature, it had to be approved.                                                                                             
                                                                                                                                
8:57:21 AM                                                                                                                    
                                                                                                                                
DAN RILEY, TESORO,  SACRAMENTO (via teleconference), pointed                                                                    
out that Tesoro  was an independent refiner  and marketer of                                                                    
petroleum  products.   He  communicated  that   the  company                                                                    
started its  Alaska operations when  it purchased  the Kenai                                                                    
refinery in  1969. The capacity  of Tesoro's  Kenai refinery                                                                    
was 72 barrels  per day. He relayed that  the Kenai refinery                                                                    
focused  on jet  and  diesel production.  The refinery  also                                                                    
produced gasoline and heating  oil. He furthered that Tesoro                                                                    
operated the 68-mile pipeline  that linked Tesoro's refinery                                                                    
to the  Port of  Anchorage. He testified  in support  of the                                                                    
legislation.  He asserted  that the  price for  RIK oil  was                                                                    
fair and  provided the company  with a sufficient  supply of                                                                    
crude.  The  availability  of  the  contract  would  have  a                                                                    
positive impact  on the Kenai refinery  operations. He noted                                                                    
the  inclusion of  a letter  in  committee members'  packets                                                                    
mentioning further points about Tesoro.                                                                                         
                                                                                                                                
9:00:17 AM                                                                                                                    
                                                                                                                                
Co-Chair Stoltze  mentioned that  he talked with  folks from                                                                    
the Kenai area  who questioned why the price of  fuel was as                                                                    
high as it  was with the Tesoro Refinery in  Kenai. He asked                                                                    
for Tesoro's  wholesale prices and  the prices prior  to the                                                                    
per-dollar sales tax added on by the municipalities.                                                                            
                                                                                                                                
Mr. Riley responded by stating that  he was not privy to the                                                                    
information Co-Chair  Stoltze was  looking for  but remarked                                                                    
that  the   market  was  competitive.   He  referred   to  a                                                                    
presentation  that was  provided to  the legislature  in the                                                                    
previous year  which detailed the factors  of transportation                                                                    
fuel in  Alaska. All aspects were  considered in determining                                                                    
the price paid at the pump.                                                                                                     
                                                                                                                                
Co-Chair  Stoltze asked  Mr. Riley  to have  the appropriate                                                                    
people provide a written answer about pricing.                                                                                  
                                                                                                                                
HB  287  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
9:01:59 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:04:00 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
^OVERVIEW OF THE GUIDANCE DOCUMENTS  (HEADS OF AGREEMENT AND                                                                  
MEMORANDUM OF UNDERSTANDING)                                                                                                  
                                                                                                                                
Commissioner  Balash  discussed  "Overview Of  The  Guidance                                                                    
Documents    (Heads   Of    Agreement   +    Memorandum   Of                                                                    
Understanding)"(copy on  file). He stated that  the overview                                                                    
was intended  to provide  committee members  the opportunity                                                                    
to  ask questions  of the  Department  of Natural  Resources                                                                    
(DNR)  regarding the  Heads of  Agreement  (HOA) with  Trans                                                                    
Canada  (TC)   and  Alaska's  Liquid  Natural   Gas  (AKLNG)                                                                    
Memorandum of  Understanding (MOU).  The HOA and  MOA helped                                                                    
to  support  Governor  Parnell's  efforts  to  commercialize                                                                    
Alaska's  North Slope  (ANS)  gas with  a  variety of  other                                                                    
parties.                                                                                                                        
                                                                                                                                
Commissioner   Balash  referred   to   slide  2:   "Guidance                                                                    
Documents  and HB  277." He  identified the  HOA and  MOA as                                                                    
support documents. He  specified that the HOA  was a roadmap                                                                    
for the  overall activities and  authorities of each  of the                                                                    
parties involved  in the project:  The State of  Alaska, the                                                                    
three  North   Slope  producers  [BP,   ConocoPhillips,  and                                                                    
ExxonMobil], TC, and  Alaska Gasline Development Corporation                                                                    
(AGDC). He reported  that there was also a MOU  with TC that                                                                    
described  an  agreement  to   transition  from  the  Alaska                                                                    
Gasline  Inducement  Act  (AGIA)  into  a  more  traditional                                                                    
commercial  relationship  where  the   state  acted  as  the                                                                    
shipper and TC as the  transporter. It also spelled out some                                                                    
specific key commercial  terms that would be  agreed to that                                                                    
would be  beneficial to the  state's long-term  interest. He                                                                    
pointed out  that both  documents supported  legislation, HB                                                                    
277 and  SB 138, that  he anticipated would be  heard before                                                                    
the House Finance Committee in the following two weeks.                                                                         
                                                                                                                                
Commissioner   Balash  explained   that   HB  277   outlined                                                                    
participation, percentage, and process,  the three "P's." He                                                                    
indicated  that the  intent of  the state  was to  align the                                                                    
interests of  the state and  the other parties  allowing the                                                                    
AKLNG project  to move forward.  He opined that  rather than                                                                    
struggling over some  of the key terms that  mattered to the                                                                    
state,   it   developed   an  approach   where   the   state                                                                    
participated as an equity partner  through the state's share                                                                    
of the  natural gas  product. The state  did not  intend for                                                                    
its    agencies   to    take    on   corporate    day-to-day                                                                    
responsibilities.  Instead, it  would  enter into  contracts                                                                    
with the  producers and with  TC and AGDC to  facilitate the                                                                    
commercialization of  Alaska's gas  as well as  maximize the                                                                    
value of the gas. He  continued that the legislature and the                                                                    
public would decide whether to  advance the project further.                                                                    
The department used a phased  approach to allow for decision                                                                    
making to  occur as  commitments were  made by  all parties.                                                                    
The  state saw  a  lot  of potential  and  had a  deliberate                                                                    
process  to move  the project  forward  alongside the  other                                                                    
project sponsors.                                                                                                               
                                                                                                                                
9:09:33 AM                                                                                                                    
                                                                                                                                
Commissioner Balash discussed  slide 3: "What is  a Heads of                                                                    
Agreement?" He indicated that HOA  was a common term used in                                                                    
the  LNG   world.  He  referred   to  the   definition  from                                                                    
www.investopedia.com:                                                                                                           
                                                                                                                                
     A  non-binding  document   outlining  the  main  issues                                                                    
     relevant  to a  tentative partnership  agreement. Heads                                                                    
     of agreement represents  the first step on  the path to                                                                    
     a  full  legally  binding agreement  or  contract,  and                                                                    
     serves as  a guideline  for roles  and responsibilities                                                                    
     of  the parties  involved  in  a potential  partnership                                                                    
     before any binding documents are drawn up.                                                                                 
                                                                                                                                
Commissioner  Balash commented  that  the definition  called                                                                    
attention  to key  items  and commented  that  DNR would  be                                                                    
bringing  a  full  legally  binding  contract  back  to  the                                                                    
legislature as soon as next fall.                                                                                               
                                                                                                                                
Commissioner   Balash   identified   all  of   the   parties                                                                    
participating in the HOA:                                                                                                       
                                                                                                                                
     HEADS OF AGREEMENT                                                                                                         
     By and Among                                                                                                               
                                                                                                                                
     The Administration of the State of Alaska                                                                                  
     Alaska Gasline Development Corporation                                                                                     
     TransCanada Alaska Development Inc.                                                                                        
     ExxonMobil Alaska Production Inc.                                                                                          
     ConocoPhillips Alaska Inc.                                                                                                 
     BP Exploration (Alaska) Inc.                                                                                               
                                                                                                                                
     FOR THE ALASKA LNG PROJECT                                                                                                 
                                                                                                                                
Commissioner  Balash  confirmed  that  all  of  the  parties                                                                    
signed the HOA.                                                                                                                 
                                                                                                                                
9:10:56 AM                                                                                                                    
                                                                                                                                
Commissioner Balash discussed slide  4: "Organization of the                                                                    
Heads of Agreement":                                                                                                            
                                                                                                                                
   The Heads of Agreement (HOA) is broken into 16 sections                                                                      
   that include:                                                                                                                
   · Recitals of recent events and understandings between                                                                       
     the parties.                                                                                                               
   · 13 Articles covering guidelines for the development of                                                                     
     the project and the roles and responsibilities of the                                                                      
     Parties to the agreement.                                                                                                  
   · And appendix articulating access and expansion                                                                             
     principles for the project.                                                                                                
   · An exhibit that provides copies of the 3 letters to                                                                        
     Governor Parnell from the Producer Parties and                                                                             
     TransCanada.                                                                                                               
                                                                                                                                
Commissioner  Balash  explained  that  recitals  provided  a                                                                    
context  for the  reader and  a history  of how  the parties                                                                    
came  to an  agreement. He  commented that  the 13  articles                                                                    
listed were  very specific about  topics within the  HOA. He                                                                    
spoke  of  the  appendix which  outlined  the  pro-expansion                                                                    
principles  to be  employed on  the  project. He  emphasized                                                                    
that  there were  a  number of  things  that were  different                                                                    
about an  LNG project  from an  overland project.  The state                                                                    
examined  some of  its policies  and  considerations of  the                                                                    
past  that helped  shape the  HOA. He  reported that  in the                                                                    
back   of  the   document  there   were  three   letters  of                                                                    
correspondence between  the governor  and parties.  In 2011,                                                                    
the  governor called  on  the  parties to  align  on an  LNG                                                                    
project as  opposed to  the overland  project that  had been                                                                    
licensed under AGIA. The correspondence showed a history.                                                                       
                                                                                                                                
9:12:52 AM                                                                                                                    
                                                                                                                                
Commissioner Balash  turned to  slide 5: "Key  Recitals." He                                                                    
reported that  the State of Alaska  set out in law  [AGIA] a                                                                    
specific set  of policies and  a path forward  between years                                                                    
2007  and 2008.  However, the  project was  targeted at  the                                                                    
North  American gas  markets. The  drastic changes  that the                                                                    
state had seen  as a result of shale  gas development caused                                                                    
the market  to become a  lost opportunity for  Alaska's gas.                                                                    
The Pacific Rim  and LNG appeared to be  the key opportunity                                                                    
currently available to the state.  He supposed that the work                                                                    
done and the license under AGIA  had value and would be able                                                                    
to be  added to  the Alaska LNG  efforts. He  recounted that                                                                    
the  legislature adopted  HB 4  [Legislation that  passed in                                                                    
2013   pertaining   to   the  Alaska   Gasline   Development                                                                    
Corporation  and   the  Regulatory  Commission   of  Alaska]                                                                    
indicating  its intention  to pursue  in-state gas.  The HOA                                                                    
that  was signed  in January  2014  outlined Alaska  Gasline                                                                    
Development  Corporation's (AGDC)  mission and  acknowledged                                                                    
the state's intent  to keep the Alaska  Stand Alone Pipeline                                                                    
(ASAP) and AKLNG projects cooperating.  He claimed that AGDC                                                                    
would be  able to carry  the states interest in  the project                                                                    
and that  when the  agreement was signed  the state  was not                                                                    
trying  to obviate  AGDC's mission.  The agreement  outlined                                                                    
ramping  up  the  preliminary front-end  engineering  design                                                                    
(Pre-FEED)  phase  of  the Alaska  LNG  project,  which  was                                                                    
estimated to  cost $400  million. The  state's share  of the                                                                    
$400 million would  be 20 to 25 percent.  The other parties'                                                                    
shares would be  based on their prospective  interest on the                                                                    
North Slope.                                                                                                                    
                                                                                                                                
9:16:03 AM                                                                                                                    
                                                                                                                                
Commissioner Balash advanced to  slide 6: "Key Definitions:"                                                                    
He  stated  that  the  slide  was included  as  a  point  of                                                                    
reference when  reading through the  HOA. He  mentioned that                                                                    
item  five, "TAG"  which  stood  for "Tax  as  Gas", was  an                                                                    
important element  of the agreement  and would  be discussed                                                                    
in further detail in the future.                                                                                                
                                                                                                                                
Commissioner  Balash  discussed  slide  7:  "Principles  and                                                                    
Benefits":                                                                                                                      
                                                                                                                                
     Article 2: Principles                                                                                                      
          1.  Recognizes  that  if Enabling  Legislation  is                                                                    
          passed that the  parties would negotiate contracts                                                                    
          that  would  incorporate  the  principles  in  the                                                                    
          agreement.                                                                                                            
                                                                                                                                
Commissioner  Balash  elaborated that  commercial  contracts                                                                    
the  state enters  into  required  legislative approval.  He                                                                    
expressed the importance  of the public being  able to weigh                                                                    
in on  long-term contracts affiliated  with the  project. He                                                                    
compared  it  to  buying  a   house.  The  process  included                                                                    
agreeing  to terms,  practicing due  diligence, and  signing                                                                    
closing documents.                                                                                                              
                                                                                                                                
Commissioner  Balash  reviewed  the benefits  of  the  AKLNG                                                                    
project  which included  energy for  homes and  communities,                                                                    
jobs  for Alaskans,  additional revenue  for the  state, and                                                                    
opportunities  for  additional  gas development.  He  stated                                                                    
that there was 33 trillion  cubic feet of proven resource at                                                                    
Prudhoe Bay and Point  Thompson. Federal, state, and private                                                                    
geologists  expected   tremendous  additional   natural  gas                                                                    
resources  on the  North Slope.  He asserted  that once  the                                                                    
resource was discovered the state  would need to preserve an                                                                    
opportunity for development and delivery to market.                                                                             
                                                                                                                                
9:20:30 AM                                                                                                                    
                                                                                                                                
Commissioner Balash  discussed slide 8: "Alaska  LNG Project                                                                    
Work." He  referenced Article 4  of the HOA stating  that if                                                                    
enabling  legislation   passed,  work   would  need   to  be                                                                    
conducted  by and  between parties.  Service agreements  for                                                                    
transportation   and    liquefaction   between    AGDC   and                                                                    
TransCanada would need to be  drafted. Offtake and balancing                                                                    
agreements  would also  be necessary  in  the upstream.  The                                                                    
state would  need to ensure  that it would be  receiving all                                                                    
of the gas it needed in  order to enter into other contracts                                                                    
related to the project. He  commented that LNG projects were                                                                    
a daisy  chain of contracts.  He acknowledged that  the most                                                                    
important  contract was  the sales  and purchase  agreement;                                                                    
the  details of  selling the  LNG  to the  buyer. The  buyer                                                                    
would want to see the  liquefaction plant, the pipeline, the                                                                    
field,  and the  specific  gas they  were  buying. From  the                                                                    
state's perspective its  share of the gas would  come at the                                                                    
field. The state would enter  into contracts downstream with                                                                    
service providers as well as  upstream to ensure getting its                                                                    
share.                                                                                                                          
                                                                                                                                
Commissioner  Balash expressed  the importance  of the  last                                                                    
point  on  slide 8.  The  state  and  each of  the  producer                                                                    
parties  would  initiate  LNG   marketing  for  Alaska  gas,                                                                    
something that was  new and key to  the present opportunity.                                                                    
In   the  past   two   decades   certain  organizations   or                                                                    
individuals  from Alaska  had traveled  to  markets in  Asia                                                                    
trying to  sell product  they did not  have. He  opined that                                                                    
the  conversation would  take another  shape with  available                                                                    
product.                                                                                                                        
                                                                                                                                
9:23:39 AM                                                                                                                    
                                                                                                                                
Commissioner Balash discussed  slide 9: "State Participation                                                                    
in   the   Project."   The   state's   participation   would                                                                    
potentially help to  maximize the value of  its resource. He                                                                    
noted  an in-depth  study about  the differences  in an  LNG                                                                    
project versus an overland  project. The differences started                                                                    
with the  way in which  the gas  was sold. He  reported that                                                                    
LNG sales  contracts between buyers and  sellers were unique                                                                    
and   proprietary.   He   furthered  that   although   broad                                                                    
characteristics carried from one  contract to another, there                                                                    
was not  a transparent  market clearing price  mechanism for                                                                    
LNG. He  opined that another  difference between an  LNG and                                                                    
an  overland project  was in  the nature  and regulation  of                                                                    
infrastructure.  In  the  overland context  the  market  was                                                                    
transparent    and   highly    liquid    in   a    regulated                                                                    
infrastructure. In  an LNG project  the pipeline may  or may                                                                    
not  be  regulated,  but  the  liquefaction  plant  was  not                                                                    
regulated for  access or  rates, presenting  a black  box to                                                                    
the State of Alaska from a value perspective.                                                                                   
                                                                                                                                
Commissioner  Balash relayed  that the  state was  seeking a                                                                    
way to participate for its share  of gas. Under the terms of                                                                    
the state's  leases it  was entitled  to its  royalty share.                                                                    
However,   the    lessee   was   entitled    to   reasonable                                                                    
transportation costs.  He indicated that the  state paid for                                                                    
its share  of the  infrastructure either upfront  or through                                                                    
deductions  over time.  He explained  that  the state  would                                                                    
experience a better  outcome by being involved  on the front                                                                    
end  of  the  project,  structuring  the  financing  of  the                                                                    
state's share.                                                                                                                  
                                                                                                                                
Commissioner  Balash noted  that the  alignment of  interest                                                                    
achieved  was an  improvement in  serving the  state in  the                                                                    
long-run.                                                                                                                       
                                                                                                                                
9:28:05 AM                                                                                                                    
                                                                                                                                
Commissioner   Balash   discussed  slide   10:   "Regulatory                                                                    
Framework, Access and Expansion":                                                                                               
                                                                                                                                
   Key Provisions                                                                                                               
                                                                                                                                
   1. At least five Alaskan offtake points for                                                                                  
     Alaskans to get their gas.                                                                                                 
                                                                                                                                
   2. Locations of offtake points will be developed in                                                                          
     consultation with AGDC. AGDC's work on ASAP will                                                                           
     greatly benefit the State and Alaska LNG Project in                                                                        
     developing these locations.                                                                                                
                                                                                                                                
 3. Each Party's shares in capacity would be managed on a                                                                       
     proprietary basis; essentially creating "projects                                                                          
     within a project."                                                                                                         
                                                                                                                                
   4. AGDC and TransCanada's shares of capacity in the                                                                          
     project are committed to provide access to third                                                                           
     parties on terms developed with the State.                                                                                 
                                                                                                                                
Commissioner  Balash stated  that  the regulatory  framework                                                                    
was a  key point which  he alluded to earlier  in describing                                                                    
some of  the differences between  an overland versus  an LNG                                                                    
project.  Another critical  factor  was  the state's  access                                                                    
into  and  out  of  the pipeline.  He  also  mentioned  that                                                                    
opportunities  for expansion  were  essential. He  expounded                                                                    
that if a party owned 32  percent of the project it would be                                                                    
obligated to finance 32 percent  of the project overall. The                                                                    
state,  as a  25  percent owner,  would  be responsible  for                                                                    
raising the  capital or  finding the  partners to  raise the                                                                    
capital for its  25 percent. It would not matter  how any of                                                                    
the  parties structured  their financing.  He reported  that                                                                    
there would not be a single  tariff for the pipe. Each party                                                                    
would have its  own set of terms.  Although physically there                                                                    
would only be one pipe,  metaphorically there would be four,                                                                    
one  for  each  sponsor.   He  believed  that  managing  the                                                                    
parties' shares on  a proprietary basis would  help to solve                                                                    
some of  the commercial  problems that have  plagued efforts                                                                    
in  the  past. He  continued  by  stating that  the  state's                                                                    
interest was in low tariffs.  They were good for the state's                                                                    
bottom  line  and  helped  to  make  unexplored  lands  more                                                                    
attractive.   Meanwhile,   those   sponsors  who   did   not                                                                    
necessarily have  the same  interest as  the state  would be                                                                    
able to set up their  finances and their tariffs higher than                                                                    
the state's. The  state would not be affected  by any prices                                                                    
set  by   other  investment  parties  because   of  how  the                                                                    
agreement is structured.                                                                                                        
                                                                                                                                
9:31:11 AM                                                                                                                    
                                                                                                                                
Commissioner  Balash  moved  to   Appendix  A  on  slide  11                                                                    
"Appendix  A: Pro-Expansion  Principles." He  indicated that                                                                    
expansion  issues were  so  fundamentally  important to  the                                                                    
State of Alaska and its  long-term future that it wanted the                                                                    
terms detailed in the agreement  with the other parties. The                                                                    
key principle was  that parties would be able  to expand the                                                                    
project  without  being vetoed  by  the  other parties.  For                                                                    
example,  if two  of four  partners wanted  to expand,  they                                                                    
could do so as long as  the expansion did not compromise the                                                                    
ability to  meet long-term obligations or  negatively impact                                                                    
the other  parties. However, the  cost and the risks  of the                                                                    
expansion were borne by the  expansion parties. He mentioned                                                                    
liquefaction trains.                                                                                                            
                                                                                                                                
Co-Chair Austerman asked for a definition of trains.                                                                            
                                                                                                                                
Commissioner  Balash  replied  that  trains  were  equipment                                                                    
units that allowed for a  given process to take place. There                                                                    
would be trains located at the  North Slope to be used for a                                                                    
gas  processing plant  (GPP) and  trains located  in Nikiski                                                                    
used  for the  gas liquefaction  process. He  continued that                                                                    
they were units  of infrastructure that would be  able to be                                                                    
plugged  together similar  to modules.  The capacity  of the                                                                    
trains would be significant.                                                                                                    
                                                                                                                                
9:34:14 AM                                                                                                                    
                                                                                                                                
Commissioner   Balash  elaborated   that  the   liquefaction                                                                    
equipment  was  fundamental to  the  ability  to deliver  to                                                                    
buyers  and would  only be  affected if  all of  the parties                                                                    
agreed.  If one  of  the parties  had more  gas  to take  to                                                                    
market it  would be able to  propose adding a train  and the                                                                    
other  parties would  have the  choice  to participate.  The                                                                    
ability to expand the  liquefaction terminal with additional                                                                    
trains  was essential  especially  since the  state did  not                                                                    
have   regulatory  protection   from   the  Federal   Energy                                                                    
Regulatory  Commission (FERC)  or the  Regulatory Commission                                                                    
of Alaska (RCA).                                                                                                                
                                                                                                                                
9:36:22 AM                                                                                                                    
                                                                                                                                
Commissioner   Balash   moved   to   slide   12:   "Enabling                                                                    
Legislation: The Timeline":                                                                                                     
                                                                                                                                
  · April 2014: Legislature passes enabling legislation.                                                                        
   · 2014-2015: Administration and Alaska LNG Project                                                                           
     Parties develop project  enabling contracts, including,                                                                    
     but  not limited  to, agreements  with TransCanada  and                                                                    
     AGDC for project services for  the State Gas Share, gas                                                                    
     offtake  and  balancing  agreements with  the  Producer                                                                    
     Parties, and preliminary LNG or gas sales contracts.                                                                       
   · 2015:    Legislature    considers   project    enabling                                                                    
     contracts.                                                                                                                 
  · 2015-2016: Parties decide whether to advance to FEED.                                                                       
                                                                                                                                
Commissioner  Balash stated  during  the intervening  period                                                                    
the  state  would be  keeping  the  legislature informed  of                                                                    
progress. The  department did  not want to  come out  of the                                                                    
process in FY  15 with legislation that would  not pass. The                                                                    
department believed  the cost  of the  front-end engineering                                                                    
and design  (FEED) phase would be  approximately $2 billion.                                                                    
The state would  be looking at its portion of  the cost, not                                                                    
the full $2 billion.                                                                                                            
                                                                                                                                
Commissioner  Balash pointed  to  slide  13: "Royalties  and                                                                    
Production   Taxes:  Key   Provisions."   He  informed   the                                                                    
committee  that royalty  and production  taxes needed  to be                                                                    
examined in order to establish  the state's share. The state                                                                    
would  receive  cash  revenues  from  corporate  income  tax                                                                    
payments  and property  tax payments.  However, royalty  and                                                                    
production  tax  revenues would  be  handled  such that  the                                                                    
state's royalty  interest, 12.5 percent  at Prudhoe  Bay and                                                                    
14 to  16 percent at  Point Thomson, would be  combined with                                                                    
the  state's production  tax interest  to equal  the state's                                                                    
gas share.  He reported that  the production tax  would fall                                                                    
within a range from 7 to  13 percent as outlined in the HOA.                                                                    
The  state's  share  would  fall within  20  to  25  percent                                                                    
overall.                                                                                                                        
                                                                                                                                
Commissioner Balash  addressed that  taking the  state's gas                                                                    
in-kind would not  be a problem except that  because the LNG                                                                    
business required  a look through  to the  specific reserves                                                                    
and  resource, all  of  the  gas at  Prudhoe  Bay and  Point                                                                    
Thomson  would   be  required  to  support   the  particular                                                                    
project. If  the state switched  back and forth from  RIK to                                                                    
RIV, it  would create some significant  commercial hardships                                                                    
and obstacles for the lessees.  The result would likely be a                                                                    
decline in  the state's  value. He  reported that  the state                                                                    
was considering the in-kind  approach. The statutes directed                                                                    
the state  to take  its oil and  gas revenue  in-kind unless                                                                    
taking it in-value would be in the state's best interest.                                                                       
                                                                                                                                
Commissioner  Balash recounted  that  DNR  conducted an  in-                                                                    
depth study examining the state's  options of taking its gas                                                                    
royalties  in-kind or  in-value. The  department found  that                                                                    
being   paid  in-kind   presented   challenges  that   would                                                                    
potentially  result in  the state  receiving  a lower  price                                                                    
than  producers. A  provision  was included  in  the HOA  in                                                                    
Article 8.8.3  that required a stringent  attorney review to                                                                    
avoid  any  violations  of  anti-competitive  rules  in  the                                                                    
United States or  in other countries. He noted  that each of                                                                    
the producers were willing to  negotiate separately with the                                                                    
state on  the sale or disposition  of its share of  gas. The                                                                    
state would  have an opportunity to  leverage the producers'                                                                    
marketing  expertise  which  led DNR  to  think  differently                                                                    
about  the option  of being  paid  in-kind. Agreements  were                                                                    
currently not  negotiated. He pointed  out that the  HOA was                                                                    
premised  on  the  state receiving  its  royalties  in-kind.                                                                    
However,  the state  had not  committed itself  to receiving                                                                    
its  share of  royalties in-kind.  The state  would have  to                                                                    
feel  satisfied  with the  marketing  aspects  prior to  any                                                                    
commitments.                                                                                                                    
                                                                                                                                
9:43:19 AM                                                                                                                    
                                                                                                                                
Commissioner  Balash  discussed  slide  14:  "Other  Project                                                                    
Enabling Terms  and Additional State Support  for the Alaska                                                                    
LNG Project:  Key Provisions." He  addressed the  first item                                                                    
on  the slide  regarding property  taxes. He  indicated that                                                                    
there would be  a large benefit to structuring  a payment in                                                                    
lieu  of  tax,  which   would  provide  certainty  to  local                                                                    
governments  and project  sponsors.  He  furthered that  the                                                                    
payment in lieu  of tax could be structured in  a variety of                                                                    
ways  and  chosen  by  local  governments.  He  referred  to                                                                    
Article 9 of  the HOA which stated  that the administration,                                                                    
in  consultation  with   local  governments,  would  develop                                                                    
payments in lieu of taxes.  The state would also examine the                                                                    
impacts  of related  construction on  communities throughout                                                                    
the Railbelt  region. The  state would  have to  account for                                                                    
the  impacts   and  help   local  governments   address  any                                                                    
additional burdens and costs associated with the project.                                                                       
                                                                                                                                
Co-Chair Stoltze asked for detail on project benefits.                                                                          
                                                                                                                                
9:45:24 AM                                                                                                                    
                                                                                                                                
Commissioner  Balash noted  that  benefits  would come  with                                                                    
some impact.  He continued  that the state  did not  want to                                                                    
repeat  some  of  the  same  experiences  that  occurred  in                                                                    
Fairbanks  in  the  1970s  when  the  Trans-Alaska  Pipeline                                                                    
System  (TAPS)  was  being constructed.  He  referenced  the                                                                    
domestic violence  and sexual  assault that  occurred during                                                                    
the construction of TAPS.                                                                                                       
                                                                                                                                
Commissioner  Balash  mentioned  that  the  development  and                                                                    
installment of  infrastructure and  a healthy  long-term oil                                                                    
business would  be fundamental to  the overall  economics of                                                                    
the project. He  discussed that the revenues  from gas would                                                                    
be  used to  account  for the  cost  of infrastructure.  The                                                                    
upstream  costs   of  maintaining  Prudhoe  Bay   and  other                                                                    
producing fields were borne by  oil. He asserted that if the                                                                    
oil business was  not healthy enough to bear  the costs, the                                                                    
gas business  would have to  which would be  problematic for                                                                    
the state.                                                                                                                      
                                                                                                                                
9:47:59 AM                                                                                                                    
                                                                                                                                
Commissioner  Balash detailed  slide  15:  "Alaska Hire  and                                                                    
Content." He  pointed out that  the estimated total  cost of                                                                    
the project  was $45 billion  to $65 billion. He  noted that                                                                    
there would be  as many as 15 thousand  jobs associated with                                                                    
the project during construction.  He reported that roughly 1                                                                    
thousand long-term  operating and maintenance jobs  would be                                                                    
generated  and would  command high  salaries. He  noted that                                                                    
Article 11 was found on page  16 of the HOA and provided key                                                                    
direction  for  the Alaska  LNG  parties  in developing  the                                                                    
project.                                                                                                                        
                                                                                                                                
ANGELA   RODELL,   COMMISSIONER,  DEPARTMENT   OF   REVENUE,                                                                    
recounted  three  points  relating   to  the  HOA  and  MOU;                                                                    
participation, percentage,  and process. She stated  that as                                                                    
the state developed  the HOA with the other  parties, it had                                                                    
to  consider its  participation not  only from  a percentage                                                                    
standpoint  but  also from  human  capital  and devotion  of                                                                    
resources  perspectives   on  the   part  of  DNR   and  the                                                                    
Department of  Revenue (DOR). In its  review, DOR recognized                                                                    
the opportunity  to continue  the state's  relationship with                                                                    
TransCanada moving  forward. The  state chose to  enter into                                                                    
an MOU with TransCanada.                                                                                                        
                                                                                                                                
Commissioner  Rodell transitioned  to slide  16: "What  is a                                                                    
MOU- Memorandum of Understanding":                                                                                              
                                                                                                                                
     The MOU  outlines the  terms of  the State  of Alaska's                                                                    
     relationship   with   TransCanada  in   the   Midstream                                                                    
     component of  the Alaska LNG Project;  however, the MOU                                                                    
     will  not  be  binding  until  the  Legislature  enacts                                                                    
     "Enabling Legislation."                                                                                                    
                                                                                                                                
Commissioner Rodell elaborated that  the MOU only applied to                                                                    
the pipeline and  the gas treatment facilities.  The MOU did                                                                    
not  apply to  the  liquefaction  facilities, an  additional                                                                    
part of the project.                                                                                                            
                                                                                                                                
9:50:54 AM                                                                                                                    
                                                                                                                                
Commissioner  Rodell directed  the committee's  attention to                                                                    
slide 17: "Key Terms of the MOU: Key Terms of Exhibit C":                                                                       
                                                                                                                                
     1. Favorable Debt to Equity Ratio                                                                                          
        · 75/25 ratio for rate-making purposes reduces the                                                                      
          State's tariff.                                                                                                       
        · Lower tariffs improve the State's overall cash                                                                        
          flows.                                                                                                                
     2. Cash Contributions by TransCanada                                                                                       
        · TransCanada as project developer reduces the                                                                          
          State's exposure to cash calls and obligations                                                                        
          until the pipeline is in service.                                                                                     
     3. Improved Value to the Treasury                                                                                          
        · When you consider the opportunity cost of                                                                             
          utilizing the State's capital (which earns 6% in                                                                      
          the treasury), our NPV is improved overall.                                                                           
     4. Expansions                                                                                                              
        · TransCanada committed to 70/30 capital structure                                                                      
          for expansions.                                                                                                       
     5. Gas to Alaskans                                                                                                         
        · At least 5 offtake points                                                                                             
        · Distance sensitive rates with three zones for                                                                         
          delivery                                                                                                              
                                                                                                                                
Commissioner  Rodell  emphasized  the value  of  TransCanada                                                                    
committing to some  of the key terms important  to the State                                                                    
of  Alaska. She  commented  that during  Pre-FEED the  state                                                                    
would  gather  additional information  and  be  in a  better                                                                    
financial   position  to   commit   its  limited   financial                                                                    
resources to  the project. The  state would also be  able to                                                                    
take advantage  of TransCanada's expertise. The  MOU allowed                                                                    
the state  to maintain  reserves and  to earn  an attractive                                                                    
interest  rate. She  assured  the  group that  TransCanada's                                                                    
75/25 ratio  for rate-making purposes and  its 70/30 capital                                                                    
structure  commitment  would  not dictate  what  TransCanada                                                                    
would ultimately finance.                                                                                                       
                                                                                                                                
9:53:06 AM                                                                                                                    
                                                                                                                                
Commissioner  Rodell advanced  to  slide 18:  "Where We  Are                                                                    
Today?"  She  noted the  Point  Thomson  settlement and  the                                                                    
joint work  agreements. She  furthered that  TransCanada and                                                                    
ExxonMobil  had   been  working  together  under   the  AGIA                                                                    
license.  She  reported that  the  state  had invested  $330                                                                    
million and TransCanada and  that ExxonMobil had contributed                                                                    
an additional  $130 million into  AGIA. There was  also work                                                                    
done in Denali by  British Petroleum (BP) and ConocoPhillips                                                                    
equal to $200 million. The  investment by the parties led to                                                                    
the concept selection  of the AKLNG project;  creating a gas                                                                    
treatment   facility,   an    800-mile   pipeline,   and   a                                                                    
liquefaction facility to be located at Nikiski.                                                                                 
                                                                                                                                
Commissioner  Rodell pointed  next  to  HB 277,  legislation                                                                    
that would  be brought  before the  committee, to  enact the                                                                    
MOU  between  the  State  of  Alaska  and  TransCanada.  She                                                                    
reported that  the HOA had  been signed. She  specified that                                                                    
currently  the  legislature  had  to decide  whether  to  go                                                                    
forward with  the Pre-FEED phase, as  the administration had                                                                    
envisioned, and contribute  all of the AGIA  and Denali work                                                                    
to  the Alaska  LNG project.  The other  option was  for the                                                                    
state to  refrain from going  forward, agreeing  to purchase                                                                    
the $130  million worth  of work  from TransCanada  that was                                                                    
spent on AGIA.  In the meantime, AGDC planned  to advance to                                                                    
a 2015 open season with ASAP (sharing with AKLNG).                                                                              
                                                                                                                                
9:54:46 AM                                                                                                                    
                                                                                                                                
Commissioner Rodell discussed slide  19, "What Happens if HB                                                                    
277 Passes?" She relayed that  if the legislation passed the                                                                    
state would enter  the pre-FEED stage that would  last 12 to                                                                    
18 months.  The estimated  cost would  be $435  million. The                                                                    
producers  would  contribute  about  $327  million  to  $348                                                                    
million  of  the  costs.  The state's  share  would  be  $35                                                                    
million to  43 million and TransCanada  would contribute $53                                                                    
million to  $67 million.  At the end  of the  pre-FEED stage                                                                    
the  administration would  return  to  the legislature  with                                                                    
information and  contracts to continue into  the next phase.                                                                    
Also, the administration would  seek legislative approval to                                                                    
exercise  the  option  to  increase  its  investment  to  40                                                                    
percent. The  state's cost  would equal  $21 million  to $27                                                                    
million for  previous costs. The  state would also  have the                                                                    
option  to stop  the  project entirely  at  which point  the                                                                    
state   would  be   liable  to   pay  TransCanada   for  its                                                                    
development costs  incurred on behalf of  the state. Lastly,                                                                    
the  state  would  have  the option  to  continue  with  the                                                                    
project at its current level of investment.                                                                                     
                                                                                                                                
9:56:54 AM                                                                                                                    
                                                                                                                                
Commissioner Rodell discussed slide  20: "What Happens after                                                                    
FEED?"  She   stated  that  in   two  to  three   years  the                                                                    
administration  would return  to the  legislature to  make a                                                                    
final  investment decision.  The FEED  costs were  currently                                                                    
estimated  at  $1.8 billion.  The  producer  share would  be                                                                    
approximately   $1.4   billion.   The  state   would   cover                                                                    
approximately  $145 million  to $180  million of  the costs.                                                                    
She interjected  that the range in  dollar amounts reflected                                                                    
the state's percentage of investment  to be between 20 to 25                                                                    
percent.  TransCanada   would  be  investing   between  $215                                                                    
million  to 270  million for  the liquefaction  facility. If                                                                    
all parties  approved going forward with  a final investment                                                                    
decision  the next  phase would  be construction.  The state                                                                    
would be obligated  to make a final investment  of about $10                                                                    
billion. The  state would  again have  the option  of ending                                                                    
the  project  prior  to  construction   but  would  have  to                                                                    
reimburse  TransCanada its  investment  of  $183 million  to                                                                    
$337 million incurred on behalf of the state.                                                                                   
                                                                                                                                
9:58:34 AM                                                                                                                    
                                                                                                                                
Commissioner Rodell discussed slide 21: "Summary":                                                                              
                                                                                                                                
     · The Heads of Agreement (HOA) and Memorandum of                                                                           
        Understanding (MOU) provide guidance on how the                                                                         
        powers provided in HB 277 will be used.                                                                                 
     · At each stage in the project there are "off- ramps"                                                                      
        and decision points for Legislative and public                                                                          
        review.                                                                                                                 
     · Commitments by the State will be made commensurate                                                                       
        with progress by the project.                                                                                           
                                                                                                                                
Commissioner  Rodell added  that  commitments  by the  state                                                                    
would also  be commensurate with the  investments being made                                                                    
by the other three sponsors  of the project; ExxonMobil, BP,                                                                    
and ConocoPhillips.                                                                                                             
                                                                                                                                
Co-Chair  Austerman  asked  about   the  20  to  25  percent                                                                    
ownership in-kind  and gas  in lieu of  taxes. He  asked how                                                                    
the money already invested in AGDC  and the work that it had                                                                    
done  played  into  the  20  to  25  percent  ownership.  He                                                                    
wondered  about a  percentage of  value that  the state  was                                                                    
assuming within the 20 to 25 percent.                                                                                           
                                                                                                                                
10:00:28 AM                                                                                                                   
                                                                                                                                
Commissioner  Balash responded  that the  work AGDC  did was                                                                    
focused  on environmental  and engineering  work tied  to an                                                                    
instate standard as  compared to a FERC  standard. He opined                                                                    
that  some things  would fit  well with  AKLNG such  as AGDC                                                                    
sharing the  state right-of-way.  Each party's share  of the                                                                    
costs would  be accounted for  as the project  moved forward                                                                    
in development. The legislation  specified that AGDC carried                                                                    
the  state's  interest in  the  liquefaction  for AKLNG  but                                                                    
would simultaneously  continue to pursue ASAP.  He indicated                                                                    
that  there would  be a  need  to continue  to separate  the                                                                    
projects until  it was clear  that AKLNG was  going forward,                                                                    
at which time  the state would be able to  focus on just one                                                                    
project.                                                                                                                        
                                                                                                                                
Co-Chair Stoltze indicated that HB  277 was currently in the                                                                    
House Resources  Committee and would  be heard by  the House                                                                    
Labor  and Commerce  Committee before  being heard  in House                                                                    
Finance Committee.  However, he wanted to  take advantage of                                                                    
getting the questions  answered early and while  some of the                                                                    
consultants were in Juneau for  other hearings. The overview                                                                    
was to  help everyone formulate questions  in preparation of                                                                    
receiving the bill later on in session.                                                                                         
                                                                                                                                
10:03:29 AM                                                                                                                   
                                                                                                                                
Representative  Gara noted  that with  oil the  bulk of  the                                                                    
state's  revenue  was  production   tax  and  royalties.  He                                                                    
understood the  concept of taking  the tax and  royalties in                                                                    
the  form of  in-kind  gas and  indicated  that royalty  was                                                                    
approximately 13  percent. He  asserted that  production tax                                                                    
had always been  greater than 13 percent but in  the case of                                                                    
the project  it would be  half or  equal to the  royalty. He                                                                    
wanted to  know how  the commissioner had  come up  with his                                                                    
figure.                                                                                                                         
                                                                                                                                
Commissioner  Balash  contended  that  tax  was  not  always                                                                    
larger than  royalty. He claimed  the opposite was  true for                                                                    
the vast majority of the  history of North Slope production.                                                                    
He explained  that it was  important to note  the difference                                                                    
between gross and net tax  in reference to gas. He furthered                                                                    
that  the  numbers  would look  different  even  though  the                                                                    
outputs from  a cash  flow perspective would  potentially be                                                                    
unequaled.  He remarked  that the  state was  not asking  to                                                                    
negotiate  tax   rates.  He  informed  the   committee  that                                                                    
according to the constitution only  the legislature was able                                                                    
to set tax rates. The department  was asking that a tax rate                                                                    
be established as part of the legislative package.                                                                              
                                                                                                                                
Commissioner Balash  reported that in identifying  the range                                                                    
that  is seen  in the  HOA,  the state  conducted a  royalty                                                                    
study with  Black and Veatch  in 2013 reviewing a  number of                                                                    
options  and opportunities.  The study  revealed that  under                                                                    
the  status quo,  without the  state making  any changes  or                                                                    
participating  at all,  the project  would have  a difficult                                                                    
time competing  for market and  capital. The state  had some                                                                    
work to do if it wanted  to bring its financial take down so                                                                    
that it was  more competitive and to  achieve an environment                                                                    
where  the  project was  more  likely  to move  forward.  He                                                                    
recommended  that  the state  model  its  royalty after  the                                                                    
royalty  rates of  other projects.  As  the commissioner  of                                                                    
DNR,  he did  not  think it  was  a good  idea,  nor did  he                                                                    
believe most  Alaskans would  want the  state to  reduce its                                                                    
interest in the royalty.                                                                                                        
                                                                                                                                
Commissioner  Balash   opined  that   alternatives  included                                                                    
participation  and  the  process  of  back  calculating  the                                                                    
percentage  expected from  production  tax  and royalty.  He                                                                    
wanted to  make sure the  state was not  needlessly reducing                                                                    
its  overall interest.  He emphasized  that  value and  cash                                                                    
mattered  and  that the  cost  and  charges of  liquefaction                                                                    
without participation would  potentially yield higher rates.                                                                    
He  alleged that  if  all  of the  value  was being  drained                                                                    
because  of  the  charges  for  liquefaction,  then  a  high                                                                    
percentage of a  thin margin would not be  beneficial to the                                                                    
state. He  continued that the legislature's  consultants had                                                                    
done a good  job of illustrating the risk to  the state from                                                                    
a wellhead perspective.                                                                                                         
                                                                                                                                
10:09:12 AM                                                                                                                   
                                                                                                                                
Co-Chair  Austerman  clarified  that  the  project  was  not                                                                    
viable without state participation.                                                                                             
                                                                                                                                
Commissioner Balash replied that if  the project was to move                                                                    
forward now,  the state needed  to take reasonable  steps to                                                                    
maximize  its  value. He  stressed  that  the state's  value                                                                    
should not  be consumed  by transportation  and liquefaction                                                                    
costs.                                                                                                                          
                                                                                                                                
Representative  Gara agreed  that  at  low prices  royalties                                                                    
could be higher  than production taxes and  at higher prices                                                                    
the production  tax was  higher. He asked  if the  state was                                                                    
bound to  a tax rate in  the agreement and inferred  that an                                                                    
expectation  had been  created with  the oil  companies that                                                                    
the  state  would not  adopt  a  tax  rate higher  than  the                                                                    
royalty. He asked for clarification.                                                                                            
                                                                                                                                
Commissioner Balash  replied that the  legislation contained                                                                    
provisions  on   production  taxes   for  natural   gas.  He                                                                    
explained that  the HOA represented the  circumstances under                                                                    
which  all of  the  parties were  prepared  to move  forward                                                                    
together. The  parties would have  to decide how  to proceed                                                                    
if the legislature  decided to set a number  that was higher                                                                    
or  lower. He  reported  that  as long  as  the number  fell                                                                    
within  a specific  range  all parties  were  ready to  move                                                                    
forward under  the current  terms set forth  in the  HOA. He                                                                    
did not  recommend moving  forward with  the project  if the                                                                    
legislature set  a number that  fell below 20  percent total                                                                    
for the state  gas share. He anticipated  that other parties                                                                    
would  object  to  the  state receiving  higher  than  a  25                                                                    
percent  share, something  that would  need to  be confirmed                                                                    
with the other signatories.                                                                                                     
                                                                                                                                
10:13:01 AM                                                                                                                   
                                                                                                                                
Co-Chair  Austerman noted  that  multiple discussions  would                                                                    
occur when the bill came before the committee.                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
10:13:49 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:13 a.m.                                                                                         

Document Name Date/Time Subjects
3.19.14 HFIN TC MOU and AK LNG HOA in Context.pdf HFIN 3/19/2014 8:30:00 AM
AK LNG HFIN Presentation DNR DOR
AK LNG Heads of Agreement.pdf HFIN 3/19/2014 8:30:00 AM
AK LNG HFIN Presentation DNR DOR
AK LNG MOU.pdf HFIN 3/19/2014 8:30:00 AM
AK LNG HFIN Presentation DNR DOR
HB 287 Briefing Paper and Sectional.pdf HFIN 3/19/2014 8:30:00 AM
HB 287
HB 287 DNR Tesoro Amendment Contract Presentation.pdf HFIN 3/19/2014 8:30:00 AM
HB 287
HB 287 Transmittal Letter.pdf HFIN 3/19/2014 8:30:00 AM
HB 287
Tesoro Support Letter HB 287 HFIN - Tangaro.pdf HFIN 3/19/2014 8:30:00 AM
HB 287
HB 287 Exhibit 1 link.pdf HFIN 3/19/2014 8:30:00 AM
HB 287