Legislature(2013 - 2014)HOUSE FINANCE 519

03/19/2014 01:30 PM FINANCE

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01:33:30 PM Start
01:34:36 PM Black and Veatch Presentation: Observations on Heads of Agreement
03:31:18 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Black & Veach - Review of Royalty Study & State TELECONFERENCED
Equity Position
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 19, 2014                                                                                            
                         1:33 p.m.                                                                                              
1:33:30 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Stoltze called the House Finance Committee meeting                                                                     
to order at 1:33 p.m.                                                                                                           
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 Lindsey Holmes                                                                                                   
Representative Cathy Munoz                                                                                                      
Representative Steve Thompson                                                                                                   
Representative Tammie Wilson                                                                                                    
MEMBERS ABSENT                                                                                                                
Representative David Guttenberg                                                                                                 
ALSO PRESENT                                                                                                                  
Deepa Poduval, Principal, Management Consulting Division,                                                                       
Black and Veatch                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
Jason De Stigter, Senior Consultant, Management Consulting                                                                      
Division, Black and Veatch                                                                                                      
^BLACK AND VEATCH PRESENTATION: OBSERVATIONS ON HEADS OF                                                                      
1:34:36 PM                                                                                                                    
Co-Chair Stoltze discussed the agenda for the day.                                                                              
DEEPA  PODUVAL, PRINCIPAL,  MANAGEMENT CONSULTING  DIVISION,                                                                    
BLACK AND VEATCH, discussed her  background and focus on the                                                                    
natural gas markets.  She relayed that Black  and Veatch had                                                                    
supported  the   state  in  its  gas   monetization  efforts                                                                    
beginning  around 2007.  A significant  portion of  her work                                                                    
revolved  around helping  private companies  and governments                                                                    
look  at  natural  gas  infrastructure,  market  trends  and                                                                    
forecasting, and investment strategies.                                                                                         
Co-Chair  Stoltze  asked  Ms. Poduval  to  clarify  who  the                                                                    
consultants were  working for. Ms. Poduval  replied that the                                                                    
firm  was consulting  for the  Alaska Department  of Natural                                                                    
Resources (DNR).                                                                                                                
Co-Chair  Stoltze remarked  that  the  consultants had  been                                                                    
hired by  the administration and  were also working  for all                                                                    
JASON DE  STIGTER, SENIOR CONSULTANT,  MANAGEMENT CONSULTING                                                                    
DIVISION, BLACK  AND VEATCH (via  teleconference), discussed                                                                    
his  background in  financial modeling  and engineering.  He                                                                    
was available to answer questions.                                                                                              
1:38:23 PM                                                                                                                    
Ms.  Poduval  provided   a  PowerPoint  presentation  titled                                                                    
"Observations on  Heads of Agreement"  dated March  19, 2014                                                                    
(copy on  file). She noted  that a presentation  in members'                                                                    
packets titled "Alaska North Slope  Royalty Study - Selected                                                                    
Extract" dated  March 10, 2014  had been provided  as backup                                                                    
material (copy on file).                                                                                                        
Ms. Poduval began  on slide 3 titled  "Long-Term North Slope                                                                    
Oil and Gas  Revenues are Driven by  AKLNG Project Success."                                                                    
The slide  depicted revenue forecasts  from North  Slope oil                                                                    
and gas  production with and  without the AK  Liquid Natural                                                                    
Gas (LNG)  project. The blue  line showed  declining revenue                                                                    
forecasts  for  the  state using  only  oil  production  and                                                                    
prices. The green line included  both oil and gas and showed                                                                    
increasing revenue  forecasts; an  additional $4  billion to                                                                    
$4.5 billion in  revenue could result from  the LNG project.                                                                    
She noted that the consultants  looked at the economic value                                                                    
of  the  AK LNG  project  from  an incremental  perspective;                                                                    
models always  included projections for an  "oil only world"                                                                    
with  an overlay  of  what  the world  would  look like  for                                                                    
Alaska with  gas production  as well.  The models  looked at                                                                    
the difference  between the two  revenue and  income streams                                                                    
as accruing  to the AK  LNG project. The modeling  took into                                                                    
account that  oil and gas  production were linked  in Alaska                                                                    
and  that   producing  gas  from  Prudhoe   Bay  could  have                                                                    
implications on oil production in the region.                                                                                   
1:41:28 PM                                                                                                                    
Co-Chair Austerman asked  if the $4 billion  to $4.5 billion                                                                    
in potential additional revenues  represented a gross or net                                                                    
revenue  stream.  Ms.  Poduval   replied  that  the  figures                                                                    
represented the  annual net revenue stream  once the project                                                                    
was operational. She detailed  that the projection looked at                                                                    
cash flows to  the state on an annual basis;  the $4 billion                                                                    
to $4.5 billion was the  incremental revenue the state would                                                                    
receive  with   the  AK  LNG   project  in   operation.  The                                                                    
presentation  also included  the  Net  Present Value  (NPV),                                                                    
which used all cash flow  streams that would accrue later in                                                                    
the  project as  well as  the upfront  investment the  state                                                                    
would make in the project.                                                                                                      
Vice-Chair Neuman  asked about  various assumptions  used in                                                                    
the data  including the price  of gas. He mentioned  the use                                                                    
of  gas   in  payment  for  taxes   and  standard  allowable                                                                    
deductions from the value to  the state. Ms. Poduval replied                                                                    
that forecasts  for 30 to 40  years in the future  relied on                                                                    
the best  information available and market  view at present.                                                                    
The data shown on slide 3  used an assumption of 2.5 billion                                                                    
cubic feet (BCF) of LNG sold  per day from the project; data                                                                    
shown  did not  take the  state's equity  investment in  the                                                                    
project into  account. The LNG market  prices generally used                                                                    
a formula that  was linked to global  oil prices; therefore,                                                                    
the  projection was  based on  a  conservative to  mid-price                                                                    
level for LNG. The oil  price was more conservative than the                                                                    
one  assumed  in the  Department  of  Revenue (DOR)  revenue                                                                    
sources book;  it used  a $90 oil  price in  current dollars                                                                    
escalating at  approximately 2.5  percent per year.  The LNG                                                                    
price was assumed  to be 13.5 percent of the  oil price plus                                                                    
$1.00. The  formula for LNG prices  was fairly standardized;                                                                    
it  was  usually a  percentage  of  the  oil price  plus  an                                                                    
"adder." Recently  the percentage  of oil price  had hovered                                                                    
around 14 to  15 percent. The LNG price at  the beginning of                                                                    
the project  was approximately $17  assuming a $90  price of                                                                    
1:45:18 PM                                                                                                                    
Representative  Gara asked  for verification  that the  data                                                                    
used  an [LNG]  price of  about $17  mmbtu [Million  British                                                                    
Thermal  Units].  Ms.  Poduval replied  in  the  affirmative                                                                    
related  to the  first  year of  LNG  production. The  price                                                                    
would increase with an increase in oil price.                                                                                   
Representative  Gara  referred  to prior  presentations  and                                                                    
explained that the  highest price estimate for  LNG had been                                                                    
roughly  $17 in  the  Japanese market.  However, there  were                                                                    
prices of $10  to $13 paid in other parts  of Asia. He noted                                                                    
that  under  contract the  state  would  be responsible  for                                                                    
selling  its gas  (Exxon, BP,  and ConocoPhillips  would not                                                                    
sell the  state's gas  on its behalf).  He wondered  why the                                                                    
model assumed the state would  receive the highest gas price                                                                    
Ms. Poduval  responded that the  $17/$18 price was  based on                                                                    
the current oil  prices and executed LNG  contracts. The LNG                                                                    
price in the  model using current prices would  be closer to                                                                    
$12 or $13.  The $17 price was a forecast  for 10 years into                                                                    
the future.                                                                                                                     
Co-Chair Stoltze  spoke to  over optimistic  projections. He                                                                    
used an example  related to pumpkin market  prices. He asked                                                                    
Ms. Poduval  if she  would bet  her own  money on  the price                                                                    
Ms.  Poduval replied  in the  negative. She  reiterated that                                                                    
the estimate was based on  the best information available at                                                                    
present.  She  believed  the  firm   had  taken  a  somewhat                                                                    
conservative view on what the  prices could be. However, she                                                                    
recalled  the  legislative  process related  to  the  Alaska                                                                    
Gasline Inducement Act; there had  been rising gas prices in                                                                    
the  Lower  48,  but  shale gas  development  had  not  been                                                                    
foreseen.  She had  believed that  $11 gas  prices would  be                                                                    
sustained; however, she  had been proven wrong  just as many                                                                    
other  natural gas  experts  had been.  She  pointed to  the                                                                    
significant   magnitude  of   the   LNG   project  and   its                                                                    
accompanying  projections over  the upcoming  40 years.  She                                                                    
did not have a crystal ball.                                                                                                    
Ms. Poduval moved to slide  4 titled "Putting the HOA within                                                                    
the Context  of AKLNG  Timeline." The  slide showed  how the                                                                    
development stages of the project  were lined up. One of the                                                                    
first   steps  of   the  process   was  the   pre-Front  End                                                                    
Engineering and  Design (pre-FEED),  where design  began for                                                                    
the  scope of  engineering and  technical aspects.  The pre-                                                                    
FEED  stage  typically took  1.5  to  2  years. The  AK  LNG                                                                    
project was anticipated to take  approximately 1.5 years; if                                                                    
it began in  mid-2014 it was expected to go  through the end                                                                    
of 2015.  The next stage  was the Front End  Engineering and                                                                    
Design (FEED);  it was anticipated  to take  approximately 3                                                                    
years for  the AK LNG  project. She stressed  the importance                                                                    
of the FEED stage, when  all of the detailed engineering and                                                                    
design  details were  solidified. She  elaborated that  cost                                                                    
estimates would  be narrowed, technical challenges  would be                                                                    
addressed,  and the  majority of  the commercial  agreements                                                                    
underlying the  project would be locked  down. She explained                                                                    
that  arrangements  between  stakeholders and  markets  were                                                                    
finalized  during the  FEED stage.  She  expounded that  LNG                                                                    
sales   and  purchase   agreements  (SPAs)   were  generally                                                                    
negotiated and executed  towards the end of  the FEED stage.                                                                    
Additionally,  financing   arrangements  were   nailed  down                                                                    
during  the stage  as  well. She  relayed  that the  project                                                                    
entered the  Final Investment Decision  (FID) stage  once it                                                                    
had been determined that the  market price would support the                                                                    
project  cost  structure  and that  banks  were  willing  to                                                                    
finance  the  project. During  the  FID  stage each  company                                                                    
involved in  a project  committed to moving  forward (Alaska                                                                    
and TransCanada in the case of the AK LNG project).                                                                             
1:51:17 PM                                                                                                                    
Representative  Gara referred  to prior  testimony that  the                                                                    
state had  proposed a production  tax rate between 7  and 13                                                                    
percent. He  wondered what production  tax rate  was assumed                                                                    
in the graph on slide 3.                                                                                                        
Ms. Poduval replied  that slide 3 showed  a straight forward                                                                    
SB 21 fiscal  structure [SB 21 was oil  tax legislation that                                                                    
passed  the legislature  in 2013].  The information  did not                                                                    
include equity investment by the  state and any changes that                                                                    
would call for the production tax.                                                                                              
Representative Gara  asked for  verification that  the taxes                                                                    
shown  were  indicative of  money  the  state would  receive                                                                    
under the  SB 21  tax structure.  Ms. Poduval  answered that                                                                    
the slide set  the framework for the  discussion ahead where                                                                    
the state's equity investment would be included as well.                                                                        
Co-Chair  Stoltze confirmed  that it  used the  current law.                                                                    
Ms. Poduval agreed.                                                                                                             
Ms. Poduval returned to the  project development timeline on                                                                    
slide  4.  Major  expenditures   began  once  FID  had  been                                                                    
completed. She  pointed to  the state's  required investment                                                                    
during each of the stages.  Depending on the level of equity                                                                    
taken on  by the state  and the involvement  of TransCanada,                                                                    
the state's investment would range  from $43 million to $100                                                                    
million in  the pre-FEED stage. State  commitment during the                                                                    
FEED stage would  be between $180 million  and $450 million.                                                                    
Once the  FID stage had  concluded and sales  agreements and                                                                    
financing  had been  locked  in,  95 to  97  percent of  the                                                                    
state's total  investment would  occur (at  the end  of 2018                                                                    
and  prior to  the  completion of  construction). The  state                                                                    
would  be  required  to  make   decisions  about  its  total                                                                    
investment  as would  the  producers.  The development  plan                                                                    
phases were  very typical of  large LNG  projects worldwide;                                                                    
decisions  about  project  viability   were  made  based  on                                                                    
information  received in  previous stages.  She pointed  out                                                                    
that the Heads  of Agreement (HOA) laid  out principles that                                                                    
advanced the  project to the  pre-FEED stage when  the state                                                                    
could  begin   entering  into  commercial   agreements  with                                                                    
producers and other parties.                                                                                                    
1:54:52 PM                                                                                                                    
Representative  Wilson asked  about the  reason for  the $43                                                                    
million and  the $108 million  investment range in  the pre-                                                                    
FEED  stage.   Ms.  Poduval  replied  that   the  range  was                                                                    
determined by the share the state and partners would take.                                                                      
Ms. Poduval  continued to  discuss slide  4. She  noted that                                                                    
the  legislature   would  have  many  sessions   ahead  that                                                                    
involved determining  more detail related to  a project. She                                                                    
moved  to  slide  5 titled  "Royalty  Study  Highlights  and                                                                    
Recommendations." She expressed  intent to discuss different                                                                    
aspects examined  by the royalty  study and some of  the key                                                                    
findings. The  key finding was  the recommendation  that the                                                                    
state  consider equity  participation  in  the project.  The                                                                    
study team  included Black and  Veatch, Daniel  Johnston and                                                                    
Co., DNR,  DOR, and producers.  The study had  examined four                                                                    
primary items.  The first was  to help the  state understand                                                                    
the global  LNG market (i.e. opportunity,  opportunity size,                                                                    
competition).  The  second  item   looked  at  supply  chain                                                                    
elements   including  potential   project  expense,   common                                                                    
commercial  structures  for  LNG projects,  and  the  likely                                                                    
structure of the AK LNG  project. The third aspect looked at                                                                    
the project from  a fiscal perspective and  used other large                                                                    
and  successful  worldwide  projects  as  a  benchmark.  The                                                                    
fourth aspect examined  project risk and ways  for the state                                                                    
to  manage  the  risks  and  incentivize  the  project.  The                                                                    
findings  (shown  in  blue) and  recommendations  (shown  in                                                                    
green)  had  led to  the  ultimate  recommendation of  state                                                                    
equity participation. The global  LNG market was growing and                                                                    
was projected  to double in size  by 2030; it was  driven by                                                                    
market fundamentals where the  developing world was becoming                                                                    
increasingly energy hungry.  Developing nations were looking                                                                    
at  natural gas  as a  source  of clean  and less  expensive                                                                    
energy.   The  global   market  recognized   the  attractive                                                                    
opportunity;  therefore,  there  were various  LNG  projects                                                                    
competing  for the  growing demand.  She stated  that Alaska                                                                    
competed  fairly  aggressively  against the  other  projects                                                                    
looking  to  capitalize  on the  opportunity.  Some  of  the                                                                    
state's  advantages  included  a  well-established  resource                                                                    
base  (competing projects  had uncertainty  about access  to                                                                    
adequate LNG that would support  a 30-year project life) and                                                                    
shipping  proximity to  Asian markets  (Asia  was a  growing                                                                    
center for  LNG demand). One of  Alaska's main disadvantages                                                                    
to  the  project was  the  expensive  cost structure.  Other                                                                    
projects that  were as or  more expensive had  achieved FID.                                                                    
The Gorgon  project in Australia  was headed by  Chevron and                                                                    
had  equivalent  capacity  to the  project  contemplated  in                                                                    
Alaska;  however,  at  last  count  the  cost  estimate  was                                                                    
approximately   $53   billion.   The   project   was   under                                                                    
construction  and  was expected  to  start  production in  a                                                                    
couple of years.                                                                                                                
2:00:49 PM                                                                                                                    
Ms.  Poduval  communicated   that  fiscal  benchmarking  put                                                                    
Alaska's government  take as fairly high;  the take included                                                                    
the state  and federal government. Alaska's  government take                                                                    
got  close to  70 percent;  for LNG  projects worldwide  the                                                                    
government  take ranged  from 40  to 85  percent. The  study                                                                    
recommended that the state work  on improving its commercial                                                                    
attractiveness given the expectation  that market demand for                                                                    
LNG  would grow  dramatically and  recognizing that  several                                                                    
other  projects  were  competing  keenly  with  Alaska.  The                                                                    
second recommendation  was to retain  value to the  state as                                                                    
much as possible in any  incentive the state provided to the                                                                    
project.  The  supply  chain element  assessment  recognized                                                                    
that the AK LNG was anticipated  to be a large, complex, and                                                                    
high cost project. She pointed  out that elements comprising                                                                    
the project  would be considered complex  individually (i.e.                                                                    
gas  treatment  plant  (GTP),  700-mile  pipeline,  and  LNG                                                                    
plant). The  good news  was that  the producers  involved in                                                                    
the project were  the best in the world and  had the ability                                                                    
to tackle the  magnitude and complexity of  the project. The                                                                    
project structure  was likely to be  integrated and producer                                                                    
owned.  She  explained  that with  a  vertically  integrated                                                                    
structure the same parties would  own the upstream, the GTP,                                                                    
pipeline, and the  LNG plant. The structure  was typical for                                                                    
large, complex LNG projects. She  relayed that an integrated                                                                    
structure  allowed for  maximum project  control; therefore,                                                                    
there was not typically a  situation where one component was                                                                    
ready but  another was not. The  integrated structure helped                                                                    
to   control   costs,   locate   efficiencies   across   the                                                                    
components, and to control the  project schedule. She stated                                                                    
that  the   structure  was   rational  from   the  project's                                                                    
perspective.  However,  one  of   the  risks  the  structure                                                                    
created  for the  state was  the potential  for misalignment                                                                    
between interests of  the state and the  producers. She used                                                                    
the  Trans-Alaska Pipeline  System  project  as an  example.                                                                    
The  state was  not  likely to  have  access to  significant                                                                    
information  and  producers  inherently worked  to  maximize                                                                    
value to  their companies.  She detailed that  the objective                                                                    
was not necessarily achieved by  allowing other companies to                                                                    
utilize the  infrastructure or to encourage  production from                                                                    
the other companies.                                                                                                            
2:05:23 PM                                                                                                                    
Ms. Poduval  highlighted the study's recommendation  for the                                                                    
state to align with producers.                                                                                                  
Representative  Gara observed  that the  term "misalignment"                                                                    
had been used  frequently related to gas  legislation in the                                                                    
current session. He  asked for detail on the  meaning of the                                                                    
word in the context of the current topic [AK LNG project].                                                                      
Ms.   Poduval   discussed   various   areas   of   potential                                                                    
misalignment.  For example,  producers had  no incentive  to                                                                    
expand a project,  to create open access, or  to enable more                                                                    
exploration  and production  activity  on  the North  Slope;                                                                    
whereas, the state  would have a high level  of incentive to                                                                    
enable  the  items.  Additionally,  if  the  LNG  plant  was                                                                    
producer-owned, under  the current  fiscal structure  a high                                                                    
midstream  cost would  reduce the  state's royalty  take and                                                                    
production  tax, but  from  the  producer's perspective  the                                                                    
scenario  was lucrative.  She  explained  that a  producer's                                                                    
midstream entity  would make a significant  amount of money,                                                                    
but  its upstream  would appear  to not  make a  substantial                                                                    
Vice-Chair Neuman  was concerned  about risk  management. He                                                                    
wondered if  Black and  Veatch had  ever compiled  a project                                                                    
were  the project  expense  structure  and the  government's                                                                    
share  looked similar  to the  proposed AK  LNG project.  He                                                                    
mentioned  that  the  proposed structure  included  royalty,                                                                    
gas, and taxes paid to the state.                                                                                               
Ms. Poduval did  not believe she had worked on  a project as                                                                    
outlined by Vice-Chair Neuman. However,  there were a number                                                                    
of projects worldwide  where the state would  take its share                                                                    
of the project as a  portion of the production. She detailed                                                                    
that  it  was  fairly  common within  a  production  sharing                                                                    
contract  for an  IOC  and production  entity  to share  the                                                                    
production  coming  out of  a  project.  The production  was                                                                    
split into two tiers: the  first tier would be called either                                                                    
"cost oil"  or "cost gas" and  went to the producer  to help                                                                    
cover  its costs  associated with  the  project; the  second                                                                    
tier  would  be  "profit  oil"   or  "profit  gas"  and  was                                                                    
typically  split between  the  state and  producers in  some                                                                    
ratio. Negotiations occurred related  to the ratio structure                                                                    
(i.e. fixed  versus varying over  time). She  provided Yemen                                                                    
LNG as an example where the  state and producers had a share                                                                    
in the project.  Cutter was the world's  leading producer of                                                                    
LNG and had  a number of projects that all  worked under the                                                                    
production  sharing  contract  arrangement.  She  reiterated                                                                    
that it  was not uncommon  to see structures similar  to the                                                                    
LNG project contemplated by the state.                                                                                          
Ms. Poduval pointed  to the dark blue box on  slide 5, which                                                                    
indicated that the project did  not come without risk. There                                                                    
were  a number  of  significant risks  the  state needed  to                                                                    
manage and to be cognizant  of. The project was currently in                                                                    
the  very early  development stage;  as more  information on                                                                    
the  project emerged  and financial  decisions needed  to be                                                                    
negotiated, the state  had to actively think  about risks it                                                                    
wanted to take  on and which risks it wanted  to offset with                                                                    
another  party. It  was important  to  recognize that  there                                                                    
would be  costs associated  with offsetting risk  to another                                                                    
party. She  returned to the royalty  study recommendation of                                                                    
state equity participation on slide 5.                                                                                          
2:12:48 PM                                                                                                                    
Ms. Poduval spoke to fiscal  aspects of the project and ways                                                                    
to   reduce   risk.   One  simple   way   to   improve   the                                                                    
attractiveness  of the  project  was to  reduce the  state's                                                                    
fiscal take  from production tax  or royalty. The  study had                                                                    
determined  that  moving  the  fiscal needle  did  not  move                                                                    
project  economics  enough  to  make  them  attractive.  She                                                                    
explained  that  taking  royalty   or  production  tax  away                                                                    
completely would  only improve the producers'  Internal Rate                                                                    
of  Return  (IRR) by  1.5  percent  due to  the  significant                                                                    
upfront   capital  outlay   required.   She  stressed   that                                                                    
midstream  costs (associated  with  the GTP  and LNG  plant)                                                                    
were such a significant portion  of the project's total cost                                                                    
that without  a way to  influence or modify them  the needle                                                                    
would  not  move  significantly.  The other  downside  to  a                                                                    
straight  fiscal-take  reduction  was  that  the  state  was                                                                    
essentially  transferring value  to  the  producers and  not                                                                    
necessarily getting  anything in  return. She  discussed the                                                                    
importance of  creating value for  the state  and producers,                                                                    
which had  led to  the equity  participation recommendation.                                                                    
The state  could be  part of the  project and  helped reduce                                                                    
the  project's cost  because some  of the  upfront cost  was                                                                    
borne by  the state.  Additionally, the state  would receive                                                                    
value  in return  for  the dollars;  it would  not  be a  $2                                                                    
billion to $4 billion reduction  in the state's fiscal take.                                                                    
The alignment  between the state  and producers  was another                                                                    
reason that  equity participation made  sense; participation                                                                    
by the state  would award the state a seat  at the table and                                                                    
would   include  access   to   information  from   producers                                                                    
throughout the process.                                                                                                         
Representative Gara discussed a  scenario in which the state                                                                    
was a  20 percent owner of  the project; he wondered  why it                                                                    
would  be helpful  to have  access to  the information  from                                                                    
producers  if the  state could  not act  on it.  Ms. Poduval                                                                    
answered  that  it  would  depend   on  how  the  commercial                                                                    
agreements were structured.  It would be valuable  to have a                                                                    
seat at the  table related to the  expansion principles that                                                                    
were laid  out in  the HOA; the  principles allowed  each of                                                                    
the parties (even minority interest  holders) to initiate an                                                                    
expansion of the project.                                                                                                       
2:17:06 PM                                                                                                                    
Representative  Gara believed  expansion  was a  significant                                                                    
benefit; however,  if the  state was  a one-fifth  owner the                                                                    
state could vote to expand, but  it would be required to pay                                                                    
the  full expansion  cost. He  questioned when  the scenario                                                                    
would be economically  viable for the state.  He stated that                                                                    
under a prior version of  the project all parties would have                                                                    
been required to share in the cost of expansion.                                                                                
Ms. Poduval  replied that  it would  not necessarily  be bad                                                                    
for the state to pay  for the expansion. She elaborated that                                                                    
the state should expect the cost  to be paid by the producer                                                                    
seeking to  use the  expansion. She provided  a hypothetical                                                                    
scenario where  Anadarko found gas  and wanted to  enter the                                                                    
LNG  project;   if  the  state  facilitated   the  expansion                                                                    
Anadarko would  pay a  tariff through  the GTP  pipeline and                                                                    
LNG plant for  the state. The state would  have its original                                                                    
investment offset  by the tariff payments  and should expect                                                                    
to earn a  return on equity as well. She  expounded that the                                                                    
scenario would be similar to  the tariff the state would pay                                                                    
TransCanada if the  company had a share in  the project. She                                                                    
summarized that having  to make the investment may  not be a                                                                    
bad thing  and may  be an additional  source of  revenue for                                                                    
the state.                                                                                                                      
2:19:24 PM                                                                                                                    
Ms.  Poduval  turned  to  a  pie chart  on  slide  6  titled                                                                    
"Criteria Applied  for Evaluation of  HOA Tie in  to Royalty                                                                    
Study   Recommendations."  She   used   the  royalty   study                                                                    
recommendations as  the valuation criteria as  she discussed                                                                    
the  HOA.  She   highlighted  four  primary  recommendations                                                                    
including   create   alignment   through   equity,   improve                                                                    
commercial  attractiveness of  the  project recognizing  its                                                                    
challenges,  preserve value  to  the state,  and manage  the                                                                    
associated risks.  She moved to  slide 7 that  addressed the                                                                    
first   concept  of   creating   alignment  through   equity                                                                    
participation.  She detailed  that the  HOA outlined  equity                                                                    
participation  for the  state. Key  tenets of  the HOA  were                                                                    
shown on slide  7. The first basic concept  was that royalty                                                                    
as  gas and  gross tax  as  gas together  would combine  and                                                                    
create the  state gas  share. The state  gas share  would be                                                                    
equivalent to  the state's equity share  through the project                                                                    
itself  (the  GTP pipeline  and  LNG  plant). In  turn,  the                                                                    
state's  equity  share  would  impact  how  much  the  state                                                                    
invests in a  project and how much it would  earn. The state                                                                    
was  anticipated  to hold  equity  along  the entire  supply                                                                    
chain  (through the  GTP pipeline  and the  LNG plant).  The                                                                    
state's financial  commitments were  anticipated to  be made                                                                    
in a  stage-gated manner (current  decisions would  focus on                                                                    
funding for  the pre-FEED stage only).  The structure helped                                                                    
to create  alignment. When  Black and  Veatch had  looked at                                                                    
state  equity  participation  there  had been  a  number  of                                                                    
different   structures   it   had  examined.   One   equally                                                                    
attractive alternative from a  financial perspective was for                                                                    
100 percent  state ownership of  the pipeline;  however, one                                                                    
of the shortcomings was that  producers could prevent access                                                                    
through the GTP or in the  LNG plant. The structure on slide                                                                    
7 created  a path  through the project  for the  state's gas                                                                    
and  to facilitate  other explorers  and developers  to move                                                                    
their gas to market.                                                                                                            
2:23:30 PM                                                                                                                    
Representative Gara  pointed to slide  7. He noted  that the                                                                    
state used  to receive  royalty and production  tax payments                                                                    
in the bank.  He mentioned a shift to the  state receiving a                                                                    
20 to  25 percent portion of  the gas, which it  would sell.                                                                    
He asked for  confirmation that the state gas  share and the                                                                    
state equity share did not need  to be the same. He wondered                                                                    
why the two numbers were identical.                                                                                             
Ms.  Poduval replied  that each  party would  have an  equal                                                                    
share of the gas and the  project; each party would have the                                                                    
same share of  the project as they had in  gas on the slope.                                                                    
The  scenario   reflected  the   general  structure   for  a                                                                    
vertically  integrated   project  where  the   upstream  and                                                                    
midstream shares were equalized.  Every party would have the                                                                    
same ownership  as it went  through the different  pieces of                                                                    
the project. The  objective was for the  producers and state                                                                    
to have  their share of  the gas;  each party would  pay for                                                                    
their  own  infrastructure to  move  the  gas to  market.  A                                                                    
difference  between shares  introduced the  possibility that                                                                    
the state would ship its  gas on the producers' capacity and                                                                    
the  question  of how  terms  would  be negotiated  or  vice                                                                    
versa. It was clearer to have the items be equal.                                                                               
2:26:59 PM                                                                                                                    
Representative   Costello  remarked   that  the   state  got                                                                    
involved  in royalty  gas arbitration  and that  the royalty                                                                    
share was not  always the same. She wondered  if the project                                                                    
royalty share would always be 12.5 percent.                                                                                     
Ms. Poduval deferred the question to DNR.                                                                                       
Representative  Costello wondered  if the  state would  have                                                                    
the  option to  sell its  equity  share in  the future.  Ms.                                                                    
Poduval replied in the affirmative.                                                                                             
Representative Costello  addressed the consideration  of the                                                                    
state's complete fiscal situation.  She wondered if it would                                                                    
be possible  for the state to  sell its equity share  in the                                                                    
project at some point in  the future. Ms. Poduval replied in                                                                    
the affirmative.                                                                                                                
Representative Costello  asked whether  an equity  owner had                                                                    
sold a  portion or all  of its  equity in any  other similar                                                                    
projects.  Ms.  Poduval  replied  in  the  affirmative.  She                                                                    
detailed that it was fairly  common during the FEED stage of                                                                    
LNG projects  for the original  sponsors to offer  a portion                                                                    
of  equity to  buyers  to create  purchasing incentive.  She                                                                    
noted  that  typically  both  parties  benefitted  from  the                                                                    
2:28:59 PM                                                                                                                    
Co-Chair Austerman  believed it  was necessary to  return to                                                                    
the  Memorandum of  Understanding  (MOU) to  define who  the                                                                    
state's partners would be in  a state equity share scenario.                                                                    
He believed  that for the state  to have an equity  share it                                                                    
would  be  required to  fund  itself;  therefore, a  partner                                                                    
would  be taken  on. He  wondered if  his understanding  was                                                                    
Ms.  Poduval replied  that there  were almost  two different                                                                    
decisions facing  the state. The first  decision was whether                                                                    
the state  wanted to  take an equity  share in  the project.                                                                    
The second decision  was about the best way  to optimize the                                                                    
state's  participation. She  believed  the TransCanada  fell                                                                    
under  the second  decision; after  choosing  to explore  an                                                                    
equity  participation in  the project  the state  would then                                                                    
think about offsetting upfront capital  cost risk by using a                                                                    
Co-Chair  Austerman asked  for verification  that there  was                                                                    
nothing forbidding  other partners  from having  partners to                                                                    
come  up  with  their  share of  the  funding.  Ms.  Poduval                                                                    
Ms.  Poduval moved  to slide  8  titled "Improve  Commercial                                                                    
Attractiveness  of  AKLNG  Project." The  slide  showed  the                                                                    
producer's  return  on  the   project.  The  state's  equity                                                                    
participation in  the project improved  the returns  for the                                                                    
producers by  3 to 4 percent  over the life of  the project.                                                                    
The increase  was largely achieved  by reducing  the upfront                                                                    
investment required by producers  to facilitate the project.                                                                    
The state's participation meant that  it would have "skin in                                                                    
the  game"   to  make   the  project   operational.  Another                                                                    
commercially attractive aspect of  the structure was that it                                                                    
could  potentially reduce  valuation disputes  if the  state                                                                    
elected  to use  royalty-in-kind  (RIK).  She detailed  that                                                                    
using the RIK method came with  risks for the state; the HOA                                                                    
designated  that  the  state  would elect  to  take  RIK  if                                                                    
satisfactory  arrangements could  be  made  for the  state's                                                                    
disposition   of   gas   and  the   producers   offered   to                                                                    
individually negotiate with the  state to market its portion                                                                    
of the  gas. She would elaborate  on the issue later  in the                                                                    
2:33:02 PM                                                                                                                    
Representative  Gara  recognized  that  sovereigns  had  the                                                                    
ability  to  tax   and  to  receive  the   tax  revenue.  He                                                                    
understood that  Black and  Veatch was  recommending options                                                                    
to  make  the project  more  economic.  He remarked  on  his                                                                    
interest in making the project  economic as well. He pointed                                                                    
to Ms.  Poduval's testimony that instead  of receiving taxes                                                                    
the state  would have a bundle  of gas to sell.  He observed                                                                    
that  the major  oil companies  had a  long history  selling                                                                    
their oil  and gas  to customers worldwide;  however, Alaska                                                                    
had zero experience in the area.  He wondered if it would be                                                                    
feasible to require the companies  to sell Alaska's share of                                                                    
the gas in  addition to their own share. He  wanted to avoid                                                                    
a situation  where oil  and gas  companies negotiated  a $17                                                                    
contract for  themselves, while Alaska  only received  a $14                                                                    
contract. He added that the  oil and gas companies would not                                                                    
be incentivized  to ensure that  Alaska received  the better                                                                    
2:34:14 PM                                                                                                                    
Ms. Poduval replied  that RIK represented valid  risk to the                                                                    
state. She noted that the  royalty study in members' packets                                                                    
["Alaska North  Slope Royalty Study  - Selected  Extract" by                                                                    
Black  and  Veatch (copy  on  file)]  included a  number  of                                                                    
slides  designated to  the risks  associated  with RIK.  She                                                                    
spoke to the importance of  the specific risk highlighted by                                                                    
Representative  Gara. She  detailed that  the state  did not                                                                    
want to  be in the  position of  competing with some  of the                                                                    
best marketers  in the world for  a share of the  LNG demand                                                                    
within the  same timeframe. One  of the advantages  with RIV                                                                    
[royalty-in-value]  was  that   the  state  benefitted  from                                                                    
[companies'] marketing expertise, which  the state would not                                                                    
have  if it  was marketing  LNG  on its  own. The  marketing                                                                    
difficulty would  not only come  from a lack  of experience,                                                                    
but from  a lack of  relationships with buyers in  the Asian                                                                    
markets.   She  noted   that  the   companies  had   lengthy                                                                    
relationships  with  some of  the  Asian  buyers; it  was  a                                                                    
market that worked based on  relationships, which was unlike                                                                    
the more transparent natural gas  market in the Lower 48 and                                                                    
the crude oil market.                                                                                                           
Ms.  Poduval  relayed  that the  Heads  of  Agreement  (HOA)                                                                    
included  the   intent  of  the  producers   to  market  the                                                                    
equivalent  of  their portion  of  the  state's royalty  and                                                                    
production tax  on the state's behalf.  The associated terms                                                                    
were yet  to be negotiated.  She stressed that  the specific                                                                    
risk was  one of the  key areas  the state should  focus on.                                                                    
She added  that it was difficult  to see how RIK  would make                                                                    
sense  if  the  producers   or  their  equivalent  were  not                                                                    
marketing the state's gas.                                                                                                      
2:36:10 PM                                                                                                                    
Representative  Wilson asked  how  much of  the state's  gas                                                                    
would be used  in-state. Ms. Poduval replied  that the study                                                                    
assumed that instate demand would  be approximately 250 mmcf                                                                    
per day.  The state could  choose to divert its  gas towards                                                                    
serving  in-state demands,  but without  knowing the  future                                                                    
demand  it  was  difficult  to  determine  the  answer.  For                                                                    
example, if  Cook Inlet production was  sustained at current                                                                    
levels  there may  not be  as much  demand in  the Anchorage                                                                    
market.  She detailed  that the  study  took in-state  needs                                                                    
into  account; it  assumed  gas  was equivalently  portioned                                                                    
between the state and producers.  She asked her colleague to                                                                    
confirm her statements.                                                                                                         
Mr. De Stigter agreed. The share  of the 250 mcf per day for                                                                    
in-state gas  between the state  and producers was  based on                                                                    
their overall share of the gas.                                                                                                 
Ms.  Poduval  elaborated that  the  study  assumed that  the                                                                    
producers and state could serve  the in-state market; market                                                                    
price was  not necessarily  discounted relative to  what the                                                                    
state or  producers would achieve  from selling to  a global                                                                    
LNG market. She  added that it was  cheaper in-state because                                                                    
the gas  would not incur  shipping or LNG plant  costs; only                                                                    
the GTP  and pipeline would  be required  to get the  gas to                                                                    
Representative   Wilson  did   not   believe  the   scenario                                                                    
increased  affordability and  surmised that  producers would                                                                    
make more  profit off of the  state if they did  not need to                                                                    
ship  gas out-of-state.  She anticipated  that if  the state                                                                    
directed  a portion  of its  gas  share to  in-state use  it                                                                    
would be more economical for  rural residents versus a price                                                                    
charged  to  go  to  Asia.   Ms.  Poduval  did  not  believe                                                                    
Representative  Wilson   was  making  a   misstatement.  She                                                                    
expounded that  the study  did not assume  that the  gas was                                                                    
sold at a  discount in the local market.  The assumption was                                                                    
that the  price was what  the producers or state  would have                                                                    
achieved in  the global  market less the  cost to  reach its                                                                    
destination.  She detailed  that the  number did  not really                                                                    
change the project economics for  the state due to the small                                                                    
percentage it made up of the  larger project as a whole. She                                                                    
stated that it was a policy call for DOR or DNR.                                                                                
Representative   Wilson  agreed   that  there   was  a   big                                                                    
difference between  what the state  was doing for  its share                                                                    
versus  working  to  ensure affordability  for  the  state's                                                                    
residents. She remarked that the  state could have a partner                                                                    
in its share that could help the state attain a good deal.                                                                      
Ms. Poduval replied in the affirmative.                                                                                         
2:40:45 PM                                                                                                                    
Representative  Edgmon  surmised  that  the  study  did  not                                                                    
include   any   additional  initial   infrastructure   costs                                                                    
associated  with building  off-take points.  He believed  an                                                                    
off-take  point  to the  Interior  could  vary greatly  from                                                                    
another  location in  terms of  size and  cost. Ms.  Poduval                                                                    
agreed.  She  anticipated  that the  costs  would  be  small                                                                    
relative to the overall project cost.                                                                                           
Co-Chair  Stoltze  noted  that   the  committee  would  hold                                                                    
questions until the end of the presentation.                                                                                    
Ms.  Poduval  addressed  criteria  on  slide  9  related  to                                                                    
preserving the  value to the  state from royalty  and taxes.                                                                    
She  addressed whether  it  was possible  for  the state  to                                                                    
obtain value  in return  for its  incentives to  the project                                                                    
and  to  preserve the  state's  expected  revenues from  the                                                                    
project  relative to  a  royalty-in-value  (RIV) world.  She                                                                    
shared that slides 10 and 11  laid out a forecast of revenue                                                                    
for the  project with and without  equity participation. She                                                                    
highlighted that  the mix between  the different  sources of                                                                    
revenue changed  depending on whether  or not the  state had                                                                    
equity  participation in  the project.  Slide 10  depicted a                                                                    
RIV  scenario   with  no  equity  participation.   The  only                                                                    
modification  to the  current fiscal  structure was  that it                                                                    
assumed that production tax  credits currently applicable to                                                                    
oil ($5.00 per  barrel) would extend to  new gas production.                                                                    
The slide showed forecasted revenues  to the state using the                                                                    
assumption  that an  Alaska LNG  project would  succeed with                                                                    
the one change in the  state's fiscal structure. The revenue                                                                    
was  slightly  under  $4 billion  per  year;  a  significant                                                                    
portion  consisted of  royalty production  tax and  property                                                                    
Ms.  Poduval  moved to  slide  11,  which showed  a  revenue                                                                    
forecast with  project ownership.  The revenue  mix shifted,                                                                    
but  the  state  was  projected to  make  slightly  over  $4                                                                    
billion  per  year.  She  noted   that  without  the  equity                                                                    
investment the initial investment  required by the state was                                                                    
small;  slide   10  showed   production  tax   credits  from                                                                    
investment  in the  Point Thomson  field (shown  in negative                                                                    
numbers   in   the   years   before   the   project   became                                                                    
operational).  She addressed  the total  cash flow  over the                                                                    
timeframe  included  on  slides  10 (2012  to  2041).  Total                                                                    
projected  cash flow  (including  expenditures and  revenue)                                                                    
was approximately $68 billion  through 2041. Total projected                                                                    
cash  flow  in a  state  equity  participation scenario  was                                                                    
approximately $72 billion. She  explained that the state did                                                                    
not necessarily loose value  by taking equity participation;                                                                    
there was a  larger upfront investment, but  it was recouped                                                                    
through revenues  coming in  during the  project's operating                                                                    
2:46:13 PM                                                                                                                    
Ms. Poduval  turned to  slide 12  titled "Preserve  Value to                                                                    
State  from  Royalty and  Taxes."  She  stated that  it  was                                                                    
challenging to identify precisely  what the state would make                                                                    
in a "do-nothing" scenario, given  that the sum would change                                                                    
based on  market conditions. She  noted that prices  and the                                                                    
project's  capital  costs   were  significant  drivers.  She                                                                    
explained  that   prices  that   were  different   than  the                                                                    
forecasted  numbers  shown  on  slide  12  would  completely                                                                    
change the  state's revenue forecast. She  remarked that the                                                                    
equity participation benchmark was  a moving target as well.                                                                    
The graph addressed  9 different combinations of  two of the                                                                    
largest risk  factors to  the project's  economics including                                                                    
market  prices and  project capital  cost  to determine  how                                                                    
much equity the  state should own to be able  to achieve the                                                                    
same  level of  revenues it  would  have achieved  in a  do-                                                                    
nothing  scenario.  The  analysis  had led  to  the  study's                                                                    
recommendation of the state's  equity percentage (between 20                                                                    
and  25  percent). In  a  low  price environment  the  state                                                                    
needed a relatively  small equity share to  make revenues it                                                                    
would have  earned without the equity  investment. As prices                                                                    
increased the  benchmark increased  because the  state would                                                                    
have  made  more  money  as  prices  rose  in  a  do-nothing                                                                    
scenario.  The  chart  indicated  that  the  state's  equity                                                                    
participation should be somewhere  between 20 and 30 percent                                                                    
to preserve the state's value.  She reiterated that the data                                                                    
assumed  that  the project  would  be  successful in  a  do-                                                                    
nothing  scenario. She  remarked that  somewhere between  20                                                                    
and 30  percent was where  the state started  preserving the                                                                    
value it would have earned.                                                                                                     
2:49:35 PM                                                                                                                    
Ms.  Poduval communicated  that  if prices  were lower,  the                                                                    
state would  end up earning more  with equity participation.                                                                    
Everyone would make  money when gas prices  were higher, but                                                                    
the  state would  not make  as much  as it  would have  made                                                                    
without equity  participation. She moved to  slide 13 titled                                                                    
"Gross Tax  Rate Sets the  Total State Gas Share  and Equity                                                                    
Participation." The  slide highlighted that the  variable in                                                                    
the mix  was the  gross tax  rate or the  "tax gas."  With a                                                                    
royalty  of  13 percent  the  tax  gas share  was  somewhere                                                                    
between 8 and  14 percent to get to a  total state gas share                                                                    
between  20 and  25 percent.  She communicated  that setting                                                                    
the  tax  gas  share  essentially  set  the  state's  equity                                                                    
participation,  the  state's  investment,  and  the  state's                                                                    
Ms. Poduval  addressed management  of risks the  state would                                                                    
take on  associated with  the project  (slide 14).  Slide 14                                                                    
looked  at  the  same  9   scenarios  of  varying  costs  of                                                                    
investment and price. The blue  bars represented the state's                                                                    
revenues in a do-nothing,  modified status quo scenario. The                                                                    
green  bars  showed  projected state  revenues  with  equity                                                                    
participation. The  slide assumed a 25  percent state equity                                                                    
participation.  At a  25 percent  equity participation  in a                                                                    
low  price  scenario  the   state  made  significantly  more                                                                    
revenues than  it would  have without  equity participation.                                                                    
She relayed  that in some ways  it helped to hedge  the risk                                                                    
of  prices  being  low.  The   base  price  scenario  showed                                                                    
revenues  that  were  relatively  close  together  with  and                                                                    
without  equity participation;  depending  on capital  costs                                                                    
revenues  could  be  slightly   over  or  under  status  quo                                                                    
revenues, but the  state was kept whole with  or without the                                                                    
25 percent equity  investment. In a high  price scenario the                                                                    
state would make less with  the 25 percent equity investment                                                                    
than it  would have  without it. The  chart showed  that the                                                                    
state  had essentially  flattened  its  revenue profile  and                                                                    
exposure to  prices with the equity  participation; it would                                                                    
make more in a low price  world, less in a high price world,                                                                    
and  about the  same  in a  base price  world.  Some of  the                                                                    
downside coming from low prices  was taken away, but some of                                                                    
the upside was also taken away from high prices.                                                                                
2:53:44 PM                                                                                                                    
Ms. Poduval shared  that the second significant  risk to the                                                                    
project  resulted from  capital  costs.  Slide 15  addressed                                                                    
whether  the  state had  found  a  way  to manage  its  risk                                                                    
exposure to capital  costs flowing out. The  highest risk to                                                                    
the  project was  in  the initial  years  before cash  flows                                                                    
began  coming  in  when  the   state  had  "cash  calls"  on                                                                    
investment (especially during  the construction period). She                                                                    
discussed the importance of acting  to manage and reduce the                                                                    
state's  risk. TransCanada's  participation  in the  project                                                                    
allowed the  state to  retain 20  to 25  percent of  the gas                                                                    
share, while  being responsible for  approximately 13  to 18                                                                    
percent of upfront  costs. She advised that  the goal should                                                                    
be  to  maximize  the  state's  share of  the  gas  (due  to                                                                    
revenues  it would  bring in)  while minimizing  the upfront                                                                    
costs. An  upfront investment was  made in order  to achieve                                                                    
revenues.  The  issue  was   especially  important  if  cost                                                                    
overruns occurred on the project.  She advised the committee                                                                    
to expect that project overruns  would occur due to its size                                                                    
and complexity. She  referred to other projects  of the same                                                                    
magnitude that had experienced  cost overruns resulting from                                                                    
equipment and skilled labor. She  pointed to Australia as an                                                                    
example  where  large LNG  projects  had  struggled to  stay                                                                    
within  budget  due  to  inflationary  pressures.  Producers                                                                    
would  try to  manage  costs closely,  but  costs were  more                                                                    
likely to increase rather than decrease.                                                                                        
2:56:26 PM                                                                                                                    
Ms. Poduval  turned to a  chart on  slide 16 related  to the                                                                    
reduction   of   capital   cost  exposure   resulting   from                                                                    
TransCanada  participation. The  blue lines  represented the                                                                    
state's investment in  current dollars from a  20 percent to                                                                    
a 25 percent equity share.  The red lines showed the state's                                                                    
required upfront investment  with TransCanada participation.                                                                    
She  relayed that  TransCanada's  participation reduced  the                                                                    
state's  upfront investment  by about  $3 billion  under the                                                                    
$45 billion cost  estimate scenario and by  $4 billion under                                                                    
a cost  overrun scenario  of $54  billion. The  strategy was                                                                    
one of the ways the state  could manage the upfront risk; it                                                                    
did not mean  the state would not have  risk associated with                                                                    
the remainder of its investment.                                                                                                
Ms. Poduval  addressed the risk  of potential loss  of value                                                                    
associated with  RIK. She detailed  that the state  would be                                                                    
in  competition with  skilled producers  with  a history  of                                                                    
marketing  LNG  globally. The  HOA  included  the intent  of                                                                    
producers  to offer  to negotiate  separately to  market the                                                                    
state's  share   of  gas  (to  avoid   triggering  antitrust                                                                    
provisions); the share  of the gas would  be proportional to                                                                    
each  producer's share  of  producer  capacity. She  advised                                                                    
remaining aware of the issue  as the details continued to be                                                                    
negotiated. Under  the arrangement  the state  would benefit                                                                    
from   the  producers'   marketing  expertise   rather  than                                                                    
competing  with  it; it  could  recreate  some of  the  same                                                                    
benefits that would be achieved by RIV.                                                                                         
2:59:34 PM                                                                                                                    
Ms. Poduval relayed that the  fourth aspect of managing risk                                                                    
was related to the  structure on equity participation (slide                                                                    
18). The  royalty study highlighted  various aspects  of the                                                                    
arrangement  and  agreement  structure  between  the  state,                                                                    
producers, and  TransCanada in  a way  that would  allow the                                                                    
state to  achieve its  objectives. She  pointed to  four HOA                                                                    
elements beginning  with "project  within a  project," which                                                                    
specified that  the major  stakeholders could  operate their                                                                    
projects   somewhat   independently    from   a   regulatory                                                                    
perspective.  The structure  also  allowed  expansion to  be                                                                    
initiated by  any one  of the  parties without  agreement by                                                                    
all parties  (the provision was subject  to some constraints                                                                    
and  should not  negatively  impact  the project  operation,                                                                    
which  was fairly  standard).  Stage-gated commitments  were                                                                    
another effective  way of managing the  state's risk because                                                                    
the state would not make  an upfront commitment covering the                                                                    
entire  project  development   process.  The  state's  first                                                                    
commitment would  be to get  through the pre-FEED  stage; it                                                                    
would  enter  into  additional binding  agreements  when  it                                                                    
entered  the FEED  stage. She  reiterated that  the strategy                                                                    
was  a  fairly  standard  way of  developing  LNG  projects;                                                                    
commitments  by the  state that  were  proportionate to  the                                                                    
project's current status were beneficial.                                                                                       
Ms. Poduval  continued to  address slide  18. The  final HOA                                                                    
element shown on the slide  was "access to information." She                                                                    
detailed that a seat at the  table should allow the state to                                                                    
have  access  to information  such  as  what producers  were                                                                    
contemplating with respect to  the project development, what                                                                    
contracts were under negotiation  for technical aspects, and                                                                    
commercial  agreements between  producers.  All  of the  HOA                                                                    
aspects   would  be   fine-tuned  and   solidified  in   the                                                                    
commercial  agreements that  would happen  at a  later date.                                                                    
She advised  that the  state had to  be vigilant  to include                                                                    
terms  in the  commercial agreements  that will  help it  to                                                                    
achieve its  objectives including open access,  expansion, a                                                                    
seat at the table, and access to information.                                                                                   
3:03:07 PM                                                                                                                    
Ms.  Poduval  moved  to  slide 19  titled  "HOA  Score  Card                                                                    
Relative to Criteria." She believed  the HOA reflected terms                                                                    
and a  structure that would  allow the state to  achieve the                                                                    
royalty study  recommendations of alignment  through equity,                                                                    
improve  commercial attractiveness,  and  preserve value  to                                                                    
the state. The equity  participation along the entire supply                                                                    
chain  and  a structure  that  enabled  the  state to  be  a                                                                    
vertically integrated participant helped  in the creation of                                                                    
alignment.   By   investing    state   equity   upfront   it                                                                    
simultaneously increased producer  returns and preserved the                                                                    
state's value  relative to a  status quo scenario.  One risk                                                                    
to the  state associated with vertical  integration was that                                                                    
the state  would not  control the  upstream; the  risk would                                                                    
need  to   managed  and  come  through   commercial  offtake                                                                    
agreements  with  producers.  She detailed  that  the  state                                                                    
would receive  a share of  the gas, but  it would be  in the                                                                    
producers' control  to determine  the amount  of production.                                                                    
She  addressed  the  management  of  risks  including  price                                                                    
exposure,  capital costs,  RIK marketing,  and structure  of                                                                    
participation. She reiterated  earlier testimony that equity                                                                    
participation dampened  the state's  exposure to  prices; it                                                                    
improved state revenues in a  low price environment and gave                                                                    
up  some of  the upside  in  a high  price environment.  She                                                                    
added that equity participation  would help the state manage                                                                    
the risk of  lower than expected prices.  She discussed that                                                                    
TransCanada's participation would  lower the state's initial                                                                    
cash calls; it helped the  state achieve a higher percentage                                                                    
of  gas  without  spending  an  equivalent  portion  of  the                                                                    
capital  up  front. She  addressed  RIK  marketing risk  and                                                                    
believed  the HOA  reflected producer  intent to  market the                                                                    
state's share of  gas; the arrangement details  had not been                                                                    
finalized. She elaborated that the  structure of the state's                                                                    
participation  would   be  in  the  details   of  commercial                                                                    
agreements; ensuring  the state  had access  to information,                                                                    
could enable open  access and expansion of  the project, and                                                                    
allow  other  explorers  and developers  capitalize  on  the                                                                    
project. She stressed that the  areas were important for the                                                                    
state to maintain vigilance on during negotiations.                                                                             
3:06:49 PM                                                                                                                    
Representative  Munoz  wondered  what would  happen  to  the                                                                    
state's equity  share if TransCanada  was not  involved. She                                                                    
wondered whether the state's ultimate  equity share would be                                                                    
impacted if it invested more money up front.                                                                                    
Ms.  Poduval replied  that TransCanada's  absence would  not                                                                    
necessarily impact the state's  equity share. She elaborated                                                                    
that  the   state  taking   equity  participation   and  the                                                                    
optimization  of  the  equity  position  were  two  separate                                                                    
decisions. The level of  equity participation was negotiated                                                                    
between  the  state  and producers;  the  participation  was                                                                    
driven in part by the amount  of gas the state would need to                                                                    
be kept  whole relative to  revenues in a status  quo world.                                                                    
The  HOA put  the necessary  state share  between 20  and 25                                                                    
percent.  The  decision  to include  TransCanada  would  not                                                                    
change the state's  gas share, but it would  affect how much                                                                    
the  state spent  upfront to  achieve the  gas share.  Their                                                                    
analysis  showed that  in the  case of  a 25  percent equity                                                                    
participation, the state could  achieve between $400 million                                                                    
to   $500  million   additional  revenues   per  year   with                                                                    
TransCanada  involved;  it  could  also  invest  between  $2                                                                    
billion to  $4 billion  less with  TransCanada's involvement                                                                    
than it would by going alone  and taking a 20 percent equity                                                                    
share. The  state needed to  take the tradeoff  into account                                                                    
and to determine whether there  was a way to maximize equity                                                                    
and reduce risk associated with initial capital costs.                                                                          
Co-Chair  Austerman  assumed  that   the  state  could  move                                                                    
forward on  its own  if it  chose to  put the  money upfront                                                                    
through bonds, debt, or other.  The objective of TransCanada                                                                    
was to reduce  the upfront cost and some of  the risk to the                                                                    
state in the beginning of the project.                                                                                          
Ms.  Poduval  agreed  that  the  state  could  move  forward                                                                    
without a  partner. She elaborated that  the issue pertained                                                                    
to what the state wanted to  spend its money on and how much                                                                    
it could borrow.                                                                                                                
Co-Chair Austerman discussed a  scenario where the state had                                                                    
TransCanada as a partner. He  referred to a buyout provision                                                                    
in  the MOU  that  would  enable the  state  to  buy back  a                                                                    
portion  of  the  investment   percentage.  He  assumed  the                                                                    
buyback would not  take place until revenues  were coming in                                                                    
from the project.                                                                                                               
Ms. Poduval  replied that the  current structure  would give                                                                    
the state the  option to buy back between 30  and 40 percent                                                                    
in the TransCanada entity holding  the state's interest. The                                                                    
decision would be made at the  end of the pre-FEED stage; it                                                                    
would not be after revenues began coming in.                                                                                    
3:11:13 PM                                                                                                                    
Vice-Chair  Neuman  wondered  how to  amortize  the  state's                                                                    
investment. He  pointed to the  assumption of $17  per mmbtu                                                                    
to   Asia    and   the   deduction   of    costs   including                                                                    
transportation,  liquefaction,  the   pipeline  cost  of  12                                                                    
percent charged by TransCanada,  the gas treatment facility,                                                                    
and transmission back  to the point of  production. He spoke                                                                    
about  taking  gas  in  value and  taxes.  He  believed  the                                                                    
assumptions were gross and not net.                                                                                             
Ms.  Poduval  answered  that the  study  accounted  for  the                                                                    
adjustments in  the analysis. The  other sources  of revenue                                                                    
for the state that made up  the $4 billion in annual revenue                                                                    
came from  property taxes, the  return the state  would earn                                                                    
from  ownership  in the  project,  and  the state  corporate                                                                    
income tax.                                                                                                                     
Vice-Chair Neuman  asked for a  copy of the costs.  He spoke                                                                    
to the assumption  under SB 21 of the $5  per barrel credit.                                                                    
He spoke about oil at $100  per barrel in addition to the $5                                                                    
per barrel equivalent and the  calculation used to determine                                                                    
the  cost of  gas. He  mentioned a  35 percent  tax and  the                                                                    
value provided to the state.                                                                                                    
Ms. Poduval asked for clarification on the question.                                                                            
Vice-Chair  Neuman  was  trying  to  determine  how  the  14                                                                    
percent number and the value  had been reached. He discussed                                                                    
that the  state would  invest close to  $100 million  in the                                                                    
project  10 years  before  it would  receive  a return.  The                                                                    
investment would  be up to  $14 billion; he spoke  about the                                                                    
estimation  of  the  time  value   of  money.  He  requested                                                                    
additional figures to help clarify value to the state.                                                                          
3:15:34 PM                                                                                                                    
Co-Chair Stoltze  wondered why  it was necessary  to discuss                                                                    
anything but the  numbers under the current  tax regime. Ms.                                                                    
Poduval  replied  that  given  the  cost  structure  of  the                                                                    
project and the current  fiscal structure, the project would                                                                    
have  a difficult  time competing  in the  market; something                                                                    
would  have to  change to  make it  commercially attractive.                                                                    
She relayed that  a fiscal reduction or  a structural change                                                                    
would  be  the  most  obvious   options  for  the  state  to                                                                    
Co-Chair  Austerman  asked  whether  the price  of  gas  was                                                                    
attached to the price of oil  in the assumptions used by the                                                                    
study and DNR. Ms. Poduval replied in the affirmative.                                                                          
Co-Chair  Austerman had  read  about  angst associated  with                                                                    
what  the  long-term contracts  had  been  in the  Southeast                                                                    
Asian market.  He believed efforts  were underway  to change                                                                    
the dynamic to a gas price based on gas price.                                                                                  
Ms.  Poduval  agreed  that  the   statement  was  fair.  She                                                                    
detailed  that  the effort  was  mostly  driven by  Japanese                                                                    
buyers who  were the largest  purchasers of LNG and  made up                                                                    
the premium and  highest price market for  LNG. The Japanese                                                                    
market was trying to capitalize on  a number of low cost LNG                                                                    
brownfield  projects  in  the   Lower  48  that  were  being                                                                    
converted  from  regasification facilities  to  liquefaction                                                                    
facilities. The projects had all  been built when Alaska was                                                                    
contemplating  the  Alaska  Gasline Inducement  Act  (AGIA).                                                                    
The expectation had  been that Lower 48 gas  prices would be                                                                    
extremely high,  that there would  not be sufficient  gas to                                                                    
meet  the  country's  own  needs,   and  that  it  would  be                                                                    
necessary to  import gas.  She elaborated  that a  number of                                                                    
regasification projects  converted back  into gas.  With the                                                                    
emergence of shale gas and a  surplus of gas in the Lower 48                                                                    
all   of  the   projects   were  being   converted  with   a                                                                    
liquefaction  facility; the  cheap shale  gas was  converted                                                                    
into  LNG  and  use  to  serve markets  such  as  Asia.  The                                                                    
projects all  had low  cost structures  because they  had no                                                                    
upstream costs  and used  many of  the same  facilities that                                                                    
had   originally   been   built  for   regasification.   The                                                                    
liquefaction  plants   had  to   be  constructed,   but  the                                                                    
pipelines  and   storage  tanks  were  already   there.  She                                                                    
detailed that there were a  finite number of projects with a                                                                    
low enough cost structure that  allowed them to offer a gas-                                                                    
linked LNG price  to the Asian markets.  The Japanese buyers                                                                    
were aggressively  negotiating with the projects  to include                                                                    
the gas  in their  portfolio. However,  the majority  of LNG                                                                    
projects did not  have that low cost  structure; the typical                                                                    
cost structure was expensive enough  to require an oil-based                                                                    
price to make the projects profitable.                                                                                          
3:20:06 PM                                                                                                                    
Co-Chair  Austerman noted  that in  the rest  of the  world,                                                                    
market  was not  based  on oil  price, but  on  the cost  of                                                                    
moving  gas. Ms.  Poduval answered  that the  projects would                                                                    
need an  oil-linked type price  level to support  their high                                                                    
cost structure, just like Alaska.                                                                                               
Representative Munoz remarked that  all parties would assume                                                                    
risk associated  with the project.  She asked why  the state                                                                    
would take  the responsibility for  TransCanada's investment                                                                    
and risk  if the  project failed.  Ms. Poduval  replied that                                                                    
TransCanada would essentially pay  what the state would have                                                                    
otherwise  paid in  the  project's  development stages.  She                                                                    
detailed  that  the off  ramps  represented  that the  state                                                                    
would  pay  TransCanada  what  it  would  have  paid  anyway                                                                    
without TransCanada in the mix.                                                                                                 
Representative Munoz  asked whether  the costs  were limited                                                                    
to  costs the  state would  have paid  without TransCanada's                                                                    
involvement or if  they included the full  costs put forward                                                                    
by  TransCanada. Ms.  Poduval  replied that  the costs  were                                                                    
equivalent. TransCanada would pay  what the state would have                                                                    
paid for the  portion of the project.  Additional costs that                                                                    
would  accrue to  the state  if it  exercised the  off ramps                                                                    
would  be  carrying   costs  associated  with  TransCanada's                                                                    
money.  Carrying  costs would  be  slightly  over 7  percent                                                                    
annually  for  TransCanada's  investment.  She  advised  the                                                                    
committee to  think about what  the opportunity cost  to the                                                                    
state would have  been if it had made  the investments; what                                                                    
the state would  have foregone and whether it  would be more                                                                    
or less than the 7 percent.                                                                                                     
Co-Chair  Austerman  wondered  whether risk  involved  in  a                                                                    
state and  TransCanada partnership was neutral.  He wondered                                                                    
if the  state would have  the same risk if  TransCanada fell                                                                    
to the  wayside. Ms.  Poduval deferred  the question  to the                                                                    
administration or the Department of Law.                                                                                        
Co-Chair  Stoltze  referred to  a  vote  on the  TransCanada                                                                    
contract from the  past. He recalled that  he and Vice-Chair                                                                    
Neuman  had  voted  against the  contract.  He  referred  to                                                                    
concerns  that  there  had  been   a  "handcuffing"  to  the                                                                    
3:23:59 PM                                                                                                                    
Representative  Gara recalled  that when  analyzing oil  and                                                                    
gas  deals  in  the  past the  legislature  had  received  a                                                                    
comparison of  the state's government  take versus  those in                                                                    
other countries.  He discussed the governor's  proposal that                                                                    
included a  royalty plus a  production tax  rate of 7  to 13                                                                    
percent. He asked if Ms.  Poduval could provide a government                                                                    
take comparison  between Alaska and  other countries  with a                                                                    
substantial natural  gas business.  He wanted to  know where                                                                    
the state  would be on  the royalty with  a 7 percent  or 13                                                                    
percent tax rate. He did  not want to hamstring the governor                                                                    
by capping  the number. Ms.  Poduval replied that  she would                                                                    
provide the data.                                                                                                               
Representative  Gara  discussed  his  understanding  of  the                                                                    
state's  relationship  with  TransCanada.   He  spoke  to  a                                                                    
reduction in costs to the  state and wondered if TransCanada                                                                    
would  be a  proportionate owner.  He asked  if it  was that                                                                    
simple. He  asked which of the  three facilities TransCanada                                                                    
would own and contribute  to. Additionally, he wondered what                                                                    
the state would get and what TransCanada was obligated to.                                                                      
Ms.   Poduval  replied   that   as  currently   contemplated                                                                    
TransCanada would hold shares in  the GTP and pipeline only;                                                                    
in all scenarios  the state would hold the share  of the LNG                                                                    
plant. In a scenario where the  state had an equity share of                                                                    
25 percent,  TransCanada would  hold 25  percent of  the GTP                                                                    
and pipeline and the state would  hold 25 percent of the LNG                                                                    
plant. There was  an option for the state to  buy back up to                                                                    
40  percent of  TransCanada's  holding company  for the  two                                                                    
components.  She  elaborated  that  40  percent  of  the  25                                                                    
percent held by  TransCanada would amount to  10 percent; if                                                                    
the  state exercised  its buyback  option,  the state  would                                                                    
have 10 percent of the GTP,  10 percent of the pipeline, and                                                                    
25 percent of the LNG  plant. TransCanada would be left with                                                                    
15 percent of the GTP and pipeline.                                                                                             
3:28:00 PM                                                                                                                    
Representative Gara  spoke to the  idea that a  pipeline was                                                                    
lucrative (as long as it  contained gas). He discussed 10 to                                                                    
14  percent rates  of return  and the  guarantee of  gas; he                                                                    
remarked that  the state  would give up  60 percent  of that                                                                    
amount.  He   wondered  about  the  value   of  the  portion                                                                    
TransCanada  would not  buy into.  Ms. Poduval  replied that                                                                    
the items would be equally  valuable; there was nothing that                                                                    
would distinguish  the pipeline from  the GTP or  LNG plant.                                                                    
She  discussed  return that  the  pipeline  would earn.  She                                                                    
explained   that  a   similar  commercial   term  would   be                                                                    
applicable to  the GTP as  well as  the LNG plant;  the same                                                                    
return  on   equity  could  be   obtained  on  any   of  the                                                                    
components.  The  state  could   have  a  long-term  service                                                                    
agreement  through any  of the  components  that included  a                                                                    
return  on equity  that  could be  identical  for all  three                                                                    
components (e.g. a 12 percent return on equity).                                                                                
Representative    Gara   asked    for   verification    that                                                                    
TransCanada's   share   meant   that  it   would   pay   its                                                                    
proportionate  cost  to  achieve   its  share.  Ms.  Poduval                                                                    
replied in the affirmative.                                                                                                     
Co-Chair   Austerman    thanked   Ms.   Poduval    for   her                                                                    
Co-Chair Stoltze  discussed the  schedule for  the following                                                                    
3:31:18 PM                                                                                                                    
The meeting was adjourned at 3:31 p.m.                                                                                          

Document Name Date/Time Subjects
B&V Royalty Study Summary Reference 3.19.14.pdf HFIN 3/19/2014 1:30:00 PM
B&V Presentation HFIN HOA 3.19.14.pdf HFIN 3/19/2014 1:30:00 PM