Legislature(2013 - 2014)HOUSE FINANCE 519

03/28/2014 01:30 PM FINANCE

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01:39:18 PM Start
01:39:54 PM Presentation by Enalytica: Alaska Lng: Key Issues
04:02:33 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to 4:00 p.m. on Sat. 3/29/14 --
+ Enalytica Consultants: Nikos Tsafos & Janak Mayer TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 28, 2014                                                                                            
                         1:39 p.m.                                                                                              
1:39:18 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Austerman called the House Finance Committee                                                                           
meeting to order at 1:39 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 David Guttenberg                                                                                                 
Representative Lindsey Holmes                                                                                                   
Representative Cathy Munoz                                                                                                      
Representative Steve Thompson                                                                                                   
Representative Tammie Wilson                                                                                                    
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Janak Mayer, Partner, enalytica; Nikos Tsafos, Partner,                                                                         
^PRESENTATION BY ENALYTICA: ALASKA LNG: KEY ISSUES                                                                            
1:39:54 PM                                                                                                                    
Co-Chair Austerman discussed the meeting agenda.                                                                                
Co-Chair Stoltze requested that questions be held until the                                                                     
end of the presentation.                                                                                                        
1:40:29 PM                                                                                                                    
JANAK  MAYER,  PARTNER,  ENALYTICA,  provided  a  PowerPoint                                                                    
presentation  titled "AK  LNG: Key  Issues" dated  March 28,                                                                    
2014,  (copy   on  file).  He  discussed   his  professional                                                                    
NIKOS  TSAFOS,  PARTNER,   ENALYTICA,  provided  information                                                                    
about his professional background.                                                                                              
1:42:37 PM                                                                                                                    
Co-Chair Austerman asked for the  presenters to provide full                                                                    
detail prior to using acronyms.                                                                                                 
Mr.  Tsafos provided  an outline  for  the presentation.  He                                                                    
pointed  to slide  4  titled "LNG  Projects  Evolve: QC  LNG                                                                    
(Australia)   Case  Study."   He  addressed   the  different                                                                    
sections of the  presentation shown at the top  of the slide                                                                    
including  project pathways,  alignment, equity,  midstream,                                                                    
risks,   and  cash-in/cash-out.   The  section   on  project                                                                    
pathways focused  on the current  status and what  may occur                                                                    
going  forward. He  remarked that  the term  "alignment" was                                                                    
the buzzword of  the season. The company  had done extensive                                                                    
economic  modeling to  determine whether  equity was  a good                                                                    
deal for the state; whether  taking ownership of the project                                                                    
made  sense.  He  intended  to  address  the  financial  and                                                                    
nonfinancial  aspects  of  the   midstream  portion  of  the                                                                    
project    including   the    proposed   partnership    with                                                                    
TransCanada.  Additionally, they  intended to  address risks                                                                    
to  the  state and  various  ways  it could  mitigate  risk.                                                                    
Lastly, they would talk about money  - what the state may be                                                                    
expected to invest upfront and  what it could expect to earn                                                                    
over the project's lifetime.                                                                                                    
Mr. Tsafos  relayed that Liquid  Natural Gas  (LNG) projects                                                                    
evolved quite  dramatically from inception to  the time they                                                                    
went  online.   The  slide  depicted   an  example   of  the                                                                    
Queensland Curtis  LNG project  in Australia  beginning with                                                                    
the FEED [Front  End Engineering and Design]  stage. He drew                                                                    
attention  to  the fact  that  Alaska  LNG as  proposed  was                                                                    
looking to  initiate a pre-feasibility study  and would move                                                                    
to  a FEED  stage in  1.5 to  2 years.  The slide  indicated                                                                    
significant change  that could occur between  the FEED stage                                                                    
and project completion. He noted  the project in the example                                                                    
was not online yet.                                                                                                             
Co-Chair  Austerman asked  for  an explanation  of the  FEED                                                                    
Mr.   Tsafos  replied   that  FEED   stood  for   Front  End                                                                    
Engineering  and Design.  He explained  that the  FEED stage                                                                    
was a project's  most extensive study that  was conducted to                                                                    
determine  whether a  project was  viable.  The final  stage                                                                    
called the  Final Investment Decision (FID)  occurred once a                                                                    
project had  been deemed viable  by the  companies involved.                                                                    
He detailed that when the  Queensland Curtis LNG project had                                                                    
entered  the FEED  stage it  had  been conceived  as a  "one                                                                    
train" unit of  volume of 3 million to 4  million tons (with                                                                    
the potential  to expand to  12 million tons).  The upstream                                                                    
was  owned by  a British  company BG  and by  Queensland Gas                                                                    
Company (QGC). The liquefaction  ownership was 70 percent BG                                                                    
and 30 percent QGC. The off-take  of the gas was 100 percent                                                                    
BG. When  the project  had reached FID  two years  later the                                                                    
project  size had  expanded to  8.5  million tons.  Upstream                                                                    
ownership  had  shifted  primarily  to  BG  with  the  China                                                                    
National  Offshore Oil  Corporation  (CNOOC)  and Tokyo  Gas                                                                    
acquiring a small portion.                                                                                                      
1:49:12 PM                                                                                                                    
Mr. Tsafos  continued to discuss  slide 4.  The liquefaction                                                                    
had also shifted  to 90 percent BG ownership  and 10 percent                                                                    
CNOOC  ownership in  the  first train  and  97.5 percent  BG                                                                    
ownership and 2.5 percent Tokyo  Gas ownership in the second                                                                    
train. Additionally, the CNOOC and  Tokyo Gas had been added                                                                    
as buyers.                                                                                                                      
Representative  Gara  asked  about the  acronym  mmtpa.  Mr.                                                                    
Tsafos replied that  the report included a  unit section. He                                                                    
relayed that 7.8 mmtpa [million  metric tonne per annum] was                                                                    
equal to  1 billion  cubic feet (bcf)  per day.  The project                                                                    
shown on slide 4 was slightly over 1 bcf per day.                                                                               
Representative Gara surmised that  it was about one-third or                                                                    
one-quarter the size of the proposed Alaska LNG project.                                                                        
Mr. Tsafos replied that the  Alaska LNG project was slightly                                                                    
over 2 bcf  per day (the project shown on  slide 4 was about                                                                    
half  the size  of  the  AK LNG  project).  He continued  to                                                                    
address slide 4. In January  2014, the Queensland Curtis LNG                                                                    
project had  remained the same  size, but CNOOC had  taken a                                                                    
larger   percentage  of   the  upstream.   The  liquefaction                                                                    
ownership had  changed to  50/50 for train  1 and  CNOOC had                                                                    
acquired  an  option  for  a  possible  third  train  if  an                                                                    
expansion  took place.  The project  off-take had  increased                                                                    
beyond the  project's capacity with  the idea that  BG would                                                                    
supplement  sales from  its  other  projects. Financing  had                                                                    
been  secured   from  the   Japan  Bank   for  International                                                                    
Cooperation and $1.8 billion had  been secured from the U.S.                                                                    
Export  and   Import  Bank.  The  slide's   purpose  was  to                                                                    
demonstrate  how  things changed;  it  was  useful to  think                                                                    
about where  the project  was at  present, but  many changes                                                                    
would  take  place  before  the   project  came  online.  He                                                                    
elaborated  that new  partners  may join  the project,  some                                                                    
partners may  leave, and buyers  were yet to  be determined.                                                                    
He  noted that  financing  had not  been  secured until  the                                                                    
after the FID stage for the Queensland Curtis LNG project.                                                                      
1:52:39 PM                                                                                                                    
Mr. Tsafos turned to slide  5. The slide depicted a timeline                                                                    
for Alaska LNG  and addressed what may be  expected to occur                                                                    
at different  development stages. Subject to  the passing of                                                                    
enabling  legislation the  project would  begin in  the pre-                                                                    
FEED  stage,  which provided  a  "first  pass" to  determine                                                                    
project  viability.  The  project   seemed  to  make  sense;                                                                    
however, whether  it would cost  $45 billion or  $65 billion                                                                    
was unknown.  Due to the  broad spectrum of  potential costs                                                                    
it was  necessary to  narrow the estimate  down in  order to                                                                    
make  a decision.  There may  be some  preliminary marketing                                                                    
agreements;  related documents  included  the Memorandum  of                                                                    
Understanding  (MOU), the  Heads of  Agreement (HOA),  and a                                                                    
State of Alaska (SOA) plan.  It was possible to move through                                                                    
the entire  pre-FEED stage  without securing  any definitive                                                                    
gas  sales plans.  Preliminary work  may  include travel  to                                                                    
Asia  to  determine  whether  the  market  was  amenable  to                                                                    
purchasing gas  from Alaska. The  state would need  to reach                                                                    
out  to  private  and sovereign  financial  institutions  to                                                                    
determine whether investors were  interested in the project.                                                                    
Defining  the  initial  structure would  cost  between  $400                                                                    
million  to $500  million;  whereas  the state's  investment                                                                    
would be  between $50 million  and $120 million.  He relayed                                                                    
that  the  range depended  on  the  total cost  and  whether                                                                    
TransCanada partnered in the project.                                                                                           
Mr. Tsafos continued  to discuss slide 5.  The project would                                                                    
advance  to the  FEED  stage if  the  pre-FEED results  were                                                                    
positive. The transition went from  the concept stage to the                                                                    
detailed blueprint stage. The  finalization of marketing and                                                                    
financing plans began  in the FEED stage  including how much                                                                    
the  state could  borrow, the  rate,  and implications.  The                                                                    
FEED stage  could cost  between $1.5  billion to  $2 billion                                                                    
with  the state's  cost ranging  from $200  million to  $500                                                                    
million. At  any point  during the  FEED stage  new partners                                                                    
may sign on and ownership may be refined.                                                                                       
1:56:01 PM                                                                                                                    
Mr.  Tsafos  continued  to  discuss slide  5.  Once  it  was                                                                    
determined  that  the project  would  move  forward the  FID                                                                    
stage  began; construction  took place  and the  majority of                                                                    
the cash was spent.  Additional partners and financing could                                                                    
still be  secured during the  FID stage. He relayed  that it                                                                    
would be  4 or 5 years  before the state would  know whether                                                                    
it wanted to authorize spending  to move into the FID stage.                                                                    
He  discussed the  challenge was  that more  information was                                                                    
wanted  for the  state  to make  an  informed decision,  but                                                                    
gaining   more  information   required  going   through  the                                                                    
process.  The process  had to  be  taken step  by step.  The                                                                    
point of the  slide was to address where the  project was in                                                                    
the process at present and  what would need to happen before                                                                    
it came online.                                                                                                                 
Mr. Mayer  addressed slide 6. He  highlighted two agreements                                                                    
the legislature  had to consider  including the HOA  that it                                                                    
would sign  with the producers  and TransCanada and  the MOU                                                                    
that it would sign only  with TransCanada. He discussed that                                                                    
currently the  state was a taxing  and regulating authority;                                                                    
it drove  value from its  oil and gas assets  through leases                                                                    
to   private  sector   participants.   Production  tax   and                                                                    
royalties  were currently  determined  by the  value of  the                                                                    
commodity at the  point of production (i.e.  the North Slope                                                                    
wellheads). As  a result  the state had  no direct  stake in                                                                    
the upstream  assets and under  the status quo it  would not                                                                    
have  a stake  in the  rest of  the project;  it would  be a                                                                    
recipient of  value (net of all  transportation costs) based                                                                    
on a percentage of tax and  royalty at the wellhead. The HOA                                                                    
was  a nonbinding  document that  laid out  a vision  for an                                                                    
alternative;  instead of  taking value  at the  wellhead the                                                                    
state  would  be a  participant  in  the project  and  would                                                                    
receive its  share of project  value in-kind in the  form of                                                                    
gas  at  the  point  of  production.  The  state  would  not                                                                    
participate in  the upstream, but  it would have a  share of                                                                    
the  gas   and  a  corresponding  share   of  gas  treatment                                                                    
facilities,  pipeline,  and  liquefaction project.  The  HOA                                                                    
posited a state  share somewhere between 20  and 25 percent;                                                                    
the figure  was more likely  to be 25 percent  (as reflected                                                                    
on slide 6). The state would  have 25 percent of the gas and                                                                    
25  percent of  the  infrastructure  facilities required  to                                                                    
eventually  sell the  gas as  LNG to  Asian buyers.  The MOU                                                                    
contemplated what may  happen with the state's  share of the                                                                    
gas treatment plant (GTP) and the pipeline.                                                                                     
2:01:29 PM                                                                                                                    
Mr. Mayer addressed alignment and  why the state may have an                                                                    
interest  in  the concept.  He  stressed  the importance  of                                                                    
long-term  stability for  large scale  LNG projects.  First,                                                                    
LNG  projects tended  to  involve  enormous upfront  capital                                                                    
expenditures ($45 billion to $60  billion for the Alaska LNG                                                                    
project)   with   relatively   low   levels   of   operating                                                                    
expenditure  and a  long  and steady  cash  flow year  after                                                                    
year. From  the perspective of private  sector investors the                                                                    
purpose  of  investment  was  to   make  one  large  upfront                                                                    
investment,  which  was  followed  by years  of  steady  and                                                                    
predictable  cash flow.  He  detailed  that the  predictable                                                                    
cash  flow was  necessary because  in order  to finance  the                                                                    
upfront capital  the overwhelming  bulk of LNG  produced was                                                                    
sold under  long-term contracts; typically  20-year take-or-                                                                    
pay   contracts.  He   explained   that  under   take-or-pay                                                                    
contracts  a buyer  signs up  to take  a volume  of LNG  and                                                                    
agrees to  pay even if they  are not able to  receive it for                                                                    
some  reason.  The  security   of  the  long-term  contracts                                                                    
enabled  projects  to move  forward;  it  was important  for                                                                    
investors to  understand what economics  looked like  in the                                                                    
future after  committing significant capital.  He elaborated                                                                    
that a  significant number of  items would be locked  over a                                                                    
20-year period;  therefore, it  was important  to understand                                                                    
what revenues  and costs  would be  over time.  He mentioned                                                                    
the  possibility  of  disputes  related to  costs  and  what                                                                    
investors were entitled to; the  potential for a dispute was                                                                    
scary from  the perspective of investors,  particularly when                                                                    
investing $45 billion to $65 billion.                                                                                           
2:05:28 PM                                                                                                                    
Mr. Mayer continued  to address stability over  time and why                                                                    
alignment  may be  in the  state's  and producers'  interest                                                                    
(slide 7).  He listed  items to  consider including  how oil                                                                    
differed from  gas and  lessons that  could be  learned from                                                                    
the  past related  to  North Slope  oil  production and  the                                                                    
Trans-Alaska Pipeline  System (TAPS)  pipeline. Calculations                                                                    
on  slide 7  had been  used from  the Department  of Revenue                                                                    
(DOR), Revenue  Sources Book projections related  to royalty                                                                    
and production  tax. He pointed  to the DOR FY  15 projected                                                                    
price of $105.06 per barrel of  oil at the top of the slide.                                                                    
To  reach  the  gross  value at  the  point  of  production,                                                                    
transportation costs  of approximately  $10 per  barrel were                                                                    
subtracted ($3.50 for marine  transportation, $6.18 for TAPS                                                                    
tariff,   and  other);   the  state's   royalty  value   was                                                                    
calculated  from  this  figure.  Additionally,  after  lease                                                                    
expenditures  ($45.99 in  FY 15)  were subtracted  the state                                                                    
could levy  production tax on  the remaining  amount ($48.64                                                                    
projected in FY 15). He  noted that credits would be applied                                                                    
2:08:07 PM                                                                                                                    
Mr. Mayer turned to slide  8 and addressed alignment and oil                                                                    
versus  gas   prices.  Determining  gas  revenue   would  be                                                                    
different  from  oil.  He explained  that  oil  prices  were                                                                    
published  daily; whereas,  there  was no  global market  or                                                                    
quoted  price for  gas. The  price  of gas  depended on  the                                                                    
cargo of LNG  and under the contract it  had been delivered.                                                                    
Gas was  priced differently  in Asia than  in Europe  or the                                                                    
U.S. and could vary between  contracts. The highest price of                                                                    
LNG going  into Korea over  the past year was  almost double                                                                    
the price of  the lowest priced LNG going  into Korea during                                                                    
the same  time. He  detailed that the  LNG going  into Korea                                                                    
had been sold under  long-term contracts based on indexation                                                                    
to  oil;  however,  the  indexation  varied  widely  between                                                                    
contracts. Subsequently, some cargo  may have been delivered                                                                    
from $8 to $10 per  million btu (mmbtu) under some contracts                                                                    
or for  $15 per mmbtu or  more under others. He  stated that                                                                    
the actual gas price was  variable based on location and was                                                                    
far from transparent; the price  would likely be linked at a                                                                    
discount to the  Japan Customs Cleared (JCC)  price of crude                                                                    
oil.  Gas was  sold  on the  basis  of thermal  equivalency;                                                                    
however, the same  price based on heat content  would not be                                                                    
received for  LNG compared to  oil. Currently a  typical gas                                                                    
contract  may bring  in around  $80  when oil  was $100.  He                                                                    
spoke about a regression formula.                                                                                               
2:11:56 PM                                                                                                                    
Mr. Mayer addressed  the tariff on slide 9.  He relayed that                                                                    
the tariff for gas would be  much higher than it was for oil                                                                    
(gas tariff  shown on  slide 10).  He elaborated  that there                                                                    
may  be  different  scenarios  determining  how  a  pipeline                                                                    
tariff was set. He shared  that the liquefaction project was                                                                    
within  the jurisdiction  of the  Federal Energy  Regulatory                                                                    
Commission (FERC);  only FERC could  regulate a  tariff, but                                                                    
currently the agency did not  regulate tariffs on LNG export                                                                    
projects.  He  described  the liquefaction  component  as  a                                                                    
"black box"  with scope for  substantial changes  in capital                                                                    
structure without  significant state insight.  He elaborated                                                                    
that  the   tariff  was  sensitive  to   debt,  equity,  and                                                                    
allowable returns.                                                                                                              
Mr. Mayer directed  attention to slide 10.  The slide showed                                                                    
an  average LNG  price of  $81.00 per  barrel with  a tariff                                                                    
price of  $66.00. The slide  included minimal  operating and                                                                    
capital  expenditures totaling  $6.00 per  barrel. With  the                                                                    
subtractions  the production  tax  value  would equal  $8.82                                                                    
under the current tax structure.                                                                                                
2:14:50 PM                                                                                                                    
He  moved  to   slide  11  related  to   the  midstream.  He                                                                    
communicated  that   fair  market  price  was   critical  in                                                                    
establishing  a solid  top line  and  that the  overwhelming                                                                    
bulk of  the value  was likely to  reside in  the midstream;                                                                    
upstream was  secondary to midstream and  often the wellhead                                                                    
value  was   insufficient  to  drive  value   to  the  state                                                                    
(particularly  when  prices  were  low).  He  discussed  LNG                                                                    
production at  different price levels  using the price  of a                                                                    
barrel  of oil  equivalent. Slide  12 included  a bar  chart                                                                    
showing prices ranging  from $110 down to $70  per barrel of                                                                    
oil  equivalent  or $18.33  per  mmbtu  down to  $12.08  per                                                                    
mmbtu. The slide depicted a  scenario in which the state was                                                                    
a  taxing  regulating authority  at  the  wellhead where  it                                                                    
generated  everything  based  on   value  at  the  point  of                                                                    
production.  He pointed  to large  deductions that  were the                                                                    
first  claims  on  the  cash coming  from  selling  the  LNG                                                                    
including  tariff,  transportation, shipping,  liquefaction,                                                                    
pipeline,  and  gas  treatment;   all  the  items  could  be                                                                    
deducted  prior to  the  assessment of  value  at the  gross                                                                    
point of  production. He explained  that a deduction  of $66                                                                    
from  a price  of  $110 still  meant  substantial value  was                                                                    
remaining; however,  it did not  take a large drop  in price                                                                    
to  reach a  point where  there was  no value  to the  state                                                                    
remaining. He  elaborated when  oil was  $70 per  barrel and                                                                    
gas was  at $12.08 per  mmbtu there  would be no  value left                                                                    
for the state  to take in the form of  royalty or production                                                                    
tax.  He  explained  that  the return  on  capital  for  the                                                                    
significant investment  in the  midstream was  guaranteed to                                                                    
companies making the investment;  the wellhead price was the                                                                    
shock absorber that took the price risk.                                                                                        
2:18:02 PM                                                                                                                    
Mr. Mayer  relayed intent to  show what value for  the state                                                                    
looked   like  across   a   range   of  possible   scenarios                                                                    
specifically when  prices were  high or  low. He  pointed to                                                                    
slide  13  related to  equity  methodology.  There were  two                                                                    
basic cash flows that would come  to the state if it were an                                                                    
active  investor   and  participant   in  the   project  (as                                                                    
envisioned  under the  HOA). The  state would  earn revenues                                                                    
from selling LNG to Asia  (the volume of LNG sold multiplied                                                                    
by price).  There were  also a  number of  expenditures that                                                                    
would need to  be removed to reach the net  cash flow to the                                                                    
state  including  initial capital  expenditures,  operations                                                                    
and  maintenance  expenses,   debt  service  (principal  and                                                                    
interest), and tariff paid to  a partner (i.e. TransCanada).                                                                    
The  state  would also  receive  cash  flows from  sovereign                                                                    
functions including state corporate  income tax and property                                                                    
tax from the state as a whole.                                                                                                  
2:20:27 PM                                                                                                                    
Mr. Mayer  addressed four cash  flow scenarios on  slide 13.                                                                    
The  initial  analysis was  more  about  taking the  state's                                                                    
value of a  taxing regulating authority versus  taking it as                                                                    
a project  participant. The presentation would  address what                                                                    
the  economics looked  like under  four cash  flow scenarios                                                                    
(slide 13):                                                                                                                     
        · No debt and no TransCanada partnership                                                                                
        · No TransCanada partnership but the state finances                                                                     
          70% of its share with debt                                                                                            
        · TransCanada is a partner and the state exercises                                                                      
          its buyback option                                                                                                    
        · TransCanada is a partner and the state does not                                                                       
          exercise its buyback option                                                                                           
Mr. Mayer relayed that the  presentation would address total                                                                    
cash flows  to the state and  whether it would be  useful to                                                                    
subtract  out  the  25  percent royalty  that  went  to  the                                                                    
Permanent Fund Dividend (PFD) and  property tax that went to                                                                    
municipalities.  He communicated  that it  was important  to                                                                    
keep in  mind that  the project still  needed to  go through                                                                    
the  pre-FEED  and FEED  stages.  He  stated that  currently                                                                    
there was not a project to  conduct a cash flow analysis on.                                                                    
Any  numbers presented  to  the  legislature currently  were                                                                    
based on  educated guesses  on potential  costs, a  range of                                                                    
structures,   and  revenues.   He   acknowledged  that   the                                                                    
information could  be very useful for  directional analysis.                                                                    
The  goal  behind  running  numbers  presently  was  not  to                                                                    
predict  that  the state  would  receive  $3 billion  to  $4                                                                    
billion in  annual revenue  into the  future and  what would                                                                    
need  to  be spent.  The  items  all came  with  significant                                                                    
caveats  because much  was unknown.  The basic  idea was  to                                                                    
predict  what the  items would  look like  given a  range of                                                                    
assumptions  if  the  state  took  value  at  the  point  of                                                                    
production   as  a   taxing   regulating   authority  or   a                                                                    
participant,  what  it  could  look like  over  a  range  of                                                                    
prices,  and how  the variables  interacted. He  stated that                                                                    
clearly  there  was  not  currently  enough  information  to                                                                    
determine whether  the project  should move forward;  if the                                                                    
information  was known  the state  would not  need to  spend                                                                    
hundreds  of millions  of dollars  on  feasibility work  and                                                                    
analysis to nail down the numbers.                                                                                              
2:23:45 PM                                                                                                                    
Mr. Mayer  turned to  slide 14 titled  "SOA Equity  Leads to                                                                    
Higher  Government Take  on Average."  He remarked  that the                                                                    
committee  had received  a  different  but similar  analysis                                                                    
from  Black and  Veatch. He  believed the  models that  made                                                                    
different  assumptions   and  ran  different   numbers  were                                                                    
directionally similar in their  conclusions related to value                                                                    
to the  state. The left  chart showed a status  quo scenario                                                                    
where the  state would remain a  taxing regulating authority                                                                    
taking  its value  by receiving  a royalty  in value  at the                                                                    
wellhead and levying a 35  percent production tax. The green                                                                    
bars  represented the  overall  share of  the total  project                                                                    
value  for  the state.  The  other  charts showed  what  the                                                                    
state's value would  look like if it had a  share of the gas                                                                    
and a corresponding equity stake  in the project (20 percent                                                                    
in the middle chart and 25  percent in the right chart). The                                                                    
slide showed that  the state would receive good  value for a                                                                    
project  in a  status  quo  scenario (with  the  state as  a                                                                    
taxing regulating  authority) if  current LNG prices  of $15                                                                    
to $18 mmbtu could hold for  a long duration; value could be                                                                    
better  than what  the state  may  receive if  it went  with                                                                    
equity in-kind. However, when  prices decreased, the state's                                                                    
value fell  much faster if  it was only a  taxing regulating                                                                    
authority at  the wellhead.  He explained  that when  all of                                                                    
the value  came at the  point of production,  after everyone                                                                    
invested  in infrastructure  to transport  the gas  from the                                                                    
North Slope  into Asian  markets had been  paid a  fixed and                                                                    
guaranteed  rate of  return on  their investment,  the state                                                                    
was the variable  source baring the price  risk. The state's                                                                    
value remained steadier in the  middle and right charts (the                                                                    
state received  the highest  share at  low prices).  Under a                                                                    
scenario where  the producers  and the state  each had  a 25                                                                    
percent share  the state would  receive a  larger percentage                                                                    
of  the  value  if  the  state's  sovereign  functions  were                                                                    
removed;  the reason  was due  to the  difference between  a                                                                    
private sector  participant and  a sovereign  participant in                                                                    
the  project.  The  state  had sources  of  cash  flow  from                                                                    
sovereign  functions (state  corporate  income and  property                                                                    
tax)  and  from producers.  As  long  as the  structure  was                                                                    
correct  the   state  should  not  be   liable  for  federal                                                                    
corporate income  tax; whereas, producers were  (as shown in                                                                    
blue on slide 14).                                                                                                              
2:29:02 PM                                                                                                                    
Mr. Mayer  addressed slide  15. When  prices began  high and                                                                    
decreased the  value to  the state in  the "in  value" world                                                                    
was  very  susceptible  to  movements  in  price  and  could                                                                    
quickly  disappear. The  slide  looked  at total  cumulative                                                                    
cash  flows  over the  life  of  the project.  The  previous                                                                    
slides looked  at a share of  value to the state  that added                                                                    
to 100  percent at both low  and high prices. He  noted that                                                                    
the  total value  was  much  smaller than  in  a high  price                                                                    
world.  Data  shown  on slide  15  used  pure,  undiscounted                                                                    
cumulative cash flows  over the lifetime of  the project and                                                                    
indicated  how   value  was  distributed   between  involved                                                                    
participants. In  a high price  world there  was substantial                                                                    
value to the  state as a taxing  regulating authority (shown                                                                    
in the left  chart). He reiterated that  as prices declined,                                                                    
value  to  the  state  decreased quickly;  the  state  would                                                                    
receive more value if it  were an in-kind participant with a                                                                    
corresponding  equity share.  He added  that the  bigger the                                                                    
state's share  the more  value it  would receive;  under the                                                                    
scenario the state's value was  subject to its total capital                                                                    
commitment  to the  project and  the  amount producers  were                                                                    
willing to  share. He communicated  that going  in-kind with                                                                    
equity counterintuitively provided  more downside protection                                                                    
to the  state when  prices were  low; whereas,  the in-value                                                                    
status quo  structure provided less value  to producers when                                                                    
LNG prices  were high,  but protected  them better  from the                                                                    
downside. Under the in-kind  with equity structure producers                                                                    
were more exposed than the state.                                                                                               
2:32:10 PM                                                                                                                    
Mr.   Mayer   relayed   that  the   information   summarized                                                                    
enalytica's high  level perspective  on the  HOA and  on the                                                                    
state going from a taxing  regulating authority to an entity                                                                    
taking a share  of the gas and facilities.  He asked members                                                                    
to think about what alignment was  like when there was a $10                                                                    
tariff on  $100 of value. He  asked them to think  about the                                                                    
past couple  of decades  of litigation  related to  what the                                                                    
real  tariff was  or should  be and  what the  value to  the                                                                    
state  was  or  should  be.  He spoke  to  the  creation  of                                                                    
uncertainty on  future project value. He  then asked members                                                                    
to think about a  tariff of $66 on an $80  per barrel of oil                                                                    
equivalent  (delivered  to Asian  markets)  and  all of  the                                                                    
incentives  it  created.  He   highlighted  the  concept  of                                                                    
spending  $45  billion to  $65  billion  of capital  to  the                                                                    
project based on 20-year  contractual commitments. He stated                                                                    
that  alignment  was  fundamental  to the  project  and  the                                                                    
reasoning behind  the proposed structure because  the tariff                                                                    
essentially went  away and  all parties had  a share  of the                                                                    
infrastructure and  gas. Additionally, under  the structure,                                                                    
all parties  would make their  money by selling LNG  to Asia                                                                    
(transportation  costs were  subtracted); whether  the value                                                                    
happened at  the wellhead, through  the pipeline, or  at the                                                                    
liquefaction plant  was no  longer an issue  or a  source of                                                                    
dispute and arbitration. He believed  that combined with the                                                                    
mitigation of price risk to  the state, the structure was an                                                                    
attractive  option  to  consider  provided  that  it  had  a                                                                    
sufficient share of  the project to generate  value (i.e. 25                                                                    
percent) and  that a  range of  items were  negotiated (e.g.                                                                    
disposition of the state's share of LNG).                                                                                       
2:36:56 PM                                                                                                                    
Mr. Mayer  continued to discuss  slide 16. He  addressed the                                                                    
MOU agreement  between the state and  TransCanada related to                                                                    
the gas  treatment and  the pipeline.  The slide  showed the                                                                    
HOA  with  25  percent  state   ownership  in  the  GTP  and                                                                    
pipeline.  The MOU  gave the  25 percent  to TransCanada  in                                                                    
return for  TransCanada using its  capital to build  the GTP                                                                    
and  pipeline facilities;  TransCanada would  recuperate the                                                                    
capital in the  form of a tariff. He  noted that TransCanada                                                                    
would  not have  a  share in  the LNG.  The  slide showed  a                                                                    
second  MOU option  where  the state  would  have no  direct                                                                    
equity  in  the GTP  and  pipeline,  but  it would  have  25                                                                    
percent ownership of  LNG. The MOU also  contained an equity                                                                    
buyback  option where  the state  could  buy back  up to  40                                                                    
percent  of its  initial  25 percent  investment  (up to  10                                                                    
percent of  the total)  in the GTP  and pipeline  before the                                                                    
end  of 2015.  He elaborated  that a  TransCanada subsidiary                                                                    
vehicle  would hold  the overall  25 percent  share and  the                                                                    
state  would  own 10  percent  of  the  total as  a  limited                                                                    
partner.  The  state  would  be   liable  for  a  tariff  to                                                                    
TransCanada, but the upfront capital  required would be much                                                                    
2:39:20 PM                                                                                                                    
Mr. Mayer highlighted  potential financial and non-financial                                                                    
benefits and  drawbacks of  the MOU on  slide 17.  The first                                                                    
financial benefit was that the  state would not be obligated                                                                    
to meet a  substantial portion of the  capital cost upfront.                                                                    
He  estimated that  $22 billion  to $25  billion of  the $45                                                                    
billion  to $65  billion project  would be  for the  GTP and                                                                    
pipeline; the state's share would  be 25 percent. He relayed                                                                    
that the state would not  be required to meet the obligation                                                                    
upfront if it  faced capital constraints. He  noted that the                                                                    
state   would  ultimately   reimburse  TransCanada   in-full                                                                    
through a tariff and would  enter into a firm transportation                                                                    
services agreement  over time. The state-owed  debt could be                                                                    
in  the  form  of  a  bond,  loan,  or  tariff,  which  were                                                                    
equivalent  in some  ways. He  believed further  analysis on                                                                    
the  fundamental difference  between the  debt reimbursement                                                                    
options was necessary in terms  of understanding the state's                                                                    
debt  service capacity,  borrowing  costs,  and how  ratings                                                                    
agencies thought about the items.  He questioned whether the                                                                    
capital  cost  would  be   fundamentally  shifted  from  the                                                                    
state's books or whether the result would be less clear.                                                                        
2:41:56 PM                                                                                                                    
Mr. Mayer continued  to highlight MOU benefits  on slide 17.                                                                    
Data  indicated that  the MOU  held attractive  tariff terms                                                                    
relative to market norms. Additionally,  the MOU would allow                                                                    
the state  to exit from potential  Alaska Gasline Inducement                                                                    
Act  (AGIA)   liabilities.  He  spoke  to   financial  costs                                                                    
occurring under the  MOU. Tariff costs would  be higher than                                                                    
the cost of capital the state  would have if it were able to                                                                    
finance the  project on  its own. Also,  the state  would be                                                                    
required to  reimburse TransCanada in full  with 7.1 percent                                                                    
interest in  all circumstances (even if  TransCanada decided                                                                    
to  terminate). He  discussed that  the  agreement could  be                                                                    
terminated  by  the  state if  the  project  was  determined                                                                    
uneconomic  or   if  TransCanada  could  not   get  adequate                                                                    
2:44:20 PM                                                                                                                    
Mr.   Mayer   discussed   the  non-financial   benefits   of                                                                    
TransCanada's   involvement.   TransCanada   would   be   an                                                                    
expansion-oriented  partner,  which  would be  important  to                                                                    
drive future  expansion development to the  remainder of the                                                                    
North Slope  and into Arctic  waters. Unlike  producers that                                                                    
made  money selling  the gas  to  market, TransCanada  would                                                                    
make  money  transporting  gas through  the  infrastructure;                                                                    
having a  partner that cared about  expansion was important.                                                                    
A  presence at  the  negotiation table  and  a partner  with                                                                    
expansion execution capabilities were  clear benefits to the                                                                    
state.  Additionally,  the  state  would  benefit  from  the                                                                    
continuity and  momentum to  move forward  without setbacks.                                                                    
One  non-financial drawback  was that  the state  would bear                                                                    
most of the  risk under the MOU; TransCanada  would be "made                                                                    
good" in  most circumstances. There was  some financing risk                                                                    
to TransCanada; the  company bore the risk  of not receiving                                                                    
the same 12  percent return on equity (ROE)  outlined in the                                                                    
MOU if it  could not raise sufficient  capital; however, the                                                                    
company  had the  right to  terminate if  financing was  not                                                                    
available.  He   questioned  how   much  the   return  could                                                                    
deteriorate  before  TransCanada  decided  to  exercise  its                                                                    
termination agreement or to renegotiate  with the state. The                                                                    
state  would also  be a  limited partner  under the  MOU and                                                                    
therefore it would give up  significant control (the general                                                                    
partner would make the majority of the decisions).                                                                              
2:47:44 PM                                                                                                                    
Mr. Mayer  summarized slide  17. He  stated that  there were                                                                    
clearly many  things to  like about  the proposed  MOU (e.g.                                                                    
transitioning   from  AGIA   and  the   involvement  of   an                                                                    
expansion-oriented  partner); however,  there were  costs to                                                                    
assess as well. He turned to  slide 18 related to the tariff                                                                    
benchmark.  The   slide  included  2012  capital   and  debt                                                                    
structure  information  for   all  FERC  regulated  pipeline                                                                    
companies. The left chart debt  reported to FERC ranged from                                                                    
zero to 34.7, 40.2, 46.7,  to 68.1 percent. He detailed that                                                                    
25  percent  of  the  companies reported  a  level  of  debt                                                                    
between zero and 34.7 percent;  the next 25 percent reported                                                                    
debt  below  40.2 percent.  He  noted  the median  was  40.2                                                                    
percent. The  next quartile reported  debt between  40.2 and                                                                    
46.7  percent;  the  remaining   25  percent  reported  debt                                                                    
between 46.7  and 68.1 percent.  He applied  the information                                                                    
to  the MOU  where  there would  be  a 75/25  debt-to-equity                                                                    
structure for the initial phase of the pipeline.                                                                                
Mr. Mayer  explained that  the MOU  debt-to-equity structure                                                                    
was quite aggressive based on  the other figures; the median                                                                    
debt-to-equity for  companies reporting to FERC  was 60 /40.                                                                    
Rate  making  capital  structures were  ideally  established                                                                    
based   on   a   correlation  to   the   capital   structure                                                                    
underpinning  the  pipeline;  it   was  a  set  number  that                                                                    
determines  the  eventual  rate of  return  allowed  to  the                                                                    
company  in setting  a tariff;  the rate  was determined  on                                                                    
both the  debt and  equity components.  The higher  the debt                                                                    
used  to set  the rate,  the cheaper  the eventual  weighted                                                                    
average  cost of  capital used  in  the rate  would be.  The                                                                    
proposed  debt to  equity was  attractive because  the lower                                                                    
cost of  debt combined  with the  greater component  of debt                                                                    
reduced the tariff  to the state. He pointed  to the average                                                                    
cost  of debt  between 2.5  percent and  9.8 percent  (right                                                                    
chart), with  a median  around 6  percent. The  chart showed                                                                    
the  average  cost of  equity  between  9 percent  and  18.5                                                                    
percent, with  a median around  12.5 percent.  The project's                                                                    
proposed  cost of  debt  was  5 percent  and  equity was  12                                                                    
percent;  both figures  were well  within market  norms. The                                                                    
project's  weighted   cost  of  capital  was   6.75  percent                                                                    
compared  to  the  6.5  percent  to  14  percent  range  for                                                                    
companies reporting to FERC.                                                                                                    
2:52:06 PM                                                                                                                    
Mr. Mayer  turned to a  chart on  slide 19 and  relayed that                                                                    
historically  FERC  ROE  had been  higher  than  returns  in                                                                    
Canada. He addressed how  FERC returns historically compared                                                                    
with  the Canadian  National Energy  Board (NEB).  The black                                                                    
line  represented  NEB ROE  rates  over  time and  the  dots                                                                    
represented  FERC  approved  litigated  cases  and  approved                                                                    
settlements. The  chart indicated  that overall there  was a                                                                    
lower allowed  return on equity  under the NEB  formula. The                                                                    
FERC  numbers tended  to  be  around the  12  percent to  14                                                                    
percent range; whereas  NEB numbers had started  out at that                                                                    
range and  had dropped  to 8  percent and  9 percent  in the                                                                    
past  decade. He  detailed that  many  companies had  sought                                                                    
higher returns  from NEB through litigation.  He referred to                                                                    
a recent  TransCanada report  citing two  to three  cases of                                                                    
successful settlements  with NEB  where rates had  gone from                                                                    
the 8  percent level to the  12 percent level (based  on the                                                                    
60/40 percent  debt to equity  split). He  communicated that                                                                    
based  on a  75/25 percent  debt to  equity with  a cost  of                                                                    
equity around  8 percent or  9 percent the  weighted average                                                                    
cost of capital  would be around 6 percent.  He relayed that                                                                    
based on  the figures the  proposed structure looked  like a                                                                    
good deal.                                                                                                                      
Mr. Mayer looked at three  charts showing total value titled                                                                    
"TC's Share  of Cash is  Highest at Low Prices"  (slide 20).                                                                    
The left chart showed a scenario  of value for the state and                                                                    
partners without  TransCanada. The  middle and  right charts                                                                    
included  TransCanada  with no  buyback  option  and with  a                                                                    
buyback option respectively.  He emphasized that TransCanada                                                                    
would only receive 25 percent  of the infrastructure return,                                                                    
which did not include a share  of the gas; the company would                                                                    
take value from the state,  but the amount was not enormous.                                                                    
He explained  that ultimately value  would come  from moving                                                                    
gas  through infrastructures  and  selling it  to buyers  in                                                                    
Asia. The value to TransCanada  was highest when prices were                                                                    
low;  it  was  a  fixed   claim  on  the  state's  cash.  He                                                                    
elaborated that under a no-buyback  scenario with the lowest                                                                    
prices TransCanada may receive 7  percent of the total cash;                                                                    
however,  with  high prices  and  a  buyback provision,  the                                                                    
total  cash to  TransCanada may  only  be 1  percent of  the                                                                    
2:56:09 PM                                                                                                                    
Mr. Mayer turned to slide  21 titled "Limited Value Foregone                                                                    
Under  TransCanada W/  Buyback  Option."  He explained  that                                                                    
cash  outlays   under  a  25   percent  equity   share  with                                                                    
TransCanada and  a buyback  option were  comparable to  a 20                                                                    
percent   share  without   TransCanada.  The   slide  showed                                                                    
cumulative cash  flows over  the life  of the  project (left                                                                    
chart) and  net present  value to  the state  (right chart).                                                                    
Overall  the  value  to  the   state  (particularly  when  a                                                                    
discount was  factored in  for the time  value of  money and                                                                    
TransCanada's  footing of  upfront costs)  looked relatively                                                                    
closer to  the 25  percent share as  opposed the  20 percent                                                                    
share. Under  a scenario  where the state  could not  do the                                                                    
project  on its  own,  the MOU  and transportation  services                                                                    
agreement could  make the project affordable  for the state;                                                                    
however,  much remained  unknown  at  present regarding  the                                                                    
state's ability to finance the project.                                                                                         
Mr. Mayer  addressed key questions related  to the midstream                                                                    
on slide 22:                                                                                                                    
        · Should the state reimburse TransCanada's expenses                                                                     
          under all scenarios; even if the project is a no-                                                                     
        · What does this imply for risk/reward split and                                                                        
          appropriate locus of control?                                                                                         
        · How firm is 'off ramp' if state must offer                                                                            
          TransCanada participation if it continues with                                                                        
          project within 5 years?                                                                                               
        · Should non-participants in an expansion benefit                                                                       
          from lower costs if they share no risks of higher                                                                     
Mr. Mayer elaborated  on slide 22. He asked  whether the all                                                                    
the risk  should be on  the state if TransCanada  decided to                                                                    
not make the  final investment decision. He  referred to the                                                                    
third question  and added that  the cost of debt  and equity                                                                    
would be negotiated  at the time based on  conditions at the                                                                    
time.  He believed  it was  important to  ask what  it would                                                                    
mean if  the state decided  it could finance the  project on                                                                    
its  own. Under  the scenario,  he asked  whether the  state                                                                    
could communicate  its cost of  capital and  ask TransCanada                                                                    
if  it could  compete on  the cost  of capital  and debt  or                                                                    
whether it was more complicated.                                                                                                
3:00:35 PM                                                                                                                    
Mr. Tsafos  addressed risks associated  with the  project on                                                                    
slide 23.  The largest risk  was that the project  would not                                                                    
get built. The  slide included a world  map comparing Alaska                                                                    
to other  locations looking to develop  LNG. Other locations                                                                    
included  Western  Canada,  the Lower  48,  Brazil,  eastern                                                                    
Mediterranean,   Qatar,  Russia,   Africa,  Australia,   and                                                                    
Southeast  Asia. He  referred  to the  high  expense of  the                                                                    
Alaska  LNG project.  He communicated  that it  was possible                                                                    
for the state  to compete, but it was not  a given. He moved                                                                    
to  a map  representing the  mid/late 2000s  on slide  24 to                                                                    
demonstrate  the point.  The map  showed where  analysts had                                                                    
predicted  that new  LNG would  come  from at  the time.  He                                                                    
listed  various  world  locations where  projects  had  been                                                                    
proposed that had not  happened including Alaska, Venezuela,                                                                    
Trinidad,  Norway, Russia,  Algeria, Libya,  Egypt, Nigeria,                                                                    
Equatorial  Guinea, Qatar,  Iran, Myanmar,  Brunei, Tangguh,                                                                    
and Papua  New Guinea. In the  past it was not  the cheapest                                                                    
gas or  most attractive project  that came to  fruition; the                                                                    
project  that  got built  was  the  project that  could  get                                                                    
built.  He elaborated  that many  locations were  cheap, but                                                                    
politics, technology,  or other  things got  in the  way. He                                                                    
relayed  that  just  because  the  Alaska  LNG  project  was                                                                    
expensive, did not mean it could not happen.                                                                                    
3:04:38 PM                                                                                                                    
Mr. Tsafos turned  to slide 25 related  to various financing                                                                    
options  open  to  LNG   projects.  He  discussed  specifics                                                                    
associated with balance sheet finance:                                                                                          
     · Project sponsors provide funds                                                                                           
     · Funds can combine debt and cash flow                                                                                     
     · Guaranteed by project sponsor (recourse)                                                                                 
     · Rate depends on sponsor's balance sheet                                                                                  
    · Easier if all parties have strong balance sheets                                                                          
Mr.  Tsafos discussed  project finance,  the second  form of                                                                    
financing (slide 25):                                                                                                           
     · Third parties lend to project directly, not to                                                                           
     · Sponsors put up some equity (e.g. 30 percent)                                                                            
     · Guaranteed by projected revenues (non-recourse)                                                                          
     · Rate depends on project risk                                                                                             
     · Easier to accommodate riskier options                                                                                    
Mr.  Tsafos explained  that because  money was  lent to  the                                                                    
project,  what it  earned was  important; earnings  would be                                                                    
driven  by gas  contracts.  Ultimately,  the project  itself                                                                    
mattered  when thinking  about the  rate  (e.g. whether  the                                                                    
project could  happen, were contracts worthwhile,  etc.). He                                                                    
elaborated that  project finance was  attractive, especially                                                                    
when there were riskier sponsors.  For example, if a company                                                                    
was trying  to do an LNG  project in Qatar in  the mid-1990s                                                                    
and the state of Qatar  had declared bankruptcy, the company                                                                    
may want  to think  about project finance  as an  option. He                                                                    
continued that  under project finance because  money was not                                                                    
lent  to the  sponsor,  the  debt did  not  show  up on  the                                                                    
sponsor's balance sheet. Whether or  not the State of Alaska                                                                    
wanted  to   recognize  the  debt  would   be  something  to                                                                    
determine. He  relayed that it  was useful to  remember that                                                                    
different  financing   options  existed;  the   options  had                                                                    
different  implications for  the state's  balance sheet.  He                                                                    
addressed various questions including  the right mix of debt                                                                    
and equity,  debt to  the project  or the  sponsors, whether                                                                    
equity would come from reoccurring  revenues or other money,                                                                    
and other.  He explained that  the different answers  to the                                                                    
questions would  provide very different impacts  in terms of                                                                    
the state's ability to borrow and finances to the state.                                                                        
3:08:37 PM                                                                                                                    
Mr.  Tsafos continued  to discuss  project finance  on slide                                                                    
26. He noted  that it may be tempting to  think that project                                                                    
finance sounded like a great  option because it would be off                                                                    
the balance sheet and that  debt would be guaranteed through                                                                    
project revenues,  while wondering  who would lend  money to                                                                    
such a large  project. He pointed to recent  examples of LNG                                                                    
projects and  relayed that large amounts  of capital existed                                                                    
for big LNG  projects. The Ichthys project  in Australia had                                                                    
secured  $20 billion  in  project finance  and  a Papua  New                                                                    
Guinea  project  secured  $14 billion  from  ExxonMobil  and                                                                    
others. He  detailed that frequently  the capital  came from                                                                    
official  sponsors. For  example, the  mission of  the Japan                                                                    
Bank of  International Cooperation  was to  support Japanese                                                                    
companies  investing overseas  with  the  goal of  importing                                                                    
natural  resources into  Japan; the  company was  willing to                                                                    
provide  interest  rates   significantly  below  market.  He                                                                    
concluded  that   once  the  state  began   working  through                                                                    
financial options, aspects, and  rates, it may discover that                                                                    
the underlying  burden was  much different;  it was  not yet                                                                    
known and  was something to  study over the next  few years.                                                                    
He summarized  that it was  not worth getting  sticker shock                                                                    
up front because the picture would change over time.                                                                            
Mr.  Tsafos spoke  to three  additional aspects  of risk  on                                                                    
slide 27  titled "Project Finance well  Established in LNG."                                                                    
He highlighted that price risk  associated with oil involved                                                                    
price fluctuations  in ANS West  Coast pricing;  whereas LNG                                                                    
would  most  likely  sell  at  a price  linked  to  oil.  He                                                                    
elaborated that  a formula specifying  that if the  price of                                                                    
oil was  $100, the price of  gas would be $14  per mmbtu. He                                                                    
stressed that  when a contract  was signed  the relationship                                                                    
was locked;  therefore, risk was  associated with  the price                                                                    
of  oil.  The  chart   showed  three  long-term  LNG  supply                                                                    
contracts for  Taiwan with  Indonesia, Malaysia,  and Qatar.                                                                    
He  detailed that  the price  paid by  Taiwan was  linked to                                                                    
oil; however, that  did not mean it would be  the same price                                                                    
under different contracts.  For example, at an  oil price of                                                                    
$120 the price  of LNG was $6  or $7 with Qatar,  but at the                                                                    
same  price of  oil  the  price of  LNG  was  over $20  with                                                                    
Indonesia.  The  most important  factor  was  what had  been                                                                    
negotiated in  the finalized  contract; knowing  the numbers                                                                    
before investing  in the project was  beneficial. He pointed                                                                    
to  an   original  contract  with   Malaysia  (red)   and  a                                                                    
renegotiated   contract  (blue);   the  contract   had  been                                                                    
renegotiated after Malaysia determined  it was not receiving                                                                    
a fair deal out of the  price. Due to their long-term nature                                                                    
every contract  allowed for price review  and renegotiation,                                                                    
which could  be defined in  the contract. He  discussed that                                                                    
the state may hear something  like the Lower 48 was offering                                                                    
gas to Asia that was not  linked to oil. He stressed that if                                                                    
the  state had  a  contract  that was  linked  to  oil in  a                                                                    
specific  formula, it  really did  not  matter what  another                                                                    
seller did  later because the state's  relationship would be                                                                    
locked; the price  could only be revisited  per the contract                                                                    
3:14:14 PM                                                                                                                    
Mr.  Tsafos  addressed slide  28  that  outlined options  to                                                                    
reduce exposure. The  chart on the left  titled "No S-Curve"                                                                    
showed  a scenario  where the  price  of LNG  rose with  the                                                                    
price  of  oil.  There  were ways  of  hedging  against  the                                                                    
volatility of  oil price  as shown in  the middle  and right                                                                    
charts. The middle chart titled  "S-Curve" showed a scenario                                                                    
where the price of gas did not  drop as fast as the price of                                                                    
oil; usually  this option could  be negotiated  by foregoing                                                                    
some  of  the   upside.  The  chart  on   the  right  titled                                                                    
"Floor/Ceiling"  depicted a  scenario  where  LNG would  not                                                                    
drop below  $12, but would  not increase beyond $17  to $19.                                                                    
He concluded  that there were  ways to  contractually reduce                                                                    
some of  the state's  exposure as contracts  were negotiated                                                                    
in order  to fit a  comfortable revenue profile.  He relayed                                                                    
that  several  more  expensive  projects  had  utilized  the                                                                    
floor/ceiling  method.  Project  sponsors did  not  want  to                                                                    
invest  only to  realize later  that  they were  out of  the                                                                    
money; therefore a floor/ceiling  option could make sense if                                                                    
they were willing to give up some of the upside.                                                                                
3:16:16 PM                                                                                                                    
Mr. Tsafos  addressed risk associated with  cost overruns on                                                                    
slide 29. He communicated that  cost overruns were a fact of                                                                    
life  in large-scale  projects.  The slide  included 16  LNG                                                                    
projects worldwide  and illustrated  two types of  risk that                                                                    
could occur  once investment  had been  made. Delay  was the                                                                    
first  risk shown  in red  in the  center of  the slide.  He                                                                    
detailed that  projects coming online  on time or  early did                                                                    
happen, though  not frequently.  Cost overruns  for projects                                                                    
shown on slide  29 ranged from zero to 120  percent, with an                                                                    
average of  25 percent (the  presentation used a  25 percent                                                                    
cost overrun example later on).                                                                                                 
Mr.  Tsafos  looked  at cash-in/cash-out  on  slide  30.  He                                                                    
emphasized the importance of the  slide that worked to bring                                                                    
together all components the  presentation had addressed thus                                                                    
far. The  slide depicted  four scenarios: 1)  No TransCanada                                                                    
and no debt (green); 2) No  TransCanada with a 70/30 debt to                                                                    
equity split (yellow); 3) TransCanada  with a buyback option                                                                    
and a 70/30  debt to equity split (red);  and 4) TransCanada                                                                    
with  100 percent  GTP and  pipeline ownership  and a  70/30                                                                    
debt  to  equity split  (blue).  The  slide illustrated  how                                                                    
cash-out and  cash-in changed between scenarios  in the pre-                                                                    
FEED stage (would be authorized  with legislation); the FEED                                                                    
stage (detailed  study); the  construction period;  and once                                                                    
the  project  went online  (this  section  was shown  as  an                                                                    
annual  figure).   He  relayed  that  the   state  would  be                                                                    
responsible for  $55 million to  $100 million if  it entered                                                                    
into the  pre-FEED stage. He  encouraged members  to refrain                                                                    
from getting  too caught  up in the  estimates. The  cost to                                                                    
the state  depended on  whether it  or TransCanada  paid for                                                                    
the study related  to the GTP and pipeline.  The state could                                                                    
choose to abandon the project  if the pre-FEED study was not                                                                    
promising;  the  state  would   be  responsible  for  paying                                                                    
TransCanada  what it  had fronted  plus interest.  The state                                                                    
could also  decide to sell  down some  of its equity  at any                                                                    
time during the process.                                                                                                        
3:21:55 PM                                                                                                                    
Mr. Tsafos continued  to address slide 30.  Depending on the                                                                    
state's arrangement  with TransCanada, the FEED  stage could                                                                    
cost  it between  $250 million  to $500  million. The  state                                                                    
would need to pay TransCanada  anywhere from $150 million to                                                                    
$400  million if  it decided  to disband  the agreement.  He                                                                    
added that  the state could  always adjust its equity  if it                                                                    
decided that 25  percent was too much. The  state could also                                                                    
decide to move  forward at the FEED study to  the FID stage.                                                                    
The  state could  potentially spend  somewhere between  $300                                                                    
million to  $600 million before  it decided to  move forward                                                                    
with  the  project.  He  reminded  the  committee  that  the                                                                    
figures  corresponded  to 25  percent  of  the project;  the                                                                    
partners  would   spend  75  percent.  He   pointed  to  the                                                                    
construction phase  and relayed that  the state would  be on                                                                    
the hook for  $11.8 billion to $12 billion if  it elected to                                                                    
move forward on the project  without TransCanada and with no                                                                    
debt. The figure  may reduce to approximately  $5 billion if                                                                    
the state  elected to  take on debt.  He stressed  that once                                                                    
the construction  phase had  begun it would  be too  late to                                                                    
abandon the  project due to the  large financial investment.                                                                    
Once  the project  came online  the state  may see  revenues                                                                    
between $2.9 billion to $4  billion. The chart's purpose was                                                                    
to  illustrate the  impact of  different  choices; what  the                                                                    
state was  giving up  in terms of  revenues later  on versus                                                                    
what  the  state gained  upfront  for  spending less  money.                                                                    
Choosing between  the yellow and red  option (no TransCanada                                                                    
versus with  TransCanada) may  allow the  state to  spend $1                                                                    
billion or less in construction,  but annually the state may                                                                    
earn $300 million less.                                                                                                         
3:25:25 PM                                                                                                                    
Mr. Tsafos  turned to slide  31 titled "LNG  Income Includes                                                                    
Restricted  Revenue." The  chart  on the  left included  the                                                                    
same  State of  Alaska cash  flow information  shown on  the                                                                    
right  of the  previous slide.  The middle  chart subtracted                                                                    
the PFD from the numbers  and the right chart subtracted the                                                                    
PFD and property tax for  municipalities (the slide included                                                                    
a hypothetical  assumption that 80  percent of  the property                                                                    
taxes went  to municipalities).  He detailed that  the state                                                                    
may  earn $4  billion, but  the figure  could be  reduced to                                                                    
something like $3.4 billion.                                                                                                    
Mr. Tsafos  moved to slide  32 titled "Stress  Testing SOA's                                                                    
Cash Calls and Revenues." The  slide created a "near perfect                                                                    
storm" of  three things that  could go wrong for  the state.                                                                    
First,  capital expenditures  that  were  25 percent  higher                                                                    
(the average  cost overrun shown  on slide 29).  Second, the                                                                    
potential for an LNG sales price  of $7 per mmbtu versus $15                                                                    
per mmbtu. He noted that the  prior year there was almost no                                                                    
LNG in  Asia that went  for $7;  there were a  few bilateral                                                                    
trades  trading at  $7 in  legacy agreements  from 12  or 13                                                                    
years earlier. He  added that Henry Hub gas in  the Lower 48                                                                    
at $3 would  be closer to $9  or $10 in Asia. At  a price of                                                                    
$7 most of the proposed  LNG projects would be uneconomical;                                                                    
the  price  was not  very  sustainable.  Third, the  average                                                                    
utilization  was  80 percent  rather  than  100 percent.  He                                                                    
elaborated  that average  LNG utilization  worldwide was  in                                                                    
the high 80s, which was due  to some older projects that had                                                                    
run out of gas. For example,  Kenai had been included in the                                                                    
calculation  when the  project  had been  active. The  slide                                                                    
used the  same charts  shown on  slides 30  and 31,  with an                                                                    
additional   chart  titled   "Stress  Case   Online  (2023+)                                                                    
Annually."  He explained  that  the  base case  construction                                                                    
figures  were  all 25  percent  higher  in the  stress  case                                                                    
scenario, which  meant the state may  be on the hook  for up                                                                    
to  $15  billion.  Under the  stress  case  scenario  annual                                                                    
revenues  could  be between  $480  million  to $1.6  billion                                                                    
instead  of $2.9  billion to  $4 billion.  He stressed  that                                                                    
even in the  worst case scenario presented on  slide 32, the                                                                    
state's revenue  did not  turn negative.  The beauty  of LNG                                                                    
projects was  that once a  project was built, it  produced a                                                                    
steady  stream of  cash for  a long  period of  time without                                                                    
needing significant attention.                                                                                                  
Mr.  Nikos  Tsafos  turned slide  33  titled  "Stress  Test:                                                                    
Restricted vs.  Unrestricted Revenues."  The first  of three                                                                    
charts reflected State of Alaska  total stress case revenues                                                                    
of  $500  million to  $1.6  billion.  The second  and  third                                                                    
charts  subtracted the  PFD and  property tax  and indicated                                                                    
that  revenues  would  turn negative  in  the  most  extreme                                                                    
3:31:14 PM                                                                                                                    
Mr. Tsafos  addressed slide 34.  The slide  illustrated cash                                                                    
flows to  the state and  included three stress  case factors                                                                    
of  price, capital  expenditures, and  utilization (left  to                                                                    
right respectively).  He relayed  that other  committees had                                                                    
asked which of the three  factors was the most important. He                                                                    
discussed  that hopefully  a perfect  storm would  not occur                                                                    
and  only one  of the  factors would  happen. He  reiterated                                                                    
that the  cases included no TransCanada,  TransCanada with a                                                                    
buyback option,  or TransCanada with no  buyback. The charts                                                                    
showed that price  was the most important factor  by far. He                                                                    
relayed that  capital expenditures were much  less important                                                                    
for the overall  project economics. He pointed  to the table                                                                    
showing cost  overruns (slide 29)  and addressed  why anyone                                                                    
would  build  the projects  with  all  of the  overruns.  He                                                                    
relayed  that even  with cost  overruns it  was possible  to                                                                    
recoup an  investment. He  communicated that  the importance                                                                    
of   utilization  fell   in   between   price  and   capital                                                                    
3:32:56 PM                                                                                                                    
Co-Chair  Austerman communicated  that  the current  meeting                                                                    
was the  first time the full  committee had taken a  look at                                                                    
the issue  from the  perspective presented by  enalytica. He                                                                    
anticipated hearing from enalytica again in the future.                                                                         
Representative  Costello  referred   to  the  importance  of                                                                    
price. She relayed  that the legislature had  been told that                                                                    
Exxon,  ConocoPhillips, or  BP would  help the  state market                                                                    
the  gas; however,  it was  not  addressed in  the HOA.  She                                                                    
opined  that  if   the  clause  was  not   included  in  the                                                                    
agreement,  the   state  would  be  competing   against  the                                                                    
companies to sell  gas in Asia. She remarked  that the state                                                                    
did not have experience marketing  gas to Asia. She wondered                                                                    
if the issue could be included in the HOA.                                                                                      
Mr. Tsafos replied  that it could be done.  He detailed that                                                                    
the  oil  companies  understood that  selling  the  gas  the                                                                    
largest  headache for  the state.  He surmised  that if  the                                                                    
state did  not receive  a good answer  to the  question, the                                                                    
project  would  not  move forward.  He  believed  the  state                                                                    
should keep  some of  its options  open. He  elaborated that                                                                    
the  HOA specified  that the  state may  decide to  have the                                                                    
three partners  sell gas  on its behalf,  but it  could also                                                                    
locate  other  partners  that were  willing  to  market  the                                                                    
state's LNG.  He asked  members to  think about  whether the                                                                    
headache  was  large  enough  to lock  down  at  present  or                                                                    
whether a better  deal may come along later  in the process.                                                                    
He  pointed out  that  the  state could  ask  for bids  from                                                                    
various companies  beyond the three  major partners.  It was                                                                    
possible to define  it up front, but was  also possible that                                                                    
the  state could  drive  a  harder bargain  if  it kept  the                                                                    
option open.  He thought the  state may  receive significant                                                                    
interest beyond  the three partners.  He opined that  if the                                                                    
HOA  locked in  the option  to  the three  partners, it  may                                                                    
unnecessarily  narrow   the  competition.  He   agreed  that                                                                    
competition with  the three companies  was an issue,  but it                                                                    
was not a significant as one  could think. He relayed that a                                                                    
number of  LNG projects had different  players marketing gas                                                                    
individually.  He  used the  Gorgon  project  as an  example                                                                    
where  Shell, Chevron,  and ExxonMobil  each marketed  their                                                                    
share  of the  gas; the  entities were  competing with  each                                                                    
other  and had  the theoretical  potential to  bid down  the                                                                    
price. He  reiterated that  the state  may receive  a better                                                                    
deal  by   opening  the   field  to   a  broader   range  of                                                                    
3:38:14 PM                                                                                                                    
Representative  Costello wondered  what role  treble damages                                                                    
played  and  if that  was  the  reason  the state  was  only                                                                    
considering  TransCanada.  She  elaborated  that  Black  and                                                                    
Veatch  had  deferred  the question  to  the  Department  of                                                                    
Natural  Resources;  whereas  Mr.  Mayer  had  relayed  that                                                                    
lawyers should be addressing the issue.                                                                                         
Mr.  Mayer addressed  several fundamental  questions related                                                                    
to the  MOU including  whether the  state needed  a partner,                                                                    
whether it was  best off going with  TransCanada through the                                                                    
MOU,  or  whether a  broader  and  more competitive  process                                                                    
would be preferable. He relayed  that much was not yet known                                                                    
about the  state's financial capacity  to carry  the project                                                                    
on  its   own.  Additionally,   he  believed  there   was  a                                                                    
significant amount to consider  around future expansions and                                                                    
whether a  third party  was desirable  and would  offset the                                                                    
additional  capital structure  costs.  He addressed  whether                                                                    
going with TransCanada was the  best approach to take if the                                                                    
state  determined it  needed a  partner. He  added that  the                                                                    
true  answer would  never be  known because  going down  one                                                                    
path precluded the  other. He noted that  someone could look                                                                    
at the MOU and find  many sensible terms (e.g. a competitive                                                                    
cost of capital)  and could look at terms  of allocation for                                                                    
risk and  reward and the  five-year offer to  TransCanada to                                                                    
participate   even  after   termination.   He  spoke   about                                                                    
negotiating leverage (which probably  came through AGIA) and                                                                    
what it would take to get  out of the agreement amicably. He                                                                    
surmised that  people could look  at the  issues differently                                                                    
and  draw  conclusions  about how  the  costs  and  benefits                                                                    
stacked up.  He believed a  further legal analysis  would be                                                                    
necessary to  gain a grounded and  educated understanding of                                                                    
the  costs and  benefits including  the potential  liability                                                                    
through  AGIA  (whether the  cost  was  in the  millions  or                                                                    
billions of dollars). He did  not know the liability related                                                                    
to AGIA because it would require rigorous legal analysis.                                                                       
3:41:54 PM                                                                                                                    
Representative Costello  thought it appeared that  the state                                                                    
had  an  obligation  to address  the  opportunity  costs  of                                                                    
approving  an MOU  during the  current legislative  session.                                                                    
She wondered if it would  be valuable for the legislature to                                                                    
take  the  time  to consider  different  financing  options.                                                                    
Alternatively,  she asked  if there  was no  chance to  make                                                                    
changes until  the legislature  found out  later on  that it                                                                    
would pay damages and perhaps others.                                                                                           
Mr. Mayer  replied that  if he was  a legislator  his answer                                                                    
would  depend   on  his   interpretation  of   the  off-ramp                                                                    
provisions. He referred to a  comment he had received from a                                                                    
legislator that off-ramps appeared to  always lead to an on-                                                                    
ramp.  He   pointed  to  the  state's   numerous  rights  to                                                                    
terminate the  contract, but  if it  wanted to  proceed with                                                                    
the project  or a  similar project, it  would need  to offer                                                                    
the  right to  TransCanada to  participate on  similar terms                                                                    
(with  the  exception  of  the   cost  of  debt  and  equity                                                                    
negotiated based on  conditions at the time).  He would want                                                                    
a good understanding  of the situation; if  the state wanted                                                                    
to "go  it alone" at some  point in the future  for a better                                                                    
deal  it  could communicate  its  cost  of capital  and  its                                                                    
openness  to offers  that were  competitive.  He would  feel                                                                    
more comfortable locking down  the partnership at present if                                                                    
there  was a  possibility  of exiting  the  contract in  the                                                                    
future. He added that he  would feel increased anxiety about                                                                    
committing to  the agreement at present  (before the state's                                                                    
financing  capabilities and  other items  were known)  if he                                                                    
thought there would be potential for dispute in the future.                                                                     
3:44:27 PM                                                                                                                    
Representative Wilson  asked what  the state should  do. She                                                                    
remarked  on gaining  understanding about  what the  state's                                                                    
relationship  had to  be with  TransCanada  and limits  that                                                                    
would   be  put   on  the   state.  Mr.   Mayer  asked   for                                                                    
clarification on  the question. Representative  Wilson asked                                                                    
what the state should do related to the entire project.                                                                         
Co-Chair  Austerman interjected  and  pointed  to the  noted                                                                    
broad nature of  the question and the  limited meeting time.                                                                    
He planned  to have  enalytica address the  committee again.                                                                    
Black and  Veatch would also  be available if  the committee                                                                    
wished  to  hear  from  them  again.  He  relayed  that  tax                                                                    
consultant Roger Marks would also  present to the committee.                                                                    
He noted  that the committee  did not currently have  a bill                                                                    
before  it. He  asked  members to  submit  questions to  his                                                                    
office; his office would submit  them to the consultants. He                                                                    
relayed that DNR  and DOL would also have  an opportunity to                                                                    
weigh in.                                                                                                                       
Representative   Gara   followed    up   on   Representative                                                                    
Costello's question  related to selling the  state's LNG. He                                                                    
stressed  that  the issue  was  a  big concern  because  the                                                                    
larger oil  companies were experienced at  marketing gas. He                                                                    
was not comforted to hear  that the companies knew the issue                                                                    
was a  big concern  to the  state and  that they  would deal                                                                    
with  it. He  stated that  the companies  would do  what was                                                                    
best for  them. He understood  the point that the  state may                                                                    
not want to  commit because a better option  may come along;                                                                    
however, he wondered what would  be wrong with including the                                                                    
option for the  large three to sell its  gas in legislation.                                                                    
He relayed that  the concept was not  foreign; currently the                                                                    
companies  were  selling  the  state's  oil.  He  asked  the                                                                    
consultants  if  they  could   help  with  an  amendment  to                                                                    
3:49:27 PM                                                                                                                    
Mr. Mayer replied  that the HOA contemplated  the option. He                                                                    
believed the question  related to how much  the state wanted                                                                    
to  lock in  at  present  versus later.  Part  of the  issue                                                                    
related to  how much was  known about the  project structure                                                                    
and  other  possibilities.  He  referred  to  joint  venture                                                                    
projects  worldwide  where  the joint  venture  collectively                                                                    
marketed  LNG  and  participants   each  take  the  proceeds                                                                    
respectively.   Under  the   joint  venture   structure  the                                                                    
participants  did not  compete against  one another  and the                                                                    
project  marketed the  gas. There  were other  projects that                                                                    
included a  joint venture where  LNG sales  were competitive                                                                    
between  each company  with their  own off-take  entitlement                                                                    
and obligation  to sell  their own  share. The  HOA outlined                                                                    
that  the   parties  would  negotiate  to   have  the  three                                                                    
producers  market   the  state's   gas  if   a  satisfactory                                                                    
agreement could be arranged. He  observed that the issue was                                                                    
clearly the  biggest sensitivity for the  state. He believed                                                                    
the state  should only proceed  with taking equity  and with                                                                    
gas in-kind  if it  could satisfactorily resolve  the issue.                                                                    
He reiterated  that the  HOA did not  commit the  state, but                                                                    
stipulated that  the state would satisfactorily  resolve the                                                                    
issues if  it could. He relayed  that it was the  start of a                                                                    
long negotiating process; there  were many things that could                                                                    
be worked  in and that  would be better understood  once the                                                                    
project  was  better understood.  He  noted  that the  state                                                                    
could include more restrictive  language in the legislation,                                                                    
but there were also a  range of possibilities where it would                                                                    
be in the state's best interest to remain open.                                                                                 
Mr.  Tsafos added  that it  would be  necessary to  know the                                                                    
terms  if legislation  included  an  option specifying  that                                                                    
Exxon,  BP, and  Conoco  had  to sell  the  state's gas.  He                                                                    
detailed  that   unless  the   state  determined   what  the                                                                    
companies would  charge to  sell the gas  it would  not have                                                                    
resolved  as  much  of  the  problem  as  it  may  like.  He                                                                    
addressed whether the  agreed upon deal was good  or not. He                                                                    
stated  that the  world  of marketing  LNG  was bizarre  and                                                                    
nontransparent.  He  pointed  to Australia  and  noted  that                                                                    
price  discovery basically  consisted of  gossip. He  stated                                                                    
that the  bottom line was that  what the market was  and the                                                                    
price  that was  accessible  became  extremely obvious  when                                                                    
marketing gas.  He added that  it was not very  difficult to                                                                    
assess whether  a contract  was in  line with  market norms;                                                                    
the gas price  transaction world was small.  However, it was                                                                    
not possible  to predict whether  in hindsight a  deal would                                                                    
turn out to be bad; the  involvement of oil companies was no                                                                    
guarantee of a good deal.  He relayed that oil companies had                                                                    
signed long-term  LNG deals that they  regretted at present.                                                                    
He communicated that  as the state went  through the process                                                                    
it would  realize that  judging whether it  had a  good deal                                                                    
may not be as much of a concern.                                                                                                
3:54:20 PM                                                                                                                    
Mr. Mayer added  that as the state went  through the process                                                                    
it would gain a  better understanding about what constituted                                                                    
a  reasonable  commercial  relationship with  companies.  He                                                                    
relayed that  it was  possible to  firm up  the sale  of the                                                                    
state's share  of gas in  current legislation, but  it would                                                                    
be  done with  much less  knowledge about  the project,  the                                                                    
market, and  a whole range  of conditions, which may  not be                                                                    
in the state's interest.                                                                                                        
Co-Chair Austerman wanted to come back to the discussion.                                                                       
Vice-Chair  Neuman referred  to earlier  testimony that  the                                                                    
best way to reduce the state's  risk prior to FID related to                                                                    
the ability to change  the financial agreements. He wondered                                                                    
how  the state  would implement  the advice  in the  current                                                                    
gasline legislation (SB 138).                                                                                                   
Mr. Mayer answered that  the legislation under consideration                                                                    
by  the legislature  would establish  a  tax structure  that                                                                    
would  enable  a discussion  of  in-kind  versus equity  and                                                                    
would  authorize a  negotiation  process  with producers  to                                                                    
establish  the  details.  The  legislation  also  created  a                                                                    
process  where legislators  would  be  briefed in  executive                                                                    
sessions on  negotiations as they  occurred (there  would be                                                                    
an  extended   period  where   the  administration   was  in                                                                    
negotiations  with  producers  and  TransCanada).  Once  the                                                                    
negotiation process had concluded  (in over two years' time)                                                                    
the terms  would come before  the legislature  for approval.                                                                    
He  surmised  that once  the  terms  had  come back  to  the                                                                    
legislature for  approval there  would be  relatively little                                                                    
ability to influence  the precise details. He  noted that it                                                                    
was  crucial what  happened in  the negotiation  process and                                                                    
how  the executive  session briefings  worked, how  frequent                                                                    
meetings  would occur,  how  much  detail legislators  would                                                                    
have access to, and how much  ability there would be to make                                                                    
it clear if the state did not like certain aspects.                                                                             
Vice-Chair  Neuman wondered  if the  consultants had  seen a                                                                    
financial agreement  where the  state or sovereign  owner of                                                                    
gas was paid in royalty and  in production tax in an in-kind                                                                    
3:59:15 PM                                                                                                                    
Mr. Tsafos  replied that in  the majority of  countries with                                                                    
LNG,  the sovereign  was a  participant with  access to  and                                                                    
marketing of the  gas. There were a few places  in the world                                                                    
where  the  sovereign acted  purely  as  a tax  and  royalty                                                                    
authority  (e.g. the  Lower 48  and Australia);  however, in                                                                    
the  vast  majority  of  countries  with  LNG  projects  the                                                                    
sovereign participated as an investor  and took ownership of                                                                    
the gas. In some countries  the sovereign was very active as                                                                    
an investor  and marketed  the gas  (e.g. Qatar  owned ships                                                                    
and  regasification terminals  and was  active in  marketing                                                                    
the  gas).  Other  sovereigns  were  more  passive  and  let                                                                    
international oil companies market the gas on their behalf.                                                                     
Mr. Mayer added that there  was one aspect that was unusual,                                                                    
which related  to the specifics  of turning royalty  and tax                                                                    
into a gas  share. He characterized it as  a hybrid approach                                                                    
compared  to the  more traditional  North  American tax  and                                                                    
royalty regime. A structure where  the state was an investor                                                                    
and participant was not a  typical arrangement; however, its                                                                    
goal of state participation in the project was common.                                                                          
Vice-Chair Neuman surmised that the answer was no.                                                                              
Mr. Tsafos  replied that  typically the  state would  own 25                                                                    
percent of the upstream rather  than turning royalty and tax                                                                    
into a 25 percent share.                                                                                                        
Co-Chair Austerman  thanked the consultants for  their time.                                                                    
He addressed the paradigm shift  in the state from pocketing                                                                    
tax to  moving to  a profit  base by  converting tax  into a                                                                    
sellable  product.  He believed  the  public  would need  to                                                                    
weigh in  with its  preference at some  point over  the next                                                                    
year and  a half.  He reiterated  his request  for committee                                                                    
members to provide questions to his office.                                                                                     
4:02:33 PM                                                                                                                    
4:02:33 PM                                                                                                                    
The meeting was adjourned at 4:02 p.m.                                                                                          

Document Name Date/Time Subjects
HFIN, enalytica, AKLNG 3-28-14.pdf HFIN 3/28/2014 1:30:00 PM