Legislature(2013 - 2014)HOUSE FINANCE 519

04/09/2014 01:30 PM FINANCE

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01:35:19 PM Start
01:35:36 PM Panel Discussion: Alaska Oil and Natural Gas Producers-transcanada and Alaska Gasline Development Corporation (agdc)
03:12:29 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Alaska Oil & Natural Gas Producers - TransCanada TELECONFERENCED
& AGDC - Panel Discussion
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                       April 9, 2014                                                                                            
                         1:35 p.m.                                                                                              
1:35:19 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Stoltze called the House Finance Committee meeting                                                                     
to order at 1:35 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                                                                                                                  
Bill McMahon, Senior Commercial Adviser, Alaska Gas                                                                             
Development, ExxonMobil Development Company; Pat Flood,                                                                         
Supervisor, Alaska North Slope Gas, ConocoPhillips Alaska.                                                                      
PRESENT VIA TELECONFERENCE                                                                                                    
David   Van  Tuyl,   Regional  Manager,   British  Petroleum                                                                    
Exploration  Alaska;  Tony  Palmer,  Vice  President,  Major                                                                    
Projects Development, TransCanada  Pipelines Limited; Daniel                                                                    
Fauske, President, Alaska Gasline Development Corporation.                                                                      
^PANEL  DISCUSSION: ALASKA  OIL AND  NATURAL GAS  PRODUCERS-                                                                  
TRANSCANADA  AND  ALASKA   GASLINE  DEVELOPMENT  CORPORATION                                                                  
1:35:36 PM                                                                                                                    
BILL   MCMAHON,  SENIOR   COMMERCIAL  ADVISER,   ALASKA  GAS                                                                    
DEVELOPMENT, EXXONMOBIL DEVELOPMENT  COMPANY, stated support                                                                    
for SB  138 [Gas Pipeline; AGDC;  Oil & Gas Prod.  Tax]. The                                                                    
legislation enabled  the Alaska LNG (liquefied  natural gas)                                                                    
project  to move  forward.  He believed  that  the bill  was                                                                    
consistent with the Heads of  Agreement (HOA) (copy on file)                                                                    
and with passage; Exxon would  enter into the pre-FEED (pre-                                                                    
front-end engineering  and design work) stage.  He explained                                                                    
that  during Pre-Feed  the participants  plan to  pursue the                                                                    
"ARC" of  the project.  The letter  "A" stood  for alignment                                                                    
among  the  participants.  The strongest  ventures  resolved                                                                    
challenges  when  all  of   the  participants  were  working                                                                    
together. He  added that state  participation was  "a strong                                                                    
signal" to  the LNG  (Liquefied Natural  Gas) market  of the                                                                    
host government  support. Risk reduction  was the R  in ARC.                                                                    
He noted  various risk factors associated  with the project:                                                                    
regulatory,  permitting, schedules,  and sales.  Reliability                                                                    
was essential  if energy  from Alaska was  to be  trusted by                                                                    
the market.  He stated that  "C" stood for cost  of service.                                                                    
Liquefied Natural  Gas was  a commodity and  cost was  a key                                                                    
factor.   The   participants   would   "relentlessly"   find                                                                    
reductions in the cost of  service to keep prices low enough                                                                    
to remain  competitive in world  markets. The  pre-FEED work                                                                    
was  "essential"  to   support  the  participants  marketing                                                                    
efforts to test the market for Alaska LNG.                                                                                      
1:40:26 PM                                                                                                                    
DAVID   VAN  TUYL,   REGIONAL  MANAGER,   BRITISH  PETROLEUM                                                                    
EXPLORATION ALASKA  (via teleconference), supported  the HOA                                                                    
and  SB  138.  He  related   that  he  participated  in  the                                                                    
negotiation of  the HOA and  was a member of  the management                                                                    
committee  of  the Alaska  LNG  project.  He emphasized  the                                                                    
importance of the  HOA and explained that it  was an aligned                                                                    
way forward to  successfully bring Alaska LNG  to market. He                                                                    
stated that the  signed HOA represented a  commitment by the                                                                    
signatories to  work together  to address  difficult issues.                                                                    
The HOA  sent a message to  the rest of the  world about the                                                                    
intention to  successfully advance  the Alaska  LNG project.                                                                    
He believed that the HOA  was critical to the advancement of                                                                    
the project  and that HB 138  was "faithful to the  HOA." He                                                                    
elaborated that  British Petroleum  (BP) understood  the HOA                                                                    
and SB  138 followed three  essential elements known  as the                                                                    
"three  "P's".   The  first  "P"  stood   for  participation                                                                    
demonstrated  by the  State's  participation, which  enabled                                                                    
"unprecedented  commercial alignment."  The bill  authorized                                                                    
the  state to  negotiate  contacts. The  second "P"  denoted                                                                    
percentage.  The bill  established  a percentage  of tax  as                                                                    
gas,  and when  added to  the  state's royalty  in kind  the                                                                    
state's share totaled 25 percent;  the high end of the range                                                                    
specified by  the HOA. The  third "P" stood for  process. He                                                                    
reported  that  the  legislation  delineated  a  negotiation                                                                    
process  and provided  transparency. British  Petroleum also                                                                    
supported  the provision  introduced  by the  administration                                                                    
that  ensured municipalities  participation in  the process.                                                                    
He concluded that  BP looked forward to  working together to                                                                    
fulfill the shared opportunity the legislation provided.                                                                        
1:45:00 PM                                                                                                                    
PAT   FLOOD,    SUPERVISOR,   ALASKA   NORTH    SLOPE   GAS,                                                                    
CONOCOPHILLIPS related  that he  worked in  the oil  and gas                                                                    
industry for  30 years  in Alaska and  was dedicated  to the                                                                    
safe, economic development  of the oil and  gas industry. He                                                                    
stated  that  ConocoPhillips  agreed with  the  main  points                                                                    
discussed by  Mr. Van Tuyl  and wanted to advance  a project                                                                    
consistent with the HOA.  ConocoPhillips understood that the                                                                    
state  needed   to  consider  "significant   policy  issues"                                                                    
regarding the state's role in  the LNG project as delineated                                                                    
by  the HOA.  He relayed  the corporation's  support of  the                                                                    
Senate  version of  SB 138  and believed  it was  consistent                                                                    
with the HOA.                                                                                                                   
1:46:41 PM                                                                                                                    
TONY  PALMER, VICE  PRESIDENT,  MAJOR PROJECTS  DEVELOPMENT,                                                                    
TRANSCANADA PIPELINES LIMITED  (via teleconference), briefly                                                                    
testified in support of SB  138, the HOA, and the Memorandum                                                                    
of Understanding (MOU)(copy on file).                                                                                           
1:47:12 PM                                                                                                                    
DANIEL   FAUSKE,  PRESIDENT,   ALASKA  GASLINE   DEVELOPMENT                                                                    
CORPORATION  (via teleconference),  testified in  support of                                                                    
the HOA  and SB 138. He  voiced that he participated  in the                                                                    
HOA  negotiation  process  with   the  major  producers  and                                                                    
TransCanada and believed it positioned  the state to advance                                                                    
a  large  gasline project  forward.  He  qualified that  the                                                                    
Alaska  Gasline  Development   Corporation  (AGDC)  remained                                                                    
committed  to its  work  under HB  4.  [HB 4-ALASKA  GASLINE                                                                    
DEVELOPMENT CORP;  RCA Adopted in 2013.]  He felt privileged                                                                    
to  be  involved in  a  process  verging  on a  major  [LNG]                                                                    
project for Alaska. He reported  AGDC's participation in the                                                                    
SB 138 process in the House Resources Committee.                                                                                
Co-Chair  Stoltze  asked if  the  AGDC  board had  a  formal                                                                    
position in support of the legislation.                                                                                         
Mr.  Fauske replied  that the  board was  supportive of  the                                                                    
decision but did not engage  in a formal process of support.                                                                    
He reported that  he briefed the board on  the amendments to                                                                    
SB 138 in  the House Resources Committee and  that the board                                                                    
was in "absolute support."                                                                                                      
Co-Chair  Stoltze reiterated  the question  regarding formal                                                                    
board support of SB 138.                                                                                                        
Mr.  Fauske  replied that  the  board  did not  take  formal                                                                    
voting  action.  He  noted  that the  AGDC  board  took  one                                                                    
informal  vote regarding  the creation  of a  subsidiary and                                                                    
understood its role in the project.                                                                                             
Co-Chair Stoltze appreciated the clarification.                                                                                 
Representative Holmes asked a  project finance question. She                                                                    
offered  that  the  state needed  to  determine  whether  it                                                                    
favored its  role under the  HOA and  MOU and how  the state                                                                    
would  finance   its  part  of  the   gas  treatment  plant,                                                                    
pipeline, and  LNG facility.  She described  another project                                                                    
model  where large,  expensive projects  were financed  by a                                                                    
"project finance  model." The  participants created  a joint                                                                    
venture to  secure the  financing and at  least part  of the                                                                    
debt was  "secured by  the project  itself." She  added that                                                                    
the project  finance model typically had  fewer participants                                                                    
than the  Alaska LNG  project. She  defined the  Alaskan LNG                                                                    
project as a  "project within a project" and  a "pipe within                                                                    
a pipe"  for the individual entities  involved. She wondered                                                                    
whether the financing model she  described would lend itself                                                                    
to the Alaskan  LNG project when it came  time for financing                                                                    
the project considering the number  of entities involved and                                                                    
its individual role in the project.                                                                                             
Mr. Van Tuyl  agreed that consideration of  financing a mega                                                                    
project  of its  kind  was  enormous and  would  want to  be                                                                    
understood in  the early stages  of the project.  He thought                                                                    
that  the  first  step  was   developing  a  financing  plan                                                                    
simultaneously during  the pre-FEED  stage suitable  for all                                                                    
of the  entities. As  the project  progressed into  the FEED                                                                    
stage,  the  potential   investors  and  specific  financial                                                                    
arrangements   could  be   worked  out   before  the   final                                                                    
investment decision.                                                                                                            
1:55:37 PM                                                                                                                    
Mr. Palmer interjected that the  MOU contained terms offered                                                                    
to the state  for the financing of  TransCanada's portion of                                                                    
the project.                                                                                                                    
Representative    Holmes    related    concerns    regarding                                                                    
confidentiality  agreements  in  the  early  stages  of  the                                                                    
project  impeding  the  state's  financial  decision  making                                                                    
ability.  She commented  that the  state might  not want  to                                                                    
finance the TransCanada portion  on its own. Notwithstanding                                                                    
the  TransCanada  portion,  she  understood  that  just  the                                                                    
liquefaction plant  was a massive endeavor  and wondered how                                                                    
the state will  finance its portion. She  mentioned that the                                                                    
different partners  might not share  all of  the information                                                                    
with the state,  obscuring the big picture  and wondered how                                                                    
that will affect the financing decisions.                                                                                       
Mr.   McMahon   agreed    that   confidentiality   was   the                                                                    
administrations  main concern  during  the  HOA process.  He                                                                    
shared that the remedy  granted the administration access to                                                                    
confidential  information  when   acting  in  a  proprietary                                                                    
capacity. The  state will have  full access  to confidential                                                                    
information when  acting in a  proprietary capacity,  as the                                                                    
"owner of gas"  to make financial decisions  in the pre-FEED                                                                    
Mr. Flood  concurred with the  previous comments.  He stated                                                                    
that the pre-FEED process was  a critical time for the state                                                                    
to access information to  make important financial decisions                                                                    
and agreed the information should be available.                                                                                 
Representative  Guttenberg  sought clarification  about  the                                                                    
state as  the owner of  gas. He wondered which  agency would                                                                    
have access to the information.                                                                                                 
Mr.  McMahon   replied  that  AGDC  and   TransCanada  would                                                                    
routinely  be privy  to the  information. The  focus of  the                                                                    
confidentiality  discussions  centered around  granting  the                                                                    
Department  of  Revenue  (DOR)  and  Department  of  Natural                                                                    
Resources (DNR) access.                                                                                                         
Representative  Gara  asked  Mr. Palmer  about  the  balance                                                                    
between the  risk and  benefit to  the state.  He maintained                                                                    
that in lieu of taxes  and royalties the state would receive                                                                    
gas "in  kind" that must be  sold. The state would  ship gas                                                                    
through  the portion  of the  pipeline it  owns (Zero  to 11                                                                    
percent).  TransCanada would  own 14  to 25  percent of  the                                                                    
pipeline. He asked whether the information was correct.                                                                         
Mr. Palmer answered in the affirmative.                                                                                         
Representative Gara  asked whether  the state  owed payment,                                                                    
to TransCanada  for capacity and  shipping even  without the                                                                    
gas  to  ship.  He  thought  that  the  process  was  termed                                                                    
"shipping capacity" and asked for clarification.                                                                                
Mr.  Palmer replied  in the  affirmative. He  explained that                                                                    
the  payment was  termed "demand  charges" and  TransCananda                                                                    
would  be   obligated  to  provide  daily   access  for  the                                                                    
capacity. The  demand charges were  not based on  the amount                                                                    
of  gas  flowing  through  the pipeline  but  based  on  the                                                                    
contract tariff  terms. The rationale was  based on assuring                                                                    
that  the pipeline  would collect  revenue in  light of  the                                                                    
"attractive commercial terms" the state received.                                                                               
Representative Gara  assumed that  the demand  charges would                                                                    
be proportionate to the 25  percent ownership of the gas. He                                                                    
questioned what  the daily  demand charge  was if  the state                                                                    
was not able to ship gas in a particular day.                                                                                   
Mr.   Palmer  replied   that  the   calculations  were   not                                                                    
completed.  He  concurred  that 25  percent  of  the  demand                                                                    
charges would be payable each  day not related to the actual                                                                    
gas in the pipeline.                                                                                                            
Representative Gara  noted the difficulty in  accessing risk                                                                    
without  the figures.  He asked  whether  the charges  could                                                                    
amount to millions of dollars per day.                                                                                          
2:04:41 PM                                                                                                                    
Mr.  Palmer  provided  a  projected   number  based  on  the                                                                    
estimated cost  of $45 billion  for the project  in addition                                                                    
to  another   approximately  $22.5   billion  for   the  gas                                                                    
treatment plant  and the pipeline. The  annual demand charge                                                                    
was  approximately  in  the "low  billions  of  dollars  per                                                                    
Representative  Gara  stated  that  Alaska  was  not  a  gas                                                                    
producer and  was reliant  on other  producers but  would be                                                                    
responsible for  shipping cost whether gas  was available or                                                                    
not.  He wondered  what assurances  the state  had that  its                                                                    
portion of  the gas would  be shipping at capacity  to avoid                                                                    
demand charges.                                                                                                                 
Mr. Flood replied  that the issue was addressed  in the HOA.                                                                    
He  referred to  section 4,  and explained  that during  the                                                                    
pre-FEED  stage the  parties  would  define "gas  off-taking                                                                    
balancing agreements in regards  to their rights to capacity                                                                    
in the  Alaska LNG  project." The  issue was  recognized and                                                                    
encountered  by  each  industry  member.  The  issue  gained                                                                    
mutual   recognition   and   discussion   during   the   HOA                                                                    
negotiations. The  consortium would collaborate to  craft an                                                                    
Representative Gara  pointed out that historically  with the                                                                    
established  tax and  royalty system,  Alaska never  carried                                                                    
the risk  of an  empty pipeline. Without  enough gas  in the                                                                    
pipeline the  state bears the  entire risk with  payments to                                                                    
TransCanada. The producers were in  control of the volume of                                                                    
flow in  the pipeline. He  pondered whether it was  fair for                                                                    
Alaska to  bear the entire  risk of royalty and  tax in-kind                                                                    
and  wondered why  the producers  did not  share the  demand                                                                    
charges if the  state's capacity was not met.  He viewed the                                                                    
arrangement as an additional risk for the state.                                                                                
Mr.  McMahon   reiterated  that  the  assurance   issue  was                                                                    
addressed   by    the   administration   during    the   HOA                                                                    
negotiations.  Section 4.6  of the  HOA addressed  the issue                                                                    
through gas off-take agreements  defined during the pre-FEED                                                                    
stage. He  added that consideration of  other mechanisms was                                                                    
not discussed.                                                                                                                  
Co-Chair  Stoltze asked  how much  TransCanada detracted  or                                                                    
added to the arrangement.                                                                                                       
Mr.  Van   Tuyl  replied  that  TransCanada   added  certain                                                                    
expertise  in  the  operation  of  pipelines  and  technical                                                                    
capabilities in  the Arctic. Each  participant used  a model                                                                    
that  would match  its equity  ownership  with its  resource                                                                    
ownership, made  possible by its global  project branch. The                                                                    
state  did  not  possess   the  industrial  organization  or                                                                    
capability  to maintain  its interest  in  the project.  The                                                                    
state's  choices were  to passively  rely on  third parties,                                                                    
hire, or  contract for the  capability. He relayed  that the                                                                    
state  chose  to  contract   with  TransCanada  for  project                                                                    
capability and executed the MOU,  strictly between the state                                                                    
and the  TransCanada. The state  had to decide the  value of                                                                    
the terms of service provided in the MOU.                                                                                       
2:13:39 PM                                                                                                                    
Mr. Flood  believed that state participation  in the project                                                                    
was vital  and how  the state chose  to participate  was the                                                                    
state's  decision.  ConocoPhillips  recognized  the  state's                                                                    
choice  in how  to  participate and  executed  the HOA  with                                                                    
TransCanada and AGDC  as parties to the state's  role in the                                                                    
Co-Chair  Stoltze  deemed  that  since  the  state  involved                                                                    
TransCanada's   participation  the   financial  terms   were                                                                    
matters of the state.                                                                                                           
Mr.   Flood  concurred   and   added   that  the   financial                                                                    
obligations   were   negotiated   between  the   state   and                                                                    
TransCanada and did not involve the producers.                                                                                  
Mr. Palmer believed that  TransCanada brought tangible value                                                                    
to  the state.  He  specified  that TransCanada's  expertise                                                                    
particularly in  Arctic conditions  was well-known  and will                                                                    
lead a team  of players from the consortium  in the pre-FEED                                                                    
stage.  He   assured  the   committee  that   the  companies                                                                    
experience was  both technical  and commercial  and utilized                                                                    
both areas to negotiate the  arrangements in the HOA and MOU                                                                    
including  the  expansion  provisions. He  opined  that  the                                                                    
expansion provisions were hugely  valuable to the state. The                                                                    
expansion provisions allowed future  potential gas not owned                                                                    
by the  three original producer's  access to the  system. He                                                                    
added   that   TransCanada   offered   the   state   "highly                                                                    
competitive commercial terms."                                                                                                  
Co-Chair  Austerman commented  that  the  LNG project  would                                                                    
heavily  impact the  state's  infrastructure.  He noted  the                                                                    
states investment costs and risks  in the project.  He asked                                                                    
the  producers  whether  the  project  would  share  in  the                                                                    
maintenance  costs  and  upgrades of  the  state's  existing                                                                    
basic infrastructure.                                                                                                           
Mr.  McMahon replied  that  the  upgrades to  infrastructure                                                                    
would  be  determined  during   the  pre-feed  process.  The                                                                    
infrastructure  evaluation   process  would   determine  the                                                                    
funding  process  either  by  state  appropriation,  federal                                                                    
government,  or project  contribution.  He felt  it was  too                                                                    
early  to  define  the specifics  until  the  infrastructure                                                                    
needs are understood.                                                                                                           
Co-Chair Austerman wanted assurance  that the producers were                                                                    
not  excluding  project  contribution  for  maintaining  the                                                                    
state's infrastructure.                                                                                                         
Mr.  McMahon  reiterated  that the  infrastructure  upgrades                                                                    
would be discussed  in the future when  they were understood                                                                    
in order to find the "broadest" solutions possible.                                                                             
Mr.    Palmer   responded    that   during    pre-FEED   the                                                                    
infrastructure would  be carefully evaluated by  all members                                                                    
of the consortium and the state.                                                                                                
Representative Costello  queried Mr. Palmer about  the five-                                                                    
year right  to participate in  a similar project.  She asked                                                                    
whether  the right  took  effect before  or  after the  firm                                                                    
transportation agreement was voted on by the legislature.                                                                       
Mr.  Palmer replied  that  the five  year  right would  take                                                                    
effect  only after  the  firm  transportation agreement  was                                                                    
voted on and implemented.                                                                                                       
Representative  Costello voiced  that TransCanada  was hyped                                                                    
as  a  valuable contributor  on  behalf  of the  state.  She                                                                    
wondered  what  type  of work  TransCanada  accomplished  to                                                                    
2:20:55 PM                                                                                                                    
Mr.  Palmer stated  that  TransCanada  brought expertise  in                                                                    
owning and  operating regulated  pipeline in  North America.                                                                    
The  company brought  expertise in  permitting the  project.                                                                    
The  company moved  large volumes  of gas  through pipelines                                                                    
every day. TransCanada built  pipelines in Arctic conditions                                                                    
and  mountainous  terrain  in Northern  Alberta,  the  Andes                                                                    
Mountains,  and  currently  constructed pipeline  in  Mexico                                                                    
with  terrain similar  to  the Brooks  Range.  He noted  the                                                                    
company's commercial  and regulatory expertise.  The company                                                                    
contributed   significant  work   on   the  Alaska   Gasline                                                                    
Inducement Act  (AGIA) which contributed  to the  work going                                                                    
forward  on   the  Alaska  LNG  project.   TransCanada  also                                                                    
contributed to all of the  commercial work regarding the MOU                                                                    
and  HOA. Finally,  TransCanada's  was able  to finance  its                                                                    
portion of the project.                                                                                                         
Representative Wilson asked why  the state needed to partner                                                                    
with TransCanada and why it was  a "good deal for the state"                                                                    
to participate.                                                                                                                 
Mr.  Van Tuyl  replied that  state participation  was a  key                                                                    
element   of  the   agreement.  The   state's  participation                                                                    
"brought an alignment that would  not otherwise be possible"                                                                    
when the  resource owner was  also an  infrastructure owner.                                                                    
He  delineated that  the state  participation as  a resource                                                                    
and  infrastructure owner  would  enable the  state to  view                                                                    
issues  similarly from  a  commercial  aspect and  similarly                                                                    
problem solve.  He believed  that participation  reduced the                                                                    
projects risk.  The state's participation ensured  that each                                                                    
party  participated in  the infrastructure  at the  level of                                                                    
its  resource ownership,  which benefited  producers by  not                                                                    
having  to   initially  pay  the  state's   portion  of  the                                                                    
Mr. McMahon concurred with the  comments of Mr. Van Tuyl. He                                                                    
added that Alaska would participate  in the early commercial                                                                    
and technical  decisions of the  project that  were critical                                                                    
to   the   projects   development   further   along.   Early                                                                    
involvement in the decision making  process ensured that the                                                                    
project met the state's needs.                                                                                                  
Representative  Wilson   did  not  understand  why   it  was                                                                    
necessary  for the  state to  be an  investor when  with the                                                                    
inclusion  of TransCanada  the  consortium  could have  four                                                                    
parties  with equal  standing and  the  state would  collect                                                                    
taxes similar to oil taxes.                                                                                                     
Mr.  Flood replied  that the  state's participation  and gas                                                                    
share was a key element  in the project. TransCanada did not                                                                    
have a  gas share  or the ability  to have  one. TransCanada                                                                    
can only participate in partnership with the state.                                                                             
2:29:15 PM                                                                                                                    
Co-Chair  Austerman observed  that the  state, as  a partner                                                                    
would have a  more favorably aligned viewpoint  on costs and                                                                    
taxes and that would benefit all partners.                                                                                      
Representative Guttenberg referred  to Representative Gara's                                                                    
question related  to unused capacity  in the line.  He noted                                                                    
that the state was not a  producer and would not control the                                                                    
volume in the  line. He wondered how  a built-in uncertainty                                                                    
in  production would  affect the  state's ability  to market                                                                    
the  gas with.  He asked  what  kind of  discount the  state                                                                    
would receive.                                                                                                                  
Mr.  Flood  answered  that ConocoPhillips  had  operated  in                                                                    
Alaska since 1999 and it had never missed a shipment.                                                                           
Representative  Guttenberg clarified  that  he wondered  how                                                                    
the state could market the  gas without a consistently known                                                                    
volume  to  offer. A  producer  could  guarantee a  buyer  a                                                                    
consistent volume, but the state cannot.                                                                                        
Mr.  McMahon  replied  that   ExxonMobil  shared  a  similar                                                                    
situation;  "lifting" gas  from  a field  not  owned by  the                                                                    
company and  relied on the  contracts with the  operator for                                                                    
the capacity. He reported that  the state would have similar                                                                    
contracts with another partner.                                                                                                 
Mr.  Van  Tuyl referenced  Section  8.3.3  of the  HOA  that                                                                    
provided the  state the  option to approach  any one  of the                                                                    
producers to  rely on their marketing  expertise rather than                                                                    
the  state taking  an  independent  approach. He  elaborated                                                                    
that  Representative Guttenberg's  point had  been discussed                                                                    
during the  HOA negotiations  regarding the state's  lack of                                                                    
marketing   experience.  As   competitors,  the   producer's                                                                    
conversations regarding  marketing LNG  gas was  limited due                                                                    
to antitrust laws. Section 8.3.3  was carefully crafted with                                                                    
regard to antitrust laws. The  state may only engage with an                                                                    
individual  producer.   The  section   was  added   to  help                                                                    
alleviate the state's "perceived" marketing risk.                                                                               
Representative  Guttenberg  remarked  that  the  maintenance                                                                    
bill of  the Dalton  Highway was  $900 million.  He wondered                                                                    
how  the  maintenance  expenses of  the  pipeline  would  be                                                                    
repaid  to  the  state.  He   asked  whether  the  producers                                                                    
expected the state to pay for the maintenance costs.                                                                            
Mr. McMahon replied  that the partners would  conduct a full                                                                    
evaluation of the infrastructure  needs for execution of the                                                                    
project. Subsequently,  the funding for the  maintenance and                                                                    
upgrades would  be determined  during the  agreement process                                                                    
with  the  administration.  He hoped  that  federal  funding                                                                    
would be considered.                                                                                                            
Representative   Guttenberg   relayed  that   according   to                                                                    
consultants,  the state's  partnership was  a reflection  of                                                                    
the producer's  uncertainty about  the project. He  asked at                                                                    
what  point a  producer could  decide to  build the  project                                                                    
Mr. Van Tuyl replied that  the HOA envisioned an aligned way                                                                    
forward  of advancing  the  project  together. He  expounded                                                                    
that  mega-projects  were  advanced through  a  "stage  gate                                                                    
decision making  process" where a  scope of work  was agreed                                                                    
upon and completed. The result  of the work would provide an                                                                    
updated view of the  project. Each participant independently                                                                    
evaluated  the  results and  decided  whether  it wanted  to                                                                    
commit to the next phase.  An incentive existed to solve one                                                                    
partner's problems together in  order to advance the project                                                                    
to the  next phase. Each step  in the LNG project  from Pre-                                                                    
FEED  to the  final investment  decision (FID)  was a  stage                                                                    
gate  or  "on-ramp"  opportunity to  sanction  the  projects                                                                    
advancement together.                                                                                                           
2:39:35 PM                                                                                                                    
Mr. Palmer  interjected that Alaska was  currently assessing                                                                    
whether  to advance  to the  pre-feed stage  along with  the                                                                    
timeframe  for completion.  He related  that if  all parties                                                                    
were ready  to advance  after pre-FEED  the state  will have                                                                    
another  opportunity to  review  the  project including  the                                                                    
firm transportation  services agreement. He referred  to the                                                                    
demand charges  and offered that  they were  only applicable                                                                    
after the project was in service.                                                                                               
Representative   Edgmon   mentioned  the   state's   several                                                                    
previous attempts  at developing  Alaska's natural  gas over                                                                    
the  years. He  wondered  how long  the current  agreement's                                                                    
process was in development.                                                                                                     
Mr. Flood  remarked that he  was a relative newcomer  to the                                                                    
process beginning  in 2008. He  stated that the  gas project                                                                    
in Alaska  was evolving over  many years. He  mentioned that                                                                    
different approaches  were tried  and the  HOA was  built on                                                                    
many  years of  prior work.  The HOA  came about  after many                                                                    
months  of engagement  and  collaboration  initiated by  the                                                                    
governor and culminating with the HOA.                                                                                          
Mr. McMahon recounted some milestone  moments leading to the                                                                    
current collaboration.  He reported that in  January 2012, a                                                                    
"milestone" meeting  with the  three CEO's  (Chief Executive                                                                    
Officers)  of  the  three major  producers  in  Alaska  took                                                                    
place. The  settlement of Pt.  Thompson litigation  on March                                                                    
29,  2012  was  another  key   milestone.  At  the  time  an                                                                    
agreement  was  signed  by Exxon,  BP,  ConocoPhillips,  and                                                                    
TransCanada to  explore an Alaskan LNG  project. In February                                                                    
2013 the entities selected a  concept for an LNG project. He                                                                    
indicated that  it all  began in 2011,  with changes  to the                                                                    
market in  the lower 48 states  that made a pipeline  to the                                                                    
lower 48 uneconomical.                                                                                                          
Representative  Edgmon pointed  to the  challenging economic                                                                    
nature  of the  project.  He asked  whether  the Alaska  LNG                                                                    
project  was the  largest private  sector  project in  North                                                                    
Mr. McMahon replied in the affirmative.                                                                                         
Representative Edgmon  asked whether the  parties considered                                                                    
options without the state in the past.                                                                                          
Mr.  Van  Tuyl  interjected  that  BP  believed  that  state                                                                    
participation  was "absolutely  critical"  to the  project's                                                                    
success.  He   emphasized  that  besides   alignment,  state                                                                    
participation  sent  a  "critically  important  message"  to                                                                    
potential buyers.                                                                                                               
Representative Edgmon  inquired how a  repeal SB 21  (SB 21-                                                                    
OIL AND GAS PRODUCTION TAX  Adopted in 2013) would affect SB                                                                    
138, if adopted.                                                                                                                
Mr.  Flood  replied  that  the  reform  of  the  oil  taxes,                                                                    
building a more competitive oil  and gas environment, was an                                                                    
important consideration  as the  LNG project  moved forward.                                                                    
The repeal of SB 21 would be unfortunate for the project.                                                                       
2:48:00 PM                                                                                                                    
Representative  Munoz   asked  about   the  values   of  the                                                                    
TransCanada partnership including  the commercial work under                                                                    
AGIA and the financial value of the work.                                                                                       
Mr. Palmer  replied that  a significant  amount of  work was                                                                    
completed  under   AGIA.  Some   of  the   right-of-way  and                                                                    
engineering  work   relating  to   the  pipeline   north  of                                                                    
Livengood  was transferable.  The work  relating to  the gas                                                                    
treatment plant  was "significantly transferrable."  Some of                                                                    
the work  relating to the  entire pipeline such  as pipeline                                                                    
integrity was  applicable. He stated  that it  was difficult                                                                    
to determine  the exact  value. He suggested  that 20  to 40                                                                    
percent of  the work  conducted under  AGIA was  directly or                                                                    
indirectly transferable.                                                                                                        
Representative  Munoz  asked  whether the  AGIA  costs  were                                                                    
reimbursed by the state to TransCanada.                                                                                         
Mr. Palmer  replied that funds were  partially reimbursed to                                                                    
TransCanada and ExxonMobil.                                                                                                     
In  response  to a  question  by  Representative Munoz,  Mr.                                                                    
Palmer  answered  that  if  SB 138  was  adopted,  the  data                                                                    
collected under  AGIA would be  contributed at no  cost into                                                                    
the new project.                                                                                                                
Representative  Munoz asked  about  the seven  circumstances                                                                    
TransCanada  would  be  reimbursed   with  interest  if  the                                                                    
project was terminated.                                                                                                         
Mr. Palmer replied that both  TransCanada and Alaska had the                                                                    
right to  terminate the  project. He  explained that,  if at                                                                    
any stage  gate the state  exercised its right  to terminate                                                                    
the  agreement, TransCanada  received  reimbursement of  its                                                                    
costs  plus an  allowance  for funds  used for  construction                                                                    
(AFUDC)  set  at  7.1  percent.  In  the  event  TransCanada                                                                    
terminated  no return  on its  funds would  be received.  He                                                                    
illuminated  the  rationale for  reimbursement.  TransCanada                                                                    
earned its money  back over the life of the  project and did                                                                    
not  profit from  development  costs. The  AFUDC  was a  low                                                                    
return on  the capital  expended. He  added that  the actual                                                                    
costs to the state were lower  than if the state retained an                                                                    
engineering firm.                                                                                                               
Co-Chair  Stoltze  asked  what  the likelihood  of  the  LNG                                                                    
project was without SB 21.                                                                                                      
Mr. McMahon  responded that  most of the  wells for  the LNG                                                                    
project produced  both oil and  gas. A healthy  oil industry                                                                    
was  required to  support the  gas project.  He communicated                                                                    
that  at any  stage  gate the  oil  companies evaluated  its                                                                    
current  situation. He  felt the  legislation factored  into                                                                    
the decision to sign the HOA.                                                                                                   
Mr.  Van  Tuyl  echoed  the  comments  of  Mr.  McMahon  and                                                                    
emphasized that  the LNG project  required the  extension of                                                                    
the North Slope infrastructure  for decades. He stressed the                                                                    
importance  of  maintaining  the   health  of  the  existing                                                                    
infrastructure for oil  and gas for an  extended period. The                                                                    
company  invested in  LNG  projects  because they  typically                                                                    
generated cash at low margins  for decades. He mentioned new                                                                    
investment  in  the  oil  industry  and  felt  that  was  an                                                                    
important sign of the industry continuing into the future.                                                                      
2:58:00 PM                                                                                                                    
Mr.  Flood added  that  the  passage of  SB  21 signaled  an                                                                    
improvement with the relationship  with the state of Alaska,                                                                    
which added to the success of a long-term relationship.                                                                         
Representative Gara  stated he  disagreed with  the comments                                                                    
on SB 21.  He asked whether the state began  the LNG project                                                                    
as a  zero percent owner with  the option of becoming  an 11                                                                    
percent owner or  did TransCanada have the  option of buying                                                                    
the states interest down from 11 percent.                                                                                       
Mr. Palmer  explained that if  the state's ownership  was 25                                                                    
percent  TransCanada  would  own   25  percent  of  the  gas                                                                    
treatment plant  and 25 percent  of the pipeline.  The state                                                                    
would  have  the  right  to   purchase  40  percent  of  the                                                                    
interest. In that event, the  state would own 10 percent and                                                                    
TransCanada 15 percent.                                                                                                         
Representative  Gara referred  to alignment  and noted  that                                                                    
the state did  not have an equal share of  the profit making                                                                    
facilities of  the project; the  pipeline and  gas facility.                                                                    
In addition,  the state shared its  profit with TransCanada.                                                                    
The producers received equal shares  and do not owe anything                                                                    
to  TransCanada if  the project  died. He  wondered how  the                                                                    
agreement was fair to the state.                                                                                                
Mr. Van Tuyl replied that  the producers were liable for its                                                                    
proportionate share of the costs  should the project die. He                                                                    
furthered  that under  the HOA  all of  the resource  owners                                                                    
have  the  opportunity  to  be  infrastructure  owners.  The                                                                    
agreement with TransCanada was  negotiated between the state                                                                    
and TransCanada and was the  state's business. He reiterated                                                                    
that although  the alignment was "not  perfect" the resource                                                                    
owners  were  the  infrastructure owners,  which  created  a                                                                    
"very different dynamic" for the project.                                                                                       
Mr. Palmer  believed that if the  state acted independently,                                                                    
the  state  would  incur  the  same costs  for  all  of  the                                                                    
expertise   TransCanada  provided.   He  opined   that  what                                                                    
TransCanada provided reflected a  fair value. He voiced that                                                                    
the legislature must decide whether the agreement was fair.                                                                     
Representative  Gara   noted  that   all  of   the  partners                                                                    
benefitted  from TransCanada's  expertise.  He wondered  why                                                                    
the producers  were not contributing to  TransCanada for the                                                                    
expertise if the project was terminated.                                                                                        
Mr.  Flood answered  that TransCanada  was not  covering the                                                                    
entire  cost  of the  work.  The  producers would  cover  75                                                                    
percent  of  the  cost  and   TransCanada  25  percent.  The                                                                    
producers  already  paid  for   their  share  of  the  costs                                                                    
incurred  in  the event  of  the  project's termination.  He                                                                    
added  that the  project was  a co-venture  and all  parties                                                                    
were contributing expertise.                                                                                                    
Co-Chair  Austerman clarified  that  Alaska and  TransCanada                                                                    
were partners in  the 25 percent ownership.  The MOU between                                                                    
TransCanada and Alaska had nothing  to do with the producers                                                                    
or their  75 percent. If  the project was  terminated Alaska                                                                    
and  TransCanada  share the  costs  of  the 25  percent.  He                                                                    
offered that  all entities shared  in the risks and  loss of                                                                    
the  project if  terminated.  The  state's partnership  with                                                                    
TransCanada  limited  the  risk  to  the  state.  The  state                                                                    
accepted TransCanada as  a partner and expected  it to front                                                                    
the money for the project.                                                                                                      
Representative  Gara asked  why  Nikiski was  chosen as  the                                                                    
port  for the  project.  He  pointed out  that  the Port  of                                                                    
Valdez  was ice  free year  around. Cook  Inlet was  not ice                                                                    
free,  had  strong tides,  and  never  handled the  size  of                                                                    
tanker the LNG project required.                                                                                                
3:08:45 PM                                                                                                                    
Mr.  McMahon   stated  that  40  different   locations  were                                                                    
considered  for  the pipeline  terminus  and  LNG plant.  He                                                                    
stated  that  both Valdez  and  Nikiski  had facilities  and                                                                    
access  to  waterways for  tankers  and  ships. Nikiski  was                                                                    
chosen  because it  could accommodate  the size  of the  LNG                                                                    
plant  required;  hundreds  of   acres  of  flat  land  were                                                                    
necessary.  The final  decision was  a tradeoff  between the                                                                    
civil  engineering work  for  sight  preparation opposed  to                                                                    
managing  ice  conditions  and  tides  in  the  Cook  Inlet.                                                                    
Nikiski  was the  lead site  based on  ice modeling,  marine                                                                    
engineering,  and   the  civil  engineering   estimated  for                                                                    
preparing the sites, determined in 2013.                                                                                        
Mr.  Flood  added that  the  location  was critical  to  the                                                                    
decision to  proceed with the  project. He pointed  out that                                                                    
Nikiski was shipping  LNG prior to the building  of the Port                                                                    
of Valdez. He felt that Nikiski  was the best option for the                                                                    
Co-Chair  Austerman  asked  about  the  size  of  the  total                                                                    
project. He asked  what percentage of the  total project the                                                                    
LNG plant was.                                                                                                                  
Mr. Flood answered  that the size was roughly  50 percent of                                                                    
the project.                                                                                                                    
3:12:29 PM                                                                                                                    
The meeting was adjourned at 3:13 p.m.                                                                                          

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