Legislature(2013 - 2014)HOUSE FINANCE 519

04/10/2014 01:00 PM FINANCE


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01:08:00 PM Start
01:08:28 PM Rick Harper, Black & Veach and Enalytica - Discussion of Natural Gas Issues
03:46:45 PM Adjourn
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+ Rick Harper, Black & Veach, and Enalytica - TELECONFERENCED
Discussion of Natural Gas Issues
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                  HOUSE FINANCE COMMITTEE                                                                                       
                      April 10, 2014                                                                                            
                         1:08 p.m.                                                                                              
                                                                                                                                
                                                                                                                                
1:08:00 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Austerman called the House Finance Committee                                                                           
meeting to order at 1:08 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                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Rick  Harper,  Energy  of  Business  Consulting  Associates;                                                                    
Janak  Mayer,  Partner,  enalytica; Nikos  Tsafos,  Partner,                                                                    
enalytica;  Deepa Poduval,  Principal Consultant,  Black and                                                                    
Veatch.                                                                                                                         
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
^RICK HARPER, BLACK & VEACH and ENALYTICA - DISCUSSION OF                                                                     
NATURAL GAS ISSUES                                                                                                            
                                                                                                                                
1:08:28 PM                                                                                                                    
                                                                                                                                
Co-Chair Stoltze discussed the meeting agenda.                                                                                  
                                                                                                                                
RICK  HARPER,  ENERGY  OF  BUSINESS  CONSULTING  ASSOCIATES,                                                                    
discussed  his professional  background related  to oil  and                                                                    
gas,  consulting, and  work  with the  State  of Alaska.  He                                                                    
highlighted his  work on liquid  natural gas  (LNG) projects                                                                    
in the  U.S., Canada,  and Oregon. He  had been  involved in                                                                    
consulting for  22 years; his  firm was located  in Houston.                                                                    
His firm specialized in everything  transactional in the oil                                                                    
and  gas  business  (e.g.  lease  writing,  joint  operating                                                                    
agreements,  asset  management  agreements, and  other).  He                                                                    
provided  a  list  of various  clients  including  [but  not                                                                    
limited to]  Shell, Chevron, Anadarko, Intel,  and other. He                                                                    
had significant  experience in  royalty taxation  issues. He                                                                    
had  been  retained  by the  Legislative  Budget  and  Audit                                                                    
Committee; his  current work for  the state  was qualitative                                                                    
and not quantitative.  He had been asked to  look at studies                                                                    
and economic modeling  that had been done; his  role was not                                                                    
to  duplicate  or  evaluate  the  studies.  Given  his  past                                                                    
involvement in  the Stranded  Gas Development  Act contract,                                                                    
the  Alaska Gasline  Inducement  Act (AGIA),  and other  tax                                                                    
measures  he had  been  asked to  compare  and contrast  the                                                                    
items with  current considerations. His report  utilized his                                                                    
past background.                                                                                                                
                                                                                                                                
1:14:56 PM                                                                                                                    
                                                                                                                                
Mr. Harper  shared that  his primary  concern for  the state                                                                    
revolved  around  royalty-in-kind (RIK)  versus  royalty-in-                                                                    
value  (RIV)  issues.  He was  in  support  of  development,                                                                    
pipeline, LNG,  export, and instate  development. He  was in                                                                    
full support  of the project  and its timing; he  thought it                                                                    
was  well thought  out. Aside  from his  concerns about  the                                                                    
project's  internal workings  he believed  that in  terms of                                                                    
the market,  time was  of the essence.  He did  not disagree                                                                    
with information  provided by Black and  Veatch or enalytica                                                                    
related to the market. He  was concerned about the structure                                                                    
involvement from  the state's perspective. He  stressed that                                                                    
the  window of  opportunity for  marketing in  Asia and  the                                                                    
Pacific  Rim was  not open-ended.  He believed  there was  a                                                                    
real sense of urgency on  the producers' part; he noted that                                                                    
he had  not had the  same view  on some prior  projects. His                                                                    
approach was to ask  committee members numerous questions he                                                                    
thought they  should consider. He referred  to his testimony                                                                    
as  a "gut  check" for  members.  He advised  that a  flawed                                                                    
project premise  would lead  to a  flawed outcome.  He asked                                                                    
members to  consider the  project objectives  (e.g. expedite                                                                    
infrastructure,   lower   capital    costs   and   financial                                                                    
thresholds,  and  other).  He  commented  on  the  different                                                                    
backgrounds of committee members.                                                                                               
                                                                                                                                
1:18:42 PM                                                                                                                    
                                                                                                                                
Mr. Harper  began at a "20,000  foot level." He asked  why a                                                                    
fiscally  conservative  individual  who  believed  in  small                                                                    
government would  opt to  design the project  in a  way that                                                                    
would expand government.  He opined that if  RIK occurred it                                                                    
would  probably  be  the biggest  intrusion  into  the  free                                                                    
market on  the part  of a sovereign  state in  U.S. history.                                                                    
He stated that  the situation would not be  like bailing out                                                                    
General Motors  or Chrysler. The  real discussion  was about                                                                    
entering into the  business in a competitive  way should the                                                                    
state decide to take its  own product to market. The project                                                                    
would be  a long-term business enterprise  that would expand                                                                    
longer than a generation.  If members believed the structure                                                                    
of the arrangement  would lead to higher  state revenues, he                                                                    
asked  them  to  consider  whether the  state  could  really                                                                    
compete   for  the   sale  of   LNG  with   ExxonMobil,  BP,                                                                    
ConocoPhillips,  Shell,   and  other   major  oil   and  gas                                                                    
companies.  He  reminded  the  committee  that  the  project                                                                    
involved gas from a single  source; whereas, competitors had                                                                    
multiple sources. For  example, the state may  have a single                                                                    
tanker  contract  against  competitors   with  access  to  a                                                                    
multitude of facilities.  He spoke to the  complexity of the                                                                    
transaction   proposal   and  understood   that   additional                                                                    
negotiations  would be  going forward.  He offered  that the                                                                    
complexity of  the present structure would  be significantly                                                                    
increased  in one  to  two years  when  the legislature  was                                                                    
asked  to approve  the agreements  in finality.  He provided                                                                    
the following quote from Albert Einstein:                                                                                       
                                                                                                                                
     Any fool can make things more complex. It takes a                                                                          
     touch of genius and a lot of courage to move in the                                                                        
     opposite direction.                                                                                                        
                                                                                                                                
Mr.  Harper advised  members to  think about  how much  more                                                                    
complex the  transaction was likely  to be. He  also advised                                                                    
members to  consider the potential  that it may be  the lone                                                                    
group standing  in the  way of  an economic  advancement for                                                                    
Alaska and the nation if it  did not accept the proposal. He                                                                    
queried whether the  state had an opportunity  to affect the                                                                    
transaction at  present or  in the  future in  a substantive                                                                    
way.                                                                                                                            
                                                                                                                                
1:21:36 PM                                                                                                                    
                                                                                                                                
Mr.  Harper  understood  from   prior  experience  that  the                                                                    
legislature's  role  related  to   advice  and  consent.  He                                                                    
communicated  that  his  role  was  limited  to  advice.  He                                                                    
provided the  presentation: "Observations on  the Memorandum                                                                    
of Understanding,  the Heads of Agreement  and the Alignment                                                                    
of the State's Interest" (copy  on file). He had no concerns                                                                    
about the  design of the  project including the  building of                                                                    
the pipeline,  the LNG facility,  the markets, or  other. He                                                                    
opined  that the  proposal was  a  significant step  forward                                                                    
from the  past Stranded  Gas Development Act  contract days;                                                                    
however, the  proposal was built  on the same  "chassis." He                                                                    
detailed  that   the  state   would  adopt   a  dramatically                                                                    
different  role than  in the  past  in its  role as  lessor,                                                                    
royalty  owner,  and  regulator. The  proposal  contemplated                                                                    
moving from  RIV to  RIK. He  believed that  the fundamental                                                                    
premise that RIK was a net  benefit to the state was flawed.                                                                    
He asserted it was a  concession to producers and introduced                                                                    
substantial risk  to the state.  He relayed that  when faced                                                                    
with  a  multitude  of  documents  pertaining  to  a  large,                                                                    
complex  project, the  natural inclination  was to  focus on                                                                    
the  internals  and  debate whether  economic  drivers  were                                                                    
given sufficient weight.                                                                                                        
                                                                                                                                
Co-Chair Stoltze handed the gavel to Vice-Chair Neuman.                                                                         
                                                                                                                                
1:23:54 PM                                                                                                                    
                                                                                                                                
Mr.  Harper  continued  that   frequently  people  made  the                                                                    
mistake of  failing to view a  project on a macro  level. He                                                                    
believed his  role was to  encourage the committee  to think                                                                    
about the project  in a macro context. He  asserted that the                                                                    
state would abandon its implied  and explicit covenants that                                                                    
benefited the state  under the leases when moving  to RIK if                                                                    
the proposal  was adopted as  is. He highlighted  that there                                                                    
was over  100 years of  history in dealing with  RIV issues.                                                                    
He  remarked that  the  topic was  never  free of  conflict;                                                                    
there   were  always   questions  to   consider  about   the                                                                    
appropriate deduction,  cost, price,  and other.  He relayed                                                                    
that  the history  had  given rise  through  the courts  and                                                                    
common  law to  include  explicit and  implied covenants  in                                                                    
leases. He underscored  that all of covenants  would be gone                                                                    
if the system changed to RIK.  He stated that every lease he                                                                    
had  ever seen  in the  oil  and gas  industry included  the                                                                    
right for  a party  to take its  share in-kind;  however, he                                                                    
had not ever  seen the right exercised. He  relayed that the                                                                    
right  had  been  exercised   typically  under  special  and                                                                    
limited  circumstances.  He  shared  that  the  state  could                                                                    
choose to use RIK, but it would be breaking new ground.                                                                         
                                                                                                                                
Mr. Harper  highlighted that  moving to  RIK would  make the                                                                    
state  a  direct competitor  [with  producers]  with a  sole                                                                    
source  of production.  He was  aware  that producers  would                                                                    
likely  offer an  option for  marketing  assistance, but  it                                                                    
would  be for  a  fee and  substantial  cost. Under  current                                                                    
lease proposals the producers had  an implied duty to market                                                                    
gas for  the state at  no cost  and to only  take reasonable                                                                    
and  actual deductions.  He discussed  that the  state would                                                                    
have  a minority  stake  in  terms of  the  North Slope  and                                                                    
globally.                                                                                                                       
                                                                                                                                
1:26:41 PM                                                                                                                    
                                                                                                                                
Mr.  Harper disputed  the notion  that the  state's interest                                                                    
may be better aligned with  RIK rather than RIV. He believed                                                                    
it would work  in the opposite direction.  He explained that                                                                    
with  RIV, notionally  the  producer received  seven-eighths                                                                    
(or  other  lease  percentage)  of  the  value  of  proceeds                                                                    
received  after  the  deduction of  appropriate  costs.  The                                                                    
assumption  was made  that  interests  were aligned  because                                                                    
both parties made money.  Additionally, the state benefitted                                                                    
by economies  of scale under  RIV. Under RIK  the producers'                                                                    
scale would remain substantial whereas  the state's scale on                                                                    
a  relative basis  would not  be. He  communicated that  the                                                                    
state  would not  be  on equal  footing  with producers;  it                                                                    
would  not be  a working  interest  owner and  would not  be                                                                    
privy  to   working  interest  owner   meetings,  decisions,                                                                    
information,  and other.  There  was also  a question  about                                                                    
where the state would take  its gas in-kind. He believed the                                                                    
decision to go with RIK  was workable, but he encouraged the                                                                    
state to take its interest  in-kind as far downstream in the                                                                    
process  as  possible.  He  asked   the  state  to  consider                                                                    
separating in its  mind why it would own an  interest in the                                                                    
pipeline and the LNG facility  from the decision to take its                                                                    
gas, own  capacity, or have  a party  own and manage  on the                                                                    
state's behalf.  He believed that under  the circumstance it                                                                    
was  easy to  see  why  the state  would  take an  ownership                                                                    
interest  in the  pipeline, LNG,  or any  other facility  in                                                                    
order  to  lower the  cost  of  capital and  accelerate  the                                                                    
project development.                                                                                                            
                                                                                                                                
Mr. Harper believed  it was impossible to  anticipate all of                                                                    
the complexities  that entering  in the  commercial business                                                                    
as a state would offer.                                                                                                         
                                                                                                                                
1:30:03 PM                                                                                                                    
                                                                                                                                
Mr. Harper shared  that it was unusual for  producers to own                                                                    
a  pipeline  and  the capacity.  He  communicated  that  the                                                                    
concept introduced  a new set  of dynamics. He  relayed that                                                                    
unlike the  oil industry, the  natural gas industry  was not                                                                    
vertically integrated; typically  producers often subscribed                                                                    
for capacity in  order to meet objectives, but  they did not                                                                    
own, build, and control the capacity  of a pipeline on a pro                                                                    
rata basis. He  added that there was nothing  wrong with the                                                                    
concept, but he  wanted the state to understand  that it was                                                                    
unusual. He found the  state's potential participation under                                                                    
the scenario  to be concerning (specifically  related to the                                                                    
state engaging itself commercially).                                                                                            
                                                                                                                                
Mr. Harper  discussed that  vertical integration  raised the                                                                    
issue of control over current  and future basins. He relayed                                                                    
that   the   topic   most  closely   manifested   with   the                                                                    
determination of the  rate design; if pricing  was rolled in                                                                    
and  a large  producer stepped  in with  major volumes  they                                                                    
were encouraged  because all parties  would have a  pro rata                                                                    
share. He compared it to  an interstate highway system where                                                                    
everyone paid equal tolls. He  noted that there was a middle                                                                    
ground. He  had seen amendments  that were discussed  in the                                                                    
Senate  and in  the  House Resources  Committee about  going                                                                    
with  incremental pricing,  but as  additional volumes  came                                                                    
on,  tariffs could  be lowered  initially until  the looping                                                                    
stage;  rolled in  rates  could be  allowed  and capped.  He                                                                    
reiterated that  he would be  concerned about  basin control                                                                    
and the larger producers.                                                                                                       
                                                                                                                                
1:32:59 PM                                                                                                                    
                                                                                                                                
Mr.  Harper  believed  the economic  modeling  conducted  by                                                                    
Black and  Veatch was excellent,  but he did not  believe it                                                                    
took in the full effect of  the downside risk of the state's                                                                    
participation   in  the   commercial  marketplace.   An  old                                                                    
analysis suggested  that a decrement to  state's net present                                                                    
value (NPV)  could be as much  as 10 percent as  a result of                                                                    
taking its  share in-kind. The  question of  jurisdiction of                                                                    
the facilities  would impact how  they were managed  and the                                                                    
degree of open access the  pipeline would be. He believed it                                                                    
was generally  presumed that the project  would be regulated                                                                    
by the  Federal Energy Regulatory Commission  (FERC), but it                                                                    
did not  have to be  the case.  He advised the  committee to                                                                    
consider what  fundamental tenets would govern  capacity and                                                                    
tariffs if  the project  was overseen by  the state  and was                                                                    
not FERC regulated.                                                                                                             
                                                                                                                                
Mr. Harper shifted  the discussion to fiscal  issues. He was                                                                    
more concerned about the state's  fiscal stability than that                                                                    
of  the  producers.  He relayed  that  from  the  producers'                                                                    
perspective fiscal  stability was typically a  code word for                                                                    
reducing  taxes and  royalties. He  conceded that  producers                                                                    
should look after their interest  as vigorously as possible,                                                                    
which  they did  well.  He stated  under  the given  context                                                                    
there  was really  no  such thing  as  fiscal stability.  He                                                                    
referred   to   constitutional    prohibitions   about   one                                                                    
legislature  binding the  hands of  future legislatures.  He                                                                    
advised  the  committee to  use  caution  about bearing  the                                                                    
pressure of  fiscal stability in  a large-scale  project. He                                                                    
opined that  based upon economics,  the project  would stand                                                                    
on   its  own   without  fiscal   concessions  towards   the                                                                    
producers. He  suspected the project  would be done  with or                                                                    
without the state's participation  albeit not as quickly. He                                                                    
surmised  that under  those  circumstances  the state  would                                                                    
probably  not  have  an opportunity  to  impact  design.  He                                                                    
believed the  Black and Veatch economics  showed the project                                                                    
to  be robust  under a  number of  scenarios. He  reiterated                                                                    
that his testimony acted as  a gut check for members related                                                                    
to legislation  and the  legislature's interaction  with the                                                                    
process going forward.  He had a high regard  for members of                                                                    
the administration.  He urged the  committee to  think about                                                                    
the  importance of  continuity  in  government positions  in                                                                    
relation to long-term projects.                                                                                                 
                                                                                                                                
1:37:21 PM                                                                                                                    
                                                                                                                                
Representative   Guttenberg   referred   to   Mr.   Harper's                                                                    
testimony that producers had a  duty to market for the state                                                                    
at no  cost. He  asked Mr. Harper  to elaborate.  Mr. Harper                                                                    
replied  that  producers  were  not  entitled  to  deduct  a                                                                    
marketing fee in the calculation  of royalties they paid the                                                                    
state for its  share of production under the  RIV system. He                                                                    
relayed that the requirement would vanish under RIK.                                                                            
                                                                                                                                
Representative  Guttenberg wondered  if the  requirement was                                                                    
included in  the lease agreements between  producers and the                                                                    
state. Mr. Harper replied that  the requirement was based on                                                                    
two things.  He relayed that  the producers' duty  to market                                                                    
was  an obligation  under the  lease. There  was an  implied                                                                    
duty  that  as  a  reasonably  prudent  operator  that  they                                                                    
receive  the highest  price  reasonably  attainable for  the                                                                    
state's  share of  production.  Additionally, the  producers                                                                    
were generally  precluded from assessing any  marketing fees                                                                    
to  the  state. The  duty  was  part  of  a benefit  of  the                                                                    
bargain.  He mentioned  joint testimony  that he  and former                                                                    
colleague  Spencer   Hosey  had  discussed   the  producers'                                                                    
affirmative  duties and  obligations. He  suggested locating                                                                    
the  old testimony  to give  the committee  a background  to                                                                    
compare what the proposal may mean if it abandoned RIV.                                                                         
                                                                                                                                
1:40:02 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg asked when  the testimony had been                                                                    
given to  the legislature.  Mr. Harper  guessed it  had been                                                                    
2007 or 2008.                                                                                                                   
                                                                                                                                
Representative Gara  referred to basin control.  He wondered                                                                    
what the state  could do to ensure  that independent parties                                                                    
could  get  as  much  explored  gas  into  the  pipeline  as                                                                    
possible in  order to increase employment,  revenue, and oil                                                                    
and gas production.                                                                                                             
                                                                                                                                
Mr.  Harper answered  that the  issue  revolved around  what                                                                    
diameter  line  to  install initially  and  how  compression                                                                    
worked against  the design  and maximum  allowable operating                                                                    
pressures in the  pipeline. He stated that there  was a game                                                                    
to be  played. A system  should be  designed in order  to be                                                                    
expanded  as much  as possible  with compression.  He stated                                                                    
that  those were  the cheapest  capacity  increments on  the                                                                    
line. There were also similar  considerations related to LNG                                                                    
facilities  design and  expansion.  The issue  needed to  be                                                                    
dealt  with first  and foremost  before  tariffing and  rate                                                                    
treatment because its impact could be just as significant.                                                                      
                                                                                                                                
1:43:05 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Neuman  wondered  if  the state  could  use  its                                                                    
portion of capacity in the  pipeline to allow for expansion.                                                                    
Mr. Harper replied  that he had heard  the option discussed;                                                                    
however, he  had never  seen a  scenario where  the pipeline                                                                    
was "basically  a condominium." He detailed  that throughput                                                                    
control and ownership  of the pipeline were  separate in all                                                                    
agreements he  had seen. He  surmised it could be  done, but                                                                    
it would  take careful craftsmanship by  the administration.                                                                    
He thought  it would  be difficult for  a minority  owner to                                                                    
achieve.                                                                                                                        
                                                                                                                                
Vice-Chair  Neuman believed  there was  related language  in                                                                    
the Heads of  Agreement (HOA) for the Trans  Alaska belt and                                                                    
the  incorporation of  minority and  majority partners.  Mr.                                                                    
Harper  agreed  that  the  issue  had  been  addressed,  but                                                                    
deserved further thought.                                                                                                       
                                                                                                                                
Representative Gara highlighted that  under the contract the                                                                    
state  had the  ability to  initiate expansion;  however, if                                                                    
the pipeline  reached expansion capacity the  state would be                                                                    
responsible for  paying the full  looping cost.  He believed                                                                    
it was a  problem if there was not a  rolled-in rate sharing                                                                    
mechanism. He  had been told  that expansion  by compression                                                                    
was cheap enough that a new  party could come in and pay the                                                                    
full cost.  He believed  that for the  size of  the pipeline                                                                    
under  discussion  there  was  room for  up  to  a  possible                                                                    
billion  cubic feet  (bcf) expansion.  He  surmised that  if                                                                    
expansion involved  the construction  of a new  pipeline and                                                                    
costs  were not  shared, a  new company  would not  have the                                                                    
opportunity  to  be involved.  He  remarked  that the  state                                                                    
could be  a zero to 10  percent owner of the  pipeline and a                                                                    
25 percent owner of the gas.                                                                                                    
                                                                                                                                
Mr. Harper agreed. He elaborated  that the construction of a                                                                    
new  pipeline  would be  a  very  serious investment,  which                                                                    
normally discouraged expansion unless  a new and large scale                                                                    
resource was  discovered. For more  conventional exploration                                                                    
and  production in  addition to  state reserves  the parties                                                                    
would not  be able to  afford the  cost of looping  on their                                                                    
own.                                                                                                                            
                                                                                                                                
1:47:09 PM                                                                                                                    
                                                                                                                                
Representative  Gara  wondered  whether  under  the  current                                                                    
contract  gas  would  get  to   the  pipeline  if  expansion                                                                    
required the  construction of a  new pipe and the  state had                                                                    
the ability to bring on another partner in its share.                                                                           
                                                                                                                                
Mr.  Harper replied  that  he was  unsure.  He believed  the                                                                    
concern was  serious. He  detailed that  incremental pricing                                                                    
was  generally  favored  in  the  Lower  48,  but  FERC  had                                                                    
identified Alaska  as different  in the past.  He elaborated                                                                    
that   Alaska  was   different  because   projects  involved                                                                    
greenfield  pipelines and  unknown reserves  to support  the                                                                    
pipeline  outside   of  Prudhoe  Bay,  Point   Thomson,  and                                                                    
satellite fields.  He expressed  concern about  anything but                                                                    
rolled-in  pricing  or  a lid  on  incremental  pricing.  He                                                                    
stated  that  the  issues  did   not  necessarily  apply  to                                                                    
offtakes and other.  The idea of bearing  the full financial                                                                    
responsibility  for the  addition of  new pipeline  could be                                                                    
discouraging and  inhibiting. He  added that natural  gas in                                                                    
Alaska was a special situation;  the issues were not present                                                                    
in Texas, Louisiana, Wyoming, and other.                                                                                        
                                                                                                                                
1:49:24 PM                                                                                                                    
                                                                                                                                
Representative  Costello   pointed  to   the  HOA   and  the                                                                    
Memorandum  of  Understanding  (MOU). She  remarked  on  the                                                                    
importance   of  momentum   when  dealing   with  the   MOU.                                                                    
Additionally, it would cost the  state financially if it put                                                                    
on  the  brakes.  She  wondered  if  the  state  would  gain                                                                    
something  by   slowing  down  and  researching   the  issue                                                                    
further.                                                                                                                        
                                                                                                                                
Mr. Harper  did not  believe the state  needed to  slow down                                                                    
because  the issues  had been  identified. The  question was                                                                    
whether  the  legislature  wanted  to force  the  issue.  He                                                                    
detailed that current pressures  associated with the project                                                                    
were minor compared to pressures  the legislature would face                                                                    
in future years.  He equated the HOA and  MOU to "agreements                                                                    
to agree"  and noted that  they were not  binding contracts.                                                                    
He did not  put confidence in any  potential assurances from                                                                    
the industry  to trust that  the issues would be  dealt with                                                                    
during negotiations. He stated  that the producers were some                                                                    
of the  finest in the world  and were looking out  for their                                                                    
own interests.  He feared that the  legislature's ability to                                                                    
provide advice  would be  very limited in  one to  two years                                                                    
without resolving what  the state really wanted  in terms of                                                                    
level  of  complexity and  whether  it  wanted expansion  of                                                                    
government  and government  involvement  in free  enterprise                                                                    
for years to come.                                                                                                              
                                                                                                                                
Representative  Costello understood  there  would be  future                                                                    
points  when  the  legislature  would  address  the  project                                                                    
including  at  the  pre-FEED   [Front  End  Engineering  and                                                                    
Design] and FEED [Front End  Engineering and Design] stages.                                                                    
She asked  about the  different options  the state  had with                                                                    
TransCanada. She wondered when the deal would be finalized.                                                                     
                                                                                                                                
Mr.  Harper answered  that he  was  not the  best source  on                                                                    
steps   associated   with   the   project.   He   spoke   to                                                                    
strengthening  the   state's  involvement  and   ability  to                                                                    
provide real input at meaningful points in time.                                                                                
                                                                                                                                
1:53:10 PM                                                                                                                    
                                                                                                                                
Vice-Chair   Neuman  wondered   if   there  was   sufficient                                                                    
engineering data  to prepare an economic  feasibility study.                                                                    
He  noted that  there had  been substantial  work done  with                                                                    
instate  gaslines  (e.g. the  Stranded  Gas  Act, AGIA,  and                                                                    
other).  He   remarked  that  substantial  money   had  been                                                                    
invested  by  multiple parties.  He  was  interested in  the                                                                    
timeline.                                                                                                                       
                                                                                                                                
Mr.  Harper replied  that  it was  difficult  to answer  the                                                                    
question  without  more  specific information.  He  imagined                                                                    
that based  on extensive  former studies  it would  not take                                                                    
much more to  put design parameters in place.  He added that                                                                    
there was  no new technology  involved. He was  certain that                                                                    
issues  related   to  right-of-way   and  the   location  of                                                                    
environmentally sensitive areas were  known because of prior                                                                    
work by the state, producers, and contractors.                                                                                  
                                                                                                                                
Vice-Chair  Neuman pointed  to  the testimony  related to  a                                                                    
concern about  basin control.  He noted  the HOA  included a                                                                    
timeline  commitment  from  TransCanada  Alaska  Development                                                                    
Corporation on the  signing of the bill. He  wondered if the                                                                    
state  should  have  other  commitments.  He  asked  if  the                                                                    
contract language was standard.                                                                                                 
                                                                                                                                
Mr.  Harper  replied  that  he  did  not  have  comments  or                                                                    
concerns to  offer in  relation to  the instate  offshoot of                                                                    
the larger project.                                                                                                             
                                                                                                                                
Vice-Chair Neuman believed  it had been a  concern. He spoke                                                                    
to a  time value  of money. He  addressed the  concern about                                                                    
the  substantial  money the  state  would  put in  and  when                                                                    
producers would actually produce the product.                                                                                   
                                                                                                                                
Mr.  Harper agreed  with  the concern.  He  believed it  was                                                                    
associated  with   RIV  versus  RIK.  He   shared  that  the                                                                    
producers would  control ownership  in the pipeline  and the                                                                    
majority  of  its  capacity, but  they  would  also  control                                                                    
decisions  about when  and how  much gas  to produce,  which                                                                    
impacted the  basin control issue  and the state's  share of                                                                    
gas.  The state  needed to  recognize  the items  as a  risk                                                                    
factor.                                                                                                                         
                                                                                                                                
Vice-Chair Neuman  pointed to Mr. Harper's  concerns related                                                                    
to  rolled-in  rates or  future  expansion.  He believed  it                                                                    
would  be a  great  thing  if the  volume  of  gas for  sale                                                                    
required  a  new  pipeline.  Mr.   Harper  referred  to  the                                                                    
scenario  as  a  "high  class  problem."  Vice-Chair  Neuman                                                                    
believed  it would  be a  good problem  to have.  Mr. Harper                                                                    
believed the state would have it.                                                                                               
                                                                                                                                
Representative   Guttenberg   surmised  that   generally   a                                                                    
pipeline was  built at the  minimum level so  capacity could                                                                    
be extended up. He wondered  if the facilities on either end                                                                    
were  built  to the  same  capacity.  He wondered  when  the                                                                    
construction  of  new LNG  or  gas  treatment plants  became                                                                    
economical.                                                                                                                     
                                                                                                                                
1:58:33 PM                                                                                                                    
                                                                                                                                
Mr. Harper  referred to prior  discussion on  the importance                                                                    
of design parameters.  He stated that it was  not unusual to                                                                    
oversize  a pipeline  in  a  greenfield situation;  examples                                                                    
given  included the  Rockies Express  Pipeline, Kern  River,                                                                    
and  other. There  was a  limit to  how much  could be  done                                                                    
economically  and  under  FERC  rules,  but  it  was  highly                                                                    
desirable  to create  as much  capacity as  possible at  the                                                                    
start.                                                                                                                          
                                                                                                                                
Representative  Guttenberg  wondered  how  the  state  would                                                                    
influence  the outcome  without  FERC in  the equation.  Mr.                                                                    
Harper answered  that the state would  influence the outcome                                                                    
through negotiations.                                                                                                           
                                                                                                                                
Representative  Guttenberg asked  for confirmation  that the                                                                    
state could  influence the outcome  as a 25  percent partner                                                                    
via  negotiations. Mr.  Harper  responded affirmatively.  He                                                                    
spoke  to the  state's desired  outcome and  noted that  its                                                                    
interests would diverge from other parties.                                                                                     
                                                                                                                                
Representative Gara pointed to page  5 of the report related                                                                    
to risks associated  with the state paying  for the shipment                                                                    
and sale of its gas. He  referenced a study mentioned by Mr.                                                                    
Harper citing that the arrangement  could reduce the state's                                                                    
NPV in  excess of 10 percent.  He wanted to be  able to vote                                                                    
for the  plan, but wanted  there to  be a better  balance of                                                                    
risk  and  reward.  As  a  taxing  authority  with  the  oil                                                                    
pipeline the state  did not have to worry  about owing great                                                                    
liability because it  received taxes based on  the amount of                                                                    
oil shipped. However,  if the state had to sell  the gas and                                                                    
it had no control of gas  coming down the pipeline, it still                                                                    
had to  pay TransCanada  for shipping capacity.  He wondered                                                                    
whether  it  was  feasible  to  develop  an  agreement  that                                                                    
producers would be  liable to pay the  shipping capacity fee                                                                    
if there was not sufficient gas in the pipeline.                                                                                
                                                                                                                                
Mr.  Harper  agreed  that  the   risk  should  be  addressed                                                                    
upfront. He classified it as a real risk.                                                                                       
                                                                                                                                
2:01:57 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Neuman   discussed  RIK   versus  RIV   and  the                                                                    
associated risks. Under RIK the  state faced risk associated                                                                    
with the  cost of  product at the  wellhead, transportation,                                                                    
and  preparation for  market;  however, the  chance to  make                                                                    
more on  the market helped  offset those risks. He  spoke to                                                                    
the legislature's  work to determine  where to set  the rate                                                                    
timelines. He  observed that if  risks were not  taken there                                                                    
would be no reward. Under  RIV the state would receive value                                                                    
at the wellhead alone.                                                                                                          
                                                                                                                                
2:03:07 PM                                                                                                                    
                                                                                                                                
Mr. Harper  agreed. He disputed  the premise offered  to the                                                                    
legislature  that  RIK  was  a  benefit  to  the  state.  He                                                                    
believed the move to RIK  represented a concession on behalf                                                                    
of the state. He believed  it was conceivable that the state                                                                    
could  be better  off with  RIK, but  it created  a downside                                                                    
risk that it did not currently  have. He did not believe the                                                                    
risk/reward balance was symmetrical.  He remarked that there                                                                    
were other elements to include in the balance as well.                                                                          
                                                                                                                                
Vice-Chair  Neuman  asked  if   risks  under  RIK  would  be                                                                    
diminished due to the large gas volume and pipeline.                                                                            
                                                                                                                                
Mr. Harper replied  that the volume was large,  but in terms                                                                    
of competing  in the marketplace,  the volume was  small. He                                                                    
stated that  sole sourcing and the  commitments required for                                                                    
the state  to ship gas to  the Pacific Rim on  its own meant                                                                    
that  deliveries  had to  be  guaranteed.  Buyers would  not                                                                    
accept  a  contract  that did  not  guarantee  delivery.  He                                                                    
relayed  that  ExxonMobil  and  BP  had  their  own  LNG  in                                                                    
addition to  established trading operations.  The producers'                                                                    
risk profile was  much different than that of  the state. He                                                                    
pointed to potential delays due to  a lost tanker or a field                                                                    
shutdown. He was concerned about  the idea of the state sole                                                                    
sourcing   a   relatively   small   volume   into   a   very                                                                    
sophisticated large  market. However, there were  people who                                                                    
believed the risk could be managed.                                                                                             
                                                                                                                                
2:06:42 PM                                                                                                                    
                                                                                                                                
Representative  Wilson asked  about  risks  the state  would                                                                    
face  if the  project was  not initiated.  She spoke  to the                                                                    
lack of affordable energy in  Fairbanks and rural areas. She                                                                    
pointed  to the  refineries' current  dependence on  diesel.                                                                    
Mr. Harper replied that he  supported her concern, but going                                                                    
with RIV or RIK did not  change the metrics; the same volume                                                                    
of gas  would move. He  believed the project was  robust and                                                                    
compelling  as   designed.  His  concerns  related   to  the                                                                    
internal  workings of  the  ownership  structure. He  opined                                                                    
that  the project  would be  done and  that instate  service                                                                    
would be a part of it.                                                                                                          
                                                                                                                                
Vice-Chair  Neuman   asked  whether   RIK  versus   RIV  was                                                                    
currently Mr.  Harper's primary concern. Mr.  Harper replied                                                                    
in the affirmative. He added  that he would have concerns if                                                                    
the  state  was doing  business  with  second or  third-tier                                                                    
subsidiaries of one  of the big producers.  He cautioned the                                                                    
state to  be careful who it  agreed with and whether  or not                                                                    
the  parent  company  of the  entity  was  backstopping  the                                                                    
obligations.  He stated  that  there were  no guarantees  in                                                                    
business, there were guarantors.                                                                                                
                                                                                                                                
Vice-Chair Neuman remarked that  ensuring that the state had                                                                    
good  contracts would  address  the  concerns. He  commented                                                                    
that  ExxonMobil  had  to amortize  its  investment  of  the                                                                    
billions  of  dollars it  had  put  into Point  Thomson.  He                                                                    
stated that  the only  way for the  company to  amortize its                                                                    
investment  was with  a pipeline.  He  suspected a  pipeline                                                                    
would be built with or without the state's involvement.                                                                         
                                                                                                                                
Mr.  Harper believed  the metrics  were radically  different                                                                    
than  they  had  been  ten   years  earlier.  Producers  had                                                                    
urgencies that  resulted from  Point Thomson  development as                                                                    
well as the change in  the gas/oil ratio. Producers also had                                                                    
the need to book and monetize  the asset. He stated that the                                                                    
world was  moving to  natural gas, which  he believed  was a                                                                    
major part  of the corporate  initiative for a  company like                                                                    
ExxonMobil.  He had  not thought  the same  thing ten  years                                                                    
earlier. He  believed the  companies had  reasons to  be and                                                                    
were serious now.                                                                                                               
                                                                                                                                
2:11:10 PM                                                                                                                    
                                                                                                                                
Representative  Gara referred  to the  requirement that  the                                                                    
state would  pay TransCanada for  shipping capacity  even if                                                                    
there  was  no gas  in  the  pipeline.  He wondered  if  the                                                                    
potential was a  real risk to the state.  Mr. Harper replied                                                                    
that it  was a serious  concern. For example, he  had worked                                                                    
as an advisor to Sunrise  Energy Corporation, a company that                                                                    
had  gone   bankrupt  over  a  single   firm  transportation                                                                    
agreement.  He  referred to  the  argument  that there  were                                                                    
trillions of cubic feet of  gas at Point Thomson and Prudhoe                                                                    
Bay.  He stated  that it  was fine  if the  state could  get                                                                    
comfortable  that  the  producers   would  be  motivated  to                                                                    
produce gas at the maximum  rate allowable and would not use                                                                    
the  fields as  storage or  as a  buffer to  other producing                                                                    
fields. However, it had and could happen catastrophically.                                                                      
                                                                                                                                
2:13:46 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:18:13 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Vice-Chair Neuman pointed  to concern on RIK  versus RIV. He                                                                    
asked  for  the opinion  of  the  consultants. He  discussed                                                                    
measuring risk for RIK beginning  at the wellhead through to                                                                    
market; however, there was the  availability to get a profit                                                                    
on the end. He compared it  to RIV that offered value at the                                                                    
wellhead.                                                                                                                       
                                                                                                                                
JANAK  MAYER, PARTNER,  ENALYTICA, began  by differentiating                                                                    
between  questions of  transactional  risk  around when  and                                                                    
where an entity took custody  or title of gas, how ownership                                                                    
was   transferred,   and  transportation   obligations.   He                                                                    
disputed the idea that under  RIK an entity was more exposed                                                                    
to  things like  price and  cost  risk, but  the risks  were                                                                    
taken in  the hopes of a  higher reward. He stated  that the                                                                    
idea was appealing and intuitive;  it had been his immediate                                                                    
intuition.  He had  questioned whether  the state  wanted to                                                                    
take on risks associated  with price, cost, and construction                                                                    
that  went along  with  RIK and  equity.  He determined  his                                                                    
intuition  had  been  wrong   after  developing  models  and                                                                    
looking  at   changes  caused   by  price   fluctuation  and                                                                    
different  construction  costs  and timing.  He  provided  a                                                                    
disclaimer  that he  separated questions  of price  and cost                                                                    
risk from  the specific workings of  transaction details. He                                                                    
believed one  of the  strongest reasons  for taking  RIK and                                                                    
project  equity was  that risk  was  actually mitigated.  He                                                                    
noted  that enalytica  had used  different  models, but  had                                                                    
come up  with very similar  results to Black and  Veatch. He                                                                    
detailed that there  was less upside and  less downside with                                                                    
RIK.  He  referred to  his  past  testimony on  where  value                                                                    
resided in dollar per barrel  equivalent terms. He discussed                                                                    
scenario  that  included  $100  per  barrel  of  oil,  which                                                                    
translated  into  $80  per  barrel   for  LNG  in  Asia  and                                                                    
transportation costs of  $60 to $70 per  barrel. He referred                                                                    
to  the small  amount of  value  once the  fixed amount  was                                                                    
taken  out. The  fundamental difference  between RIV  versus                                                                    
RIK with  equity participation was  that RIV  guaranteed the                                                                    
$60 to  $70 transportation cost.  Unless there was  no value                                                                    
left at  the wellhead RIV  served to guarantee  the shipping                                                                    
amount  so that  when prices  rose and  fell the  return was                                                                    
always  steady;  what  varied   was  what  the  state  would                                                                    
receive.  One of  the biggest  reasons to  consider RIK  and                                                                    
equity was that everyone would  rise and fall together; when                                                                    
prices  were high  returns were  not as  high they  would be                                                                    
under RIV, but returns were  better when prices were low. He                                                                    
referred   to   a   model   that   illustrated   his   point                                                                    
quantitatively.                                                                                                                 
                                                                                                                                
2:24:32 PM                                                                                                                    
                                                                                                                                
NIKOS TSAFOS, PARTNER, ENALYTICA,  believed the big question                                                                    
was whether there  was a project could  be accomplished with                                                                    
RIV and  if the  state's role  was limited  to a  taxing and                                                                    
regulating  authority. He  spoke  to the  importance of  the                                                                    
question. Under  RIV the state  would deduct costs  from the                                                                    
final sales price  to come up with a taxable  barrel of LNG.                                                                    
He  discussed   the  history  of  oil   and  the  litigation                                                                    
associated  with  a   Trans-Alaska  Pipeline  System  (TAPS)                                                                    
tariff  of $5  to $6.  He questioned  how much  disagreement                                                                    
would  occur with  a tariff  of  $60. He  presumed that  the                                                                    
disagreement  could occur  enough  that  in anticipation  of                                                                    
such  disputes,  the   state  did  not  want   to  make  the                                                                    
investment  until  it  had  reassurance   that  it  was  not                                                                    
starting another 30  to 40 year legal battle  between it and                                                                    
producers.   The   crucial   question  was   to   completely                                                                    
understand  what   was  being  compared.  For   purposes  of                                                                    
illustration  enalytica  had run  RIK  and  RIV projects  to                                                                    
demonstrate  the different  economics. The  broader question                                                                    
went back to whether there was an RIV project.                                                                                  
                                                                                                                                
Vice-Chair  Neuman  asked  the  presenters  to  avoid  using                                                                    
acronyms.                                                                                                                       
                                                                                                                                
Mr. Tsafos agreed.  He continued to address  RIK versus RIV.                                                                    
He questioned whether producers would  be willing to make an                                                                    
investment under RIV  based on items he  had outlined. Under                                                                    
an RIV scenario, he put  the probability of producers making                                                                    
an investment in the project at a fairly low number.                                                                            
                                                                                                                                
DEEPA  PODUVAL,  PRINCIPAL  CONSULTANT,  BLACK  AND  VEATCH,                                                                    
agreed with  Mr. Mayer and Mr.  Tsafos. She added that  in a                                                                    
Black and Veatch royalty study  one of the significant risks                                                                    
was RIK. The study had concluded  that there would be a risk                                                                    
of eroding  significant value  for the  state with  RIK. She                                                                    
detailed that the  largest component of the  risk related to                                                                    
the state's ability to compete  with producers in the global                                                                    
LNG market.  She believed the  current HOA helped  to reduce                                                                    
the  risk;  it  included  the  offer  of  the  producers  to                                                                    
negotiate and  market the state's  share of LNG.  She opined                                                                    
that  for  the state  to  have  the  option of  writing  the                                                                    
producers' contract  brought the  advantage of RIV  into the                                                                    
RIK  world. Therefore,  the state  would not  lose value  by                                                                    
taking a lower  price contract than what  the producers were                                                                    
able to achieve in the market.                                                                                                  
                                                                                                                                
2:29:50 PM                                                                                                                    
                                                                                                                                
Mr. Mayer added that when  thinking about tariff disputes it                                                                    
was  important to  consider that  the liquefaction  terminal                                                                    
would likely  be regulated under FERC  Section 3 (regulation                                                                    
of  permitting, but  not of  the tariff).  He reasoned  that                                                                    
there  was a  possibility that  the pipeline  would also  be                                                                    
regulated under  the section, which meant  the project could                                                                    
become  a  $50 billion  project  with  no direct  regulatory                                                                    
oversight  over  the tariff  or  debt  to equity  ratio.  He                                                                    
elaborated  that  there  was   an  enormous  possibility  of                                                                    
shifting  costs to  create the  highest tariff  possible (on                                                                    
the liquefaction  end and  potentially the  entire project).                                                                    
There  was enormous  incentive to  do  it. One  of the  most                                                                    
appealing aspects  of the RIK  with equity was that  it took                                                                    
all of those potential issues off the table.                                                                                    
                                                                                                                                
Representative  Wilson  wondered  about the  weaknesses  and                                                                    
strengths in  partnering with  TransCanada versus  a company                                                                    
that  was  used  to  shipping  and  other  issues.  She  was                                                                    
concerned about  the state's  25 percent  [equity ownership]                                                                    
and  whether TransCanada  would be  the strongest  player at                                                                    
the table. She understood that  TransCanada was not going to                                                                    
sell  the  state's  gas.  She shared  that  she  would  feel                                                                    
differently if the  state was partnered with  a company like                                                                    
BP that knew  how to get the most return  for its LNG sales.                                                                    
She  acknowledged the  benefit  of  the state's  partnership                                                                    
with a  company that knew how  to build a pipeline,  but she                                                                    
was   concerned  about   being  in   a  position   to  trust                                                                    
competitors  to  sell the  state's  gas  at their  price  or                                                                    
better.                                                                                                                         
                                                                                                                                
Mr. Tsafos replied that it  was important to understand that                                                                    
TransCanada was irrelevant  in terms of how  the state would                                                                    
sell its gas.  He detailed that under  the current structure                                                                    
TransCanada would be an owner  in some of the infrastructure                                                                    
and  would be  paid a  tariff  for providing  a service  for                                                                    
processing and shipping gas. The  typical structure was that                                                                    
the pipeline company would not  own the gas; the state would                                                                    
own the gas.  He pointed out that the concern  about how the                                                                    
state would market its gas  had been identified by Black and                                                                    
Veatch as well. He made  several observations related to the                                                                    
issue.  First,  he  appreciated  that  trying  to  sell  the                                                                    
state's  gas in  the  global market  may  seem daunting.  He                                                                    
shared that  he had worked  with a number of  companies that                                                                    
started from  the same position;  the companies  had decided                                                                    
to learn  how to sell the  gas. He had observed  that it did                                                                    
not take  much to develop the  expertise to sell LNG  in the                                                                    
global  market. He  spoke about  marketing  teams of  former                                                                    
clients  that  had consisted  of  seven  to ten  people.  He                                                                    
believed  learning  how to  market  gas  was different  than                                                                    
learning  how   to  build  a  liquefaction   facility  or  a                                                                    
pipeline.  He   relayed  that  marketing  LNG   was  not  as                                                                    
complicated as  it seemed upfront.  He believed the  cost of                                                                    
developing a sophisticated marketing  operation was not that                                                                    
high. His opinion  was based on experience with  a number of                                                                    
players that had no former  marketing experience. There were                                                                    
two  ways to  market the  gas;  one way  was to  sell it  to                                                                    
someone, another  way was to pay  someone to sell it  on the                                                                    
state's behalf.  The HOA contemplated  both of  the options;                                                                    
it had not  been determined what the state  would choose. He                                                                    
detailed that  the state could  choose both options  for its                                                                    
gas.                                                                                                                            
                                                                                                                                
2:36:58 PM                                                                                                                    
                                                                                                                                
Mr.  Tsafos continued  to answer.  He expounded  that paying                                                                    
someone  to sell  gas on  another party's  behalf was  not a                                                                    
typical model because there was  not significant upside. The                                                                    
large  producers  made money  by  selling  gas, but  not  by                                                                    
selling another party's gas. However,  the option helped the                                                                    
state to understand  what the costs were.  The state's other                                                                    
option was  to sell  its gas. He  detailed that  selling gas                                                                    
would involve  the state issuing  a request for  proposal to                                                                    
Asian buyers to determine how  much they were willing to pay                                                                    
for the LNG.  He observed that if the  state directly worked                                                                    
with Asian  markets for  six to nine  months on  selling its                                                                    
LNG it would  gain a good idea about what  it could sell gas                                                                    
for.  He   relayed  that  the  state's   challenge  was  not                                                                    
associated  with competing  against its  partners, but  with                                                                    
other  locations  with  much   higher  volumes  of  gas.  He                                                                    
reiterated his expectation that it  would not take the state                                                                    
long to determine what constituted  a fair deal for its gas;                                                                    
the number  of people the state  would need to hire  to make                                                                    
the  determination was  low. He  stipulated that  it was  no                                                                    
guarantee  that  the state  would  not  regret the  deal  it                                                                    
signed  later; it  was  always possible  to  get the  market                                                                    
wrong. For example,  parties that signed deals  in the Lower                                                                    
48  with   the  expectation  that  gas   would  be  imported                                                                    
regretted the decision; however,  they had signed deals that                                                                    
were at the market at the  time. He understood that the task                                                                    
may seem daunting, but the challenge  may not be as large or                                                                    
insurmountable as it may seem at present.                                                                                       
                                                                                                                                
2:39:43 PM                                                                                                                    
                                                                                                                                
Representative Gara  remarked that enalytica  was consulting                                                                    
for  the governor's  office. He  expressed concern  that the                                                                    
bill presumed  the state would  be able  to tax the  gas and                                                                    
that  RIV   would  be  the   methodology  used   unless  the                                                                    
commissioner found  it was in  the state's best  interest to                                                                    
go  with RIK.  He believed  that based  on testimony  in the                                                                    
meeting  it sounded  like the  decision to  go with  RIK had                                                                    
been made.                                                                                                                      
                                                                                                                                
Mr.   Mayer  clarified   that  enalytica   worked  for   the                                                                    
Legislative  Budget   and  Audit   Committee  and   not  the                                                                    
administration.  He stated  that the  HOA posited  a vision,                                                                    
future,  and project  structure that  would use  royalty and                                                                    
tax  in  kind, but  only  if  it  was  in the  state's  best                                                                    
interest.  The focus  on RIK  with  an equity  share was  an                                                                    
endpoint  that   was  envisioned,  but   not  predetermined.                                                                    
Additionally, much of the debate  had been about whether RIK                                                                    
could or  would be desirable  for the state.  Ultimately, if                                                                    
the state  could not come  to an  agreement on RIK  it would                                                                    
need to change direction,  which would probably require much                                                                    
of  the project  structure to  be reconsidered.  He stressed                                                                    
that the state was not  committed to RIK, its commitment was                                                                    
to  pursue the  route to  determine  if it  was possible  to                                                                    
overcome the issues.                                                                                                            
                                                                                                                                
Ms. Poduval added  that the HOA specified  that the election                                                                    
to take  RIK would  be subject  to arriving  at satisfactory                                                                    
arrangements  for the  disposition of  the state's  LNG. She                                                                    
explained  that the  language did  not contemplate  that RIK                                                                    
was  a done  deal. She  did  not believe  the best  interest                                                                    
findings  had  been  presupposed  in  any  way.  Discussions                                                                    
related  to the  state  taking equity  participation in  the                                                                    
project were separate from the decision to take RIK or RIV.                                                                     
                                                                                                                                
2:43:53 PM                                                                                                                    
                                                                                                                                
Representative  Gara apologized  for his  misstatement about                                                                    
the testifiers'  representation. He referred  to enalytica's                                                                    
testimony  that  under RIV  the  downside  risk was  not  as                                                                    
great. He spoke to risks the  state would take on if it sold                                                                    
the  gas  itself.  First,  the state  had  no  control  over                                                                    
production  on the  North Slope  and how  much gas  it would                                                                    
receive.  Second,  the  state   would  owe  TransCanada  for                                                                    
shipping gas even  when gas was not shipped.  He thought the                                                                    
risks  were  substantial. He  observed  that  under RIV  the                                                                    
risks  did not  exist. He  wondered why  he should  take the                                                                    
risks so lightly.                                                                                                               
                                                                                                                                
Mr.  Tsafos   relayed  that  the  conditions   and  possible                                                                    
compensations  of  the  failure  to  deliver  gas  would  be                                                                    
negotiated in  the agreements in  the next couple  of years.                                                                    
He stated  that technically  speaking only the  operator had                                                                    
control  over production,  which  could  affect all  parties                                                                    
involved. He could  not think of a  scenario where producing                                                                    
gas  would  go against  any  of  the parties'  interest.  He                                                                    
stated  that the  producers could  compensate  and meet  the                                                                    
obligation  to  deliver  gas  to  Japan  with  other  supply                                                                    
sources,  but  it would  be  a  poor economic  decision.  He                                                                    
elaborated that each party  would invest significant capital                                                                    
and revenues  would be made  by selling gas. He  added there                                                                    
would be  a commitment to  sell the gas  for 15 or  20 years                                                                    
prior  to the  start of  the project.  It was  possible that                                                                    
accidents  or outages  may  occur resulting  in  less or  no                                                                    
production; the state  would not be the only  one that would                                                                    
have a  claim or complaint  against the operator.  He stated                                                                    
that the issues would  be settled contractually. He believed                                                                    
the  idea  that there  was  any  economic incentive  to  not                                                                    
produce   gas   ignored   the  fundamental   goal   of   LNG                                                                    
investments.                                                                                                                    
                                                                                                                                
2:48:44 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Neuman  surmised  that  if  an  entity  had  $45                                                                    
billion in debt it would have  incentive to sell as much gas                                                                    
as quickly as possible. Mr. Tsafos agreed.                                                                                      
                                                                                                                                
Representative Gara  believed the  assumption was  missing a                                                                    
component. He  noted that the  state did not know  about the                                                                    
goals  of producers.  He surmised  that  producers may  find                                                                    
that during  a given  period they could  make more  money by                                                                    
using their  gas to produce  oil instead of shipping  it. He                                                                    
discussed  a scenario  where TransCanada  agreed to  produce                                                                    
less gas  because the price  of oil had spiked.  He wondered                                                                    
if the risk was valid.                                                                                                          
                                                                                                                                
Ms. Poduval replied  that it was not a  coincidence that LNG                                                                    
projects worldwide operated at  over 90 percent utilization.                                                                    
She  stressed that  the economics  did not  make sense  once                                                                    
billions  had  been spent  to  not  run  a project  at  full                                                                    
capacity.  She noted  there was  always the  possibility for                                                                    
unplanned outages. She reasoned that  using Prudhoe Bay as a                                                                    
storage field would be an  extremely expensive storage field                                                                    
at $45  billion to  $50 billion.  She summarized  that every                                                                    
party  would have  incentives lined  up to  maximize natural                                                                    
gas production from the slope and  to run the project at its                                                                    
highest utilization.                                                                                                            
                                                                                                                                
Mr. Mayer added  that parties would also have 15  to 20 year                                                                    
take-or-pay  commitments  to  customers   in  Asia;  if  the                                                                    
commitments  could  not  be met  through  the  project,  the                                                                    
parties  would  be required  to  locate  the gas  elsewhere,                                                                    
which would involve a significant  financial penalty in many                                                                    
cases. Additionally,  in most  instances parties  would have                                                                    
significant debt  obligations that were  guaranteed directly                                                                    
from  the project's  cash  flows or  by  the parent  entity.                                                                    
Parties would also have to  justify the reason for letting a                                                                    
$50  billion project  sit idle  without  earning the  return                                                                    
promised  to   their  boards.  He  could   not  imagine  any                                                                    
incentive to  not maximize  gas production.  He acknowledged                                                                    
that  there could  be situations  where production  could be                                                                    
interrupted that  created a range  of risks the  state would                                                                    
need to  manage. He  agreed that  the difficulty,  onus, and                                                                    
complexity of managing the risks  was higher in an RIK world                                                                    
than in a pure taxing  regulating authority world. The risks                                                                    
were the reason for the  host of agreements to be negotiated                                                                    
in upcoming year  including the balance of  offtake from the                                                                    
fields and  how the agreements compared  with obligations on                                                                    
the sale of  the state's LNG. He noted that  there were many                                                                    
pieces to understand  and stated that the "devil  was in the                                                                    
details." For  instance, under what circumstances  the state                                                                    
would be  obligated to  sell LNG  to counterparties  in Asia                                                                    
and what  its obligation  would be if  it could  not provide                                                                    
the gas.  He spoke to understanding  what constituted "force                                                                    
majeure" events, when  the obligation to provide  LNG was no                                                                    
longer  in place,  and how  it matched  against the  state's                                                                    
contractual  assurances with  producers that  it would  have                                                                    
the gas.  He stated that  the ability to balance  and manage                                                                    
the items  was not unprecedented;  there were any  number of                                                                    
global  projects where  the project  owner did  not directly                                                                    
control  or own  the upstream,  but the  projects had  to be                                                                    
carefully  negotiated and  thought through.  He agreed  that                                                                    
Representative Gara was right to be concerned.                                                                                  
                                                                                                                                
2:53:46 PM                                                                                                                    
                                                                                                                                
Mr.  Tsafos  expounded that  if  there  was an  outage,  the                                                                    
producers would  not earn money  on their capacity,  but the                                                                    
state would have  a tariff that it could be  required to pay                                                                    
even  without  production.  He  pointed  to  the  difference                                                                    
between a  TransCanada versus a no-TransCanada  scenario for                                                                    
the state. He  stated that it was  no different economically                                                                    
than  taking  on  debt.  He compared  the  situation  to  an                                                                    
owner's  requirement  to  pay the  mortgage  on  a  building                                                                    
whether or not it was  rented. The economic downside risk to                                                                    
the state  of being on the  hook for a commitment  even when                                                                    
gas was not flowing through  the pipeline. He explained that                                                                    
with no  TransCanada the state  would owe debt to  the bank.                                                                    
He pointed out that the scenarios were not too dissimilar.                                                                      
                                                                                                                                
Representative  Munoz referred  to testimony  by Mr.  Harper                                                                    
that moving to  RIK would be a concession  to producers. She                                                                    
asked for a comment.                                                                                                            
                                                                                                                                
Ms.  Poduval  did  not  agree   that  going  to  RIK  was  a                                                                    
concession to  producers. She referred to  advantages to RIK                                                                    
including  price protection  during low  price circumstances                                                                    
where the  state actually fared  better with RIK.  She noted                                                                    
that going to RIK with  equity participation was the package                                                                    
that increased the commercial  attractiveness of the project                                                                    
for  the  producers.  From  the  perspective  of  commercial                                                                    
attractiveness the question was  not necessarily between RIK                                                                    
and  RIV,  but between  the  possibility  of having  or  not                                                                    
having  a  project for  the  state  to participate  in.  She                                                                    
discussed preservation of value  to the state and incentives                                                                    
the  state could  offer to  producers  in a  way that  would                                                                    
transfer  value back  to the  state as  opposed to  a fiscal                                                                    
concession  that  reduced  the royalty  or  tax  percentage.                                                                    
Additionally, she addressed  at what point the  value of the                                                                    
state's equity  participation and gas share  would equal the                                                                    
value  it would  have  received from  a theoretical  project                                                                    
under RIV without equity participation.                                                                                         
                                                                                                                                
2:57:48 PM                                                                                                                    
                                                                                                                                
Representative Munoz  expressed concern about the  idea that                                                                    
going with RIK could be a  risk to the state and the project                                                                    
NPV. Ms. Poduval answered that  if anything, the risk to the                                                                    
state would  come from making upfront  investments alongside                                                                    
the producers. She  agreed that the state  could risk losing                                                                    
up  to $400  million of  investment if  the project  did not                                                                    
reach an  affirmative final investment decision  (FID). In a                                                                    
success-case scenario at  FID the state would  have sold the                                                                    
LNG, locked in the project  debt, determined cash flows, and                                                                    
the NPV  would be  significantly positive. She  believed the                                                                    
real risk  to the  state would  be prior to  the FID  to the                                                                    
extent that the  state was a partner in  the project through                                                                    
the pre-FEED and FEED stages.                                                                                                   
                                                                                                                                
Vice-Chair Neuman  asked for  comment on  the capitalization                                                                    
structure. He  wondered about the  costs for  gas treatment,                                                                    
pipelines, transportation. He referred  to the 70 percent/30                                                                    
percent   (70/30)   debt   equity   structure   during   the                                                                    
development and construction stages.  He asked why structure                                                                    
would  be  changed to  75/25  two  years after  the  initial                                                                    
startup  date   through  the  term  of   the  transportation                                                                    
agreements. He wondered why the numbers optimal.                                                                                
                                                                                                                                
3:00:56 PM                                                                                                                    
                                                                                                                                
Ms.  Poduval  relayed  that  during  AGIA,  TransCanada  had                                                                    
proposed  and accepted  a 70/30  debt equity  structure. She                                                                    
detailed  that  higher  debt  was  better  for  the  project                                                                    
shipper because  debt was less expensive  than equity, which                                                                    
meant the state's rate was lower.                                                                                               
                                                                                                                                
Vice-Chair Neuman asked Ms. Poduval to elaborate.                                                                               
                                                                                                                                
Ms.  Poduval  explained that  under  the  state's deal  with                                                                    
TransCanada  the cost  of  debt was  5  percent whereas  the                                                                    
return on  equity was 12  percent; therefore, the  state was                                                                    
paying  more   for  the  equity  portion   of  TransCanada's                                                                    
capitalization structure  than for the debt.  She summarized                                                                    
that the higher  the debt in the structure,  the cheaper the                                                                    
cost of the transportation capacity  would be for the state.                                                                    
She  elaborated  that  moving  to a  75/25  debt  to  equity                                                                    
structure  two   years  after  the  project   begins  was  a                                                                    
concession the  state had achieved during  negotiations. She                                                                    
relayed  that  a  70/30  capitalization  structure  was  not                                                                    
unusual  for LNG  projects.  She noted  that  the topic  was                                                                    
covered in  the royalty study  that benchmarked a  number of                                                                    
global LNG projects.  She explained that 70/30  was the most                                                                    
aggressive  debt  heavy  structure.  Several  of  the  other                                                                    
projects the  study included had 60/40  or 50/50 structures,                                                                    
which made projects more expensive.  She added that a couple                                                                    
of projects had been financed  completely with equity off of                                                                    
the sponsors'  balance sheets. She  provided the  Gorgon LNG                                                                    
project  as   an  example.  She  summarized   that  a  70/30                                                                    
structure  was  in  the  "fairway"  of  what  a  prudent  or                                                                    
attractive  capitalization   structure  would  be   for  LNG                                                                    
projects.                                                                                                                       
                                                                                                                                
Mr.  Mayer referred  to previous  debt-to-equity information                                                                    
they had  presented that included  an analysis of  FERC data                                                                    
for U.S.  pipeline companies. He  relayed that  there tended                                                                    
to be a ceiling around  the 60/40 ratio, which was typically                                                                    
a common ratio  for pipelines. He stated that  a 70/30 ratio                                                                    
was  aggressive  and 75/35  was  even  more aggressive.  The                                                                    
consultants believed  that the  overall rate  structure with                                                                    
TransCanada was  attractive. He  added the  stipulation that                                                                    
certain items could change (e.g.  a potential change in rate                                                                    
tracker and  the actual debt  and equity costs)  before FID.                                                                    
He  concluded that  the 75/25  debt-to-equity structure  was                                                                    
attractive.                                                                                                                     
                                                                                                                                
3:04:36 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Neuman remarked  that TransCanada  had committed                                                                    
approximately $6 billion  at 5 percent debt  with risers. He                                                                    
asked if the 70 percent debt benefited the state.                                                                               
                                                                                                                                
Ms. Poduval requested clarification.                                                                                            
                                                                                                                                
Vice-Chair  Neuman  noted that  there  was  70 percent  debt                                                                    
during  the  development/construction phase.  He  referenced                                                                    
that  TransCanada  would  construct  the  pipeline  and  gas                                                                    
treatment facility  for about $6  billion at 5  percent debt                                                                    
with risers. He  wondered if the benefit to  the state would                                                                    
increase if the debt was 75 percent.                                                                                            
                                                                                                                                
Ms. Poduval  replied that 75  percent debt was  optimal; the                                                                    
more  debt the  better,  from the  state's perspective.  She                                                                    
stated  that the  75/25  ratio throughout  the  life of  the                                                                    
project  was  even  more attractive  than  the  70/30  ratio                                                                    
during the construction phase.                                                                                                  
                                                                                                                                
Vice-Chair  Neuman  assumed  that   the  reason  lay  behind                                                                    
TransCanada's commitment to a 5  percent interest rate on $6                                                                    
billion.  Ms.  Poduval  responded in  the  affirmative,  but                                                                    
noted it was subject to trackers.                                                                                               
                                                                                                                                
Representative  Guttenberg discussed  the  RIK  and RIV.  He                                                                    
recalled that the  modeling displayed that RIV  was a better                                                                    
deal for the state but  that the commissioner would make the                                                                    
final decision.  He wondered  what would  tip the  scale the                                                                    
other direction.                                                                                                                
                                                                                                                                
3:07:14 PM                                                                                                                    
                                                                                                                                
Mr. Mayer replied  that the scale would be tipped  to RIK if                                                                    
existing hurdles could be overcome.  He detailed that it was                                                                    
necessary  to know  the LNG  sale  terms, understanding  the                                                                    
nature of offtake and balancing  agreements, the state's gas                                                                    
share and  how it may  change over time, and  what potential                                                                    
events of production interruption  meant. He elaborated that                                                                    
it  would  necessary  to  take  a  look  at  the  change  to                                                                    
understand  the  different  obligations and  how  they  were                                                                    
connected.                                                                                                                      
                                                                                                                                
3:08:13 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg surmised that  more would be known                                                                    
about  RIK  versus RIV  in  one  to  two years  when  terms,                                                                    
conditions, and contracts had been put in place.                                                                                
                                                                                                                                
Mr.   Tsafos  replied   that  the   key   variable  to   the                                                                    
attractiveness of RIK  related to how well the  gas had been                                                                    
sold. He  noted that in  the next 1.5  years there may  be a                                                                    
range of finality  on terms; the state  may have preliminary                                                                    
agreements to sell  gas and other more  final agreements. He                                                                    
did not  think the state  would have nailed the  whole issue                                                                    
down in  the next 1.5 years;  the process began with  an MOU                                                                    
and HOA and turned into  final contracts. He added a comment                                                                    
on the broader discussion of  RIK versus RIV. He stated that                                                                    
whether RIK or RIV was  more favorable to the state depended                                                                    
on the cost  and price. He underscored that there  was not a                                                                    
scenario where RIK  or RIV was always better.  He pointed to                                                                    
the importance  of understanding  that there  were tradeoffs                                                                    
with both RIK  and RIV; depending on the market,  one or the                                                                    
other could yield more money for the state.                                                                                     
                                                                                                                                
3:11:23 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg stated  that  at  some point  the                                                                    
state would  need to balance  the risk. He surmised  that in                                                                    
15 months  when parties came  back to the  legislature there                                                                    
would  continue  to be  tradeoffs  under  each scenario.  He                                                                    
hoped   the  range   would  be   narrowed   with  a   better                                                                    
understanding  of the  world market  and interest.  He noted                                                                    
that the  state would not  have the ability to  make changes                                                                    
after that  point. He  wondered about  the chances  that the                                                                    
project would do what the state wanted it to do.                                                                                
                                                                                                                                
Ms. Poduval  looked at  RIK and  RIV separately  from equity                                                                    
participation. She theorized that if  in 1.5 years the state                                                                    
had negotiated  an agreement that  producers would  sell the                                                                    
state's share  of LNG  at the  same price  as their  own, it                                                                    
would give  the state  comfort that using  RIK would  not be                                                                    
worse than RIV.                                                                                                                 
                                                                                                                                
Representative  Guttenberg wondered  when  the state  should                                                                    
have concern  that an  agreement did  not look  as favorable                                                                    
for the  state as possible.  He wondered what  warning signs                                                                    
to look out for.                                                                                                                
                                                                                                                                
Ms. Poduval replied  that an agreement for  the producers to                                                                    
sell the state's  gas with significant costs would  be a red                                                                    
flag that the state may  receive less under an RIK scenario.                                                                    
Additionally, it  would be  unclear whether  RIK or  RIV was                                                                    
better for the state if  the producers purchased the state's                                                                    
LNG outright  rather than  selling it  along with  their own                                                                    
LNG to  the market; the  state would not have  visibility on                                                                    
the price the producers received  for their own oil. Offtake                                                                    
and in-balance  agreements could go either  way and involved                                                                    
volume related risks  the state would take with  RIK that it                                                                    
may or  may not manage  directly with RIV. She  advised that                                                                    
risk  of  volume  imbalances or  interrupted  gas  flow  was                                                                    
shared  equitably  with  producers  or  that  producers  had                                                                    
mitigated the state's risks associated with the items.                                                                          
                                                                                                                                
3:15:30 PM                                                                                                                    
                                                                                                                                
Mr.  Tsafos  recommended  paying   close  attention  to  who                                                                    
agreements  were with  if the  state was  marketing its  own                                                                    
gas. He stated  that it was always possible  to find someone                                                                    
to sell  gas to,  but it  did not  mean it  would be  in the                                                                    
state's  best interest.  He explained  that the  state would                                                                    
make  decisions  based  on   the  credit-worthiness  of  its                                                                    
counter  parties. He  advised  that there  were  a range  of                                                                    
customers from good  to bad. He would be  concerned that the                                                                    
market  was  not  being  receptive to  Alaskan  gas  if  all                                                                    
willing  buyers were  inexperienced  without strong  balance                                                                    
sheets.                                                                                                                         
                                                                                                                                
Vice-Chair  Neuman wondered  what  the consultants'  studies                                                                    
showed as the minimum gas  market price that would cover the                                                                    
state's costs.                                                                                                                  
                                                                                                                                
Mr. Mayer answered that enalytica  had conducted a number of                                                                    
stress case  analyses. He emphasized  that all  figures were                                                                    
preliminary.  One scenario  combined a  substantial increase                                                                    
in  the  project's  capital cost,  an  80  percent  pipeline                                                                    
utilization rate, and a price of  gas of $7 per mmbtu. Under                                                                    
the "almost perfect  storm" of negative outcomes  it did not                                                                    
reach a point  where the state was actually  losing money on                                                                    
an  annual  basis  although the  project  would  generate  a                                                                    
fairly  poor   return.  Once  FID  had   been  reached,  the                                                                    
fundamental  risk  was  that  the project  may  or  may  not                                                                    
achieve returns  the state had  hoped for. He stated  that a                                                                    
key part  of considering RIK  versus RIV was looking  to see                                                                    
whether the  economics looked more  attractive to  the state                                                                    
than  to producers.  He explained  that  the producers  lost                                                                    
money in  a low  price scenario much  faster than  the state                                                                    
because  the  state  was a  commercial  participant  in  the                                                                    
project  in  addition to  a  sovereign  that took  corporate                                                                    
income and  property tax from the  companies (companies were                                                                    
also subject  to federal  income tax  whereas the  state was                                                                    
not).  He detailed  that the  relative fall  in value  was a                                                                    
much shallower  slope for the  state than for  producers. He                                                                    
drew comfort from  the state entering into  the project with                                                                    
three experienced  and capable  companies who went  into the                                                                    
project  with  eyes  wide  open  and  facing  greater  risks                                                                    
associated with price downside than the state.                                                                                  
                                                                                                                                
Vice-Chair Neuman  wondered about  the breakeven  price that                                                                    
would  make  a  $50 billion  pipeline  project  economically                                                                    
viable.                                                                                                                         
                                                                                                                                
3:19:53 PM                                                                                                                    
                                                                                                                                
Mr. Mayer deferred the question to Black and Veatch.                                                                            
                                                                                                                                
Vice-Chair  Neuman referred  to  charts  showing $4  billion                                                                    
profit on $17  per mmbtu gas. Ms. Poduval  shared that Black                                                                    
and Veatch  had run  a stress case  for the  House Resources                                                                    
Committee. She  deferred to her  colleague for  the numbers.                                                                    
She stated  that under the  worst case scenario  as outlined                                                                    
by  Mr.  Mayer, the  state's  cash  flows and  NPV  remained                                                                    
positive  given  the state's  receipt  of  property tax  and                                                                    
other  non-price  sensitive  sources  of  revenue  from  the                                                                    
project. Prices would  need to be less than $7  per mmbtu in                                                                    
order for the state's cash flow reach zero or below.                                                                            
                                                                                                                                
Vice-Chair Neuman  asked for  verification that  Ms. Poduval                                                                    
was referring  to $7  [per mmbtu] to  the Asian  market. Ms.                                                                    
Poduval replied in the affirmative.                                                                                             
                                                                                                                                
Co-Chair  Austerman  referred  to earlier  discussion  about                                                                    
facility expansion  and the  cost of  service. He  asked for                                                                    
detail on the difference  between roll-in versus incremental                                                                    
rates.                                                                                                                          
                                                                                                                                
Mr.  Mayer   answered  that  future  expansions   and  their                                                                    
economics would hinge on the  initial design capacity of the                                                                    
system,  the  diameter of  the  pipeline,  and how  easy  or                                                                    
difficult   it  was   to   expand   it  through   additional                                                                    
compression. He  believed the issue  was the  most important                                                                    
item  the  state should  be  concerned  about pertaining  to                                                                    
potential  bottlenecked  facilities  or additional  use  for                                                                    
instate  gas.  He  believed  the  issue  made  direct  state                                                                    
involvement  in the  project important  because  it was  not                                                                    
necessarily  clear that  the  state  interest was  perfectly                                                                    
aligned with  the producers by themselves.  He detailed that                                                                    
the producers had a fairly  well known and defined asset and                                                                    
some took on additional  exploration more than others, which                                                                    
could  lead to  the discovery  of additional  gas. He  could                                                                    
envision a  case where the  primary incentive  for producers                                                                    
would be  to have  a well-defined  capacity for  the initial                                                                    
project, to  keep the  costs at  a minimum,  and to  know it                                                                    
would  make  the  desired   return.  Alternately,  he  could                                                                    
envision a  scenario where the state's  interest was broader                                                                    
than the  previous case.  Where it was  in the  state's best                                                                    
interest to spend extra money  on a larger diameter pipeline                                                                    
with  lower initial  pressure and  greater future  expansion                                                                    
capability. He stated that how  the costs and benefits would                                                                    
play out  was not  currently known.  He believed  there were                                                                    
costs and  benefits to using  TransCanada as a  partner, but                                                                    
in the present case he  believed its involvement would offer                                                                    
a significant benefit. He elaborated  that the benefit would                                                                    
come from having  a pro-expansion minded party  at the table                                                                    
when court decisions were  made around engineering, pipeline                                                                    
size, and  the costs  of future  expansions. He  stated that                                                                    
the  items   would  have  a   much  bigger  impact   on  the                                                                    
expandability  of the  pipeline  than  the question  between                                                                    
rolled-in versus incremental rates.  He relayed that under a                                                                    
rolled-in rates scenario if the  total per unit capital cost                                                                    
of  the  pipeline was  increased  through  an expansion  the                                                                    
additional  cost  was  borne  by  everyone,  whereas  on  an                                                                    
incremental  basis  the additional  cost  was  borne by  the                                                                    
expansion participants only. He  discussed the importance of                                                                    
understanding that  for the initial participants,  gas would                                                                    
be sold  under 15  to 20-year contracts  to parties  in Asia                                                                    
with very little ability to  change the terms once they were                                                                    
set.  He  reasoned  that  the   prospect  of  a  substantial                                                                    
increase in a  tariff when the increase could  not be passed                                                                    
on  to an  end-consumer,  would be  a  substantial risk.  He                                                                    
elaborated that there would  be numerous circumstances where                                                                    
it  would be  against the  best  interest of  the state  and                                                                    
producers  to have  additional pipe  laid in  response to  a                                                                    
small discovery of gas.                                                                                                         
                                                                                                                                
3:26:17 PM                                                                                                                    
                                                                                                                                
Mr. Mayer  relayed that  when it  came to  expansions beyond                                                                    
compression there would be  overwhelming hurdles unless they                                                                    
were  for  a  large  new  discovery  with  export  potential                                                                    
regardless  of   rolled-in  versus  incremental   rates.  He                                                                    
believed it  was fundamental to  establish that  the state's                                                                    
interest  was   well  represented  in  the   initial  design                                                                    
capacity  decisions  on  the  pipe  size  and  other  design                                                                    
considerations related to expandability.                                                                                        
                                                                                                                                
Co-Chair Austerman  surmised that  it may benefit  the state                                                                    
and TransCanada in  the long-term if the  expansion was done                                                                    
early on rather  than doing it afterwards.  He assumed there                                                                    
would be a cost savings in the strategy.                                                                                        
                                                                                                                                
Mr. Mayer replied  that there were a  multitude of variables                                                                    
to consider when contemplating  future expansion. He relayed                                                                    
that it  could be in the  state's interest to spend  more on                                                                    
the pipe  to ensure  the possibility of  solid expandability                                                                    
through compression before adding additional pipe.                                                                              
                                                                                                                                
Ms. Poduval expounded  that it was important to  have all of                                                                    
the  facilities  designed in  a  way  that would  facilitate                                                                    
expansion.                                                                                                                      
                                                                                                                                
Vice-Chair   Neuman  opined   that  $7   gas  used   in  the                                                                    
consultants'  stress   case  seemed  phenomenally   low.  He                                                                    
believed  there was  a specific  type of  gas used  in Asian                                                                    
markets, which was the reason  for a 2,500-plus psi line. He                                                                    
asked what  the value of gas  had to be to  ship, go through                                                                    
liquefaction, and other.                                                                                                        
                                                                                                                                
Ms. Poduval  answered that  for the  state's portion  of the                                                                    
project the total was just under $8.                                                                                            
                                                                                                                                
Vice-Chair Neuman  asked if the figure  included wellhead to                                                                    
market.                                                                                                                         
                                                                                                                                
3:30:12 PM                                                                                                                    
                                                                                                                                
Ms.  Poduval replied  that the  figure did  not account  for                                                                    
shipping; with shipping it would be $9.                                                                                         
                                                                                                                                
Vice-Chair Neuman asked  whether the figure was  based on $2                                                                    
or  $3  gas.  Ms.  Poduval  replied  in  the  negative.  She                                                                    
detailed  that the  cost  did  not assume  a  gas cost;  the                                                                    
figure  included  the  cost  to move  the  gas  through  the                                                                    
infrastructure.                                                                                                                 
                                                                                                                                
Vice-Chair  Neuman  referred  to   a  question  by  Co-Chair                                                                    
Austerman  related  to  expansion.  He  wondered  about  the                                                                    
design of  the pipeline  related to  size. He  wondered what                                                                    
the  design decisions  were  based on.  He  remarked on  the                                                                    
relative  inaccessibility of  48-inch pipe  compared to  42-                                                                    
inch pipe.                                                                                                                      
                                                                                                                                
Mr. Mayer replied that they could  not speak to the issue in                                                                    
detailed  terms. He  relayed that  a  smaller pipeline  with                                                                    
high compression could have a  lower initial capital cost in                                                                    
some  circumstances.  At  some  point with  larger  pipe  it                                                                    
became difficult  to source the  material. He  discussed his                                                                    
understanding  that the  proposed  project  envisioned a  42                                                                    
inch line. One of the  benefits of state involvement ensured                                                                    
that a broader  range of options were  evaluated in addition                                                                    
to how the state's interest  in future expansion may compare                                                                    
to the producers' interest.                                                                                                     
                                                                                                                                
Ms. Poduval noted that the  details had not been worked out.                                                                    
The  initial concept  selection had  designated a  range for                                                                    
the  pipeline's diameter.  She believed  the  size would  be                                                                    
resolved through pre-FEED.                                                                                                      
                                                                                                                                
3:33:09 PM                                                                                                                    
                                                                                                                                
Representative   Guttenberg   surmised   that   there   were                                                                    
different  ownership components  between  the gas  treatment                                                                    
plant, the  pipeline, and the  LNG plant. He  believed every                                                                    
time  there  was  a  seam   it  presented  vulnerability  to                                                                    
exposure on additional  cost. He wondered how  normal it was                                                                    
for a project to have the various ownership structures.                                                                         
                                                                                                                                
Ms. Poduval  answered that she  did not believe  the project                                                                    
was sliced  up in the  way mentioned. She explained  that it                                                                    
was envisioned  to be an  integrated project;  therefore the                                                                    
same  project  team  would  work its  way  through  the  gas                                                                    
treatment  plant,  the  pipeline,  and the  LNG  plant.  She                                                                    
discussed that  it made sense from  a management perspective                                                                    
for  a large  project  to have  an  integrated structure  in                                                                    
order to  keep the various  project components in  sync. She                                                                    
addressed  that  TransCanada would  hold  a  portion of  the                                                                    
state's share in  the gas treatment plant  and the pipeline;                                                                    
any uncertainty  related to the  issue would be  resolved in                                                                    
the enabling  contracts between  TransCanada and  the state.                                                                    
She  elaborated that  the transportation  services agreement                                                                    
would guarantee  the state passage through  the pipeline and                                                                    
gas  treatment plant.  Under the  current  proposal the  LNG                                                                    
plant  would  be  held  by  AGDC; the  state  would  have  a                                                                    
liquefaction services  agreement for the LNG  plant. She did                                                                    
not  believe   the  structure  created  seams;   it  created                                                                    
commercial  agreements that  would  define  how the  state's                                                                    
share of the gas would move through the project.                                                                                
                                                                                                                                
Mr. Tsafos  added that the  structure was  highly integrated                                                                    
with   the  exception   of  the   TransCanada  portion.   He                                                                    
elaborated that  worldwide, LNG projects had  many different                                                                    
models.  He  detailed  that  some  resource  owners  had  no                                                                    
ownership of the infrastructure,  in other circumstances all                                                                    
of  the  pipelines  were  owned  by  the  state  and  export                                                                    
facilities  were owned  by private  companies. Additionally,                                                                    
there were  projects where  the components  were integrated.                                                                    
Usually the  resource drove how the  project was structured;                                                                    
it was  easier to  use integration when  there was  a large-                                                                    
scale resource  with a fairly  similar player  ownership. He                                                                    
explained  that if  the gas  was owned  across 15  different                                                                    
fields  with  10  owners,   an  integrated  structure  would                                                                    
probably not be used.                                                                                                           
                                                                                                                                
3:37:17 PM                                                                                                                    
                                                                                                                                
Vice-Chair Neuman  pointed to the various  presentations. He                                                                    
advised  members to  take advantage  of the  consultants. He                                                                    
asked  Mr.  Harper  to  provide  any  closing  comments.  He                                                                    
referred  to  discussions  on  RIK, RIV,  and  the  cost  of                                                                    
deliverable gas to the Asian market.                                                                                            
                                                                                                                                
Mr.  Harper  agreed  with  some  of what  was  said  by  the                                                                    
consultants. He  agreed that  the initial  design parameters                                                                    
(i.e. pipeline diameter) would have  a significant impact on                                                                    
future  access  to  other  players  and  initial  costs.  He                                                                    
believed there  may be incentive  for producers  to downsize                                                                    
the project  as negotiations moved forward  because it would                                                                    
result  in  a   lower  initial  cost.  He   had  heard  some                                                                    
conflicting  statements  about   RIK.  He  disputed  earlier                                                                    
remarks  that learning  to market  LNG was  not a  difficult                                                                    
task. He stated  that it was not just a  matter of finding a                                                                    
buyer. He detailed  that under RIV the state  would not take                                                                    
on  the  purchaser's  credit  or  shipping  contract  risks.                                                                    
Additionally, the  state would  not take  the risk  that its                                                                    
source of  production may  decline. He  pointed to  a recent                                                                    
trial  that had  resulted in  a judgment  in excess  of $400                                                                    
million  as  a result  of  Prudhoe  Bay  going down  for  an                                                                    
extended  period  of time.  He  believed  there had  been  a                                                                    
remark   that  RIK   could  be   potentially  viewed   as  a                                                                    
concession.  He believed  that if  the state  received other                                                                    
counterbalances a concession would  be fine. He relayed that                                                                    
RIK rights  were present in  virtually every lease  in North                                                                    
America. He stressed  that it had never been  availed to any                                                                    
degree  by a  lessor.  He pointed  to  the federal  Minerals                                                                    
Management Services  that had come  close to using  RIK, but                                                                    
after taking a  close look it decided against  it. He stated                                                                    
that RIK was typically not used.  He agreed that it could be                                                                    
done  and could  be  used  as a  concession  or tradeoff  to                                                                    
advance  the   project.  He   agreed  completely   with  the                                                                    
discussion  on   rolled-in  versus  incremental   rates  and                                                                    
variances associated with capital structure.                                                                                    
                                                                                                                                
3:42:32 PM                                                                                                                    
                                                                                                                                
Representative Gara  asked for verification that  Mr. Harper                                                                    
had been citing a state  consultant's data when he testified                                                                    
that taking RIK could result in a 10 percent loss to NPV.                                                                       
                                                                                                                                
Mr.  Harper  agreed. He  relayed  that  the study  had  been                                                                    
conducted by the  Lukens Energy Group (Black  and Veatch had                                                                    
acquired   Lukens).  He   suggested  contacting   Ken  Alper                                                                    
[legislative aide] for a copy of the study.                                                                                     
                                                                                                                                
Representative   Gara  addressed   issues   that  had   been                                                                    
discussed during  the meeting including  who would  sell the                                                                    
state's gas,  would the state get  a good deal for  its gas,                                                                    
what would happen  if the state did not get  the gas but was                                                                    
liable  for  shipping cost  to  TransCanada,  and issues  on                                                                    
expansion. He remarked that the  response had been that each                                                                    
item  would be  determined in  negotiations. He  wondered if                                                                    
the state  should address as  many of the items  as possible                                                                    
in the legislation. He believed  that when negotiations were                                                                    
complete the state  would be told to take the  deal or leave                                                                    
it.                                                                                                                             
                                                                                                                                
Mr. Harper  replied that it  would be better to  address the                                                                    
items  sooner rather  than  later. He  believed  that in  18                                                                    
months  or  so the  state  would  be  dealing with  a  "fait                                                                    
accompli."  He   did  not  believe   the  process   was  ill                                                                    
intentioned, but that the negotiations  would have been down                                                                    
a  long  road with  many  tradeoffs.  He stressed  that  all                                                                    
decisions were made on incremental  costs in the oil and gas                                                                    
business.                                                                                                                       
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
3:46:45 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 3:46 p.m.                                                                                          
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
Rick Harper HFIN 4-10-14.doc HFIN 4/10/2014 1:00:00 PM
AK LNG