Legislature(2013 - 2014)HOUSE FINANCE 519

04/11/2014 01:30 PM FINANCE


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01:34:57 PM Start
01:35:08 PM Presentation: Discussion of Oil and Gas Issues - Roger Marks and Enalytica.
03:48:08 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
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+ Roger Marks - Discussion of Oil & Gas Issues TELECONFERENCED
+ Enalytica - Q & A, Oil & Gas Issues TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      April 11, 2014                                                                                            
                         1:34 p.m.                                                                                              
                                                                                                                                
                                                                                                                                
1:34:57 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  Austerman  called   the  House  Finance  Committee                                                                    
meeting to order at 1:34 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                                                                                                                  
                                                                                                                                
Roger Marks, Legislative  Consultant, Legislative Budget and                                                                    
Audit  Committee;  Janak  Mayer, Partner,  Enalytica;  Nikos                                                                    
Tsafos, Partner, Enalytica.                                                                                                     
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
^PRESENTATION:  DISCUSSION OF  OIL  AND GAS  ISSUES -  ROGER                                                                  
MARKS AND ENALYTICA.                                                                                                          
                                                                                                                                
1:35:08 PM                                                                                                                    
                                                                                                                                
ROGER MARKS, LEGISLATIVE  CONSULTANT, LEGISLATIVE BUDGET AND                                                                    
AUDIT COMMITTEE, provided  a PowerPoint presentation titled:                                                                    
"Evaluation of  SB 138 and  Associated Proposed  North Slope                                                                    
Natural Gas Commercialization Proposals" (copy on file).                                                                        
                                                                                                                                
1:35:52 PM                                                                                                                    
                                                                                                                                
Mr. Marks began his presentation  with slide 2: "Roger Marks                                                                    
-  Background." He  disclosed that  he worked  in a  private                                                                    
consulting practice  in Anchorage specializing  in petroleum                                                                    
economics  and taxation.  From 1983  through 2008  he was  a                                                                    
senior  petroleum  economist  with   the  State  of  Alaska,                                                                    
Department   of   Revenue   Tax   Division.   One   of   his                                                                    
responsibilities  was   to  assess   the  North   Slope  gas                                                                    
commercialization issue  which he  continued to do  over the                                                                    
course of his 25 years of  service. He pointed out that over                                                                    
a fifteen-year period  in the 1980s and 1990s  he was likely                                                                    
the  only  state  employee  looking at  the  gas  issue.  He                                                                    
participated in  various study groups with  the producers on                                                                    
liquefied  natural  gas  (LNG),  pipeline gas,  and  gas  to                                                                    
liquids.  He   also  worked  on  the   Alaska  Stranded  Gas                                                                    
Development  Act  under  Governors Tony  Knowles  and  Frank                                                                    
Murkowski.  He  reported that  since  leaving  the state  he                                                                    
published  on  Alaska Gasline  Inducement  Act  (AGIA) in  a                                                                    
couple  of  journals  and  through  his  work  with  various                                                                    
clients he continually  assessed commercialization potential                                                                    
of North Slope gas.                                                                                                             
                                                                                                                                
1:36:58 PM                                                                                                                    
                                                                                                                                
Mr. Marks continued with some  background explaining that in                                                                    
early  February 2014  he was  asked by  Senator Kevin  Meyer                                                                    
through  the  Legislative  Budget  and  Audit  Committee  to                                                                    
prepare  an evaluation  of  the gas  proposal.  He issued  a                                                                    
report  in  mid-February 2014  which  members  had in  their                                                                    
packets. He  announced he  would be  addressing some  of the                                                                    
findings in  his report and  indicated he would  be offering                                                                    
some  observations,  some   suggested  questions,  and  some                                                                    
options to consider. He turned to slide 3: "Outline":                                                                           
                                                                                                                                
   1. Introduction: Market and Timing Landscape                                                                                 
   2. Hi-level Decisions                                                                                                        
        a. In -Kind Gas                                                                                                         
        b. Regulation                                                                                                           
        c. Ownership                                                                                                            
   3. Role of AGIA in Proposal                                                                                                  
                                                                                                                                
1:38:21 PM                                                                                                                    
                                                                                                                                
Mr.   Marks  discussed   slide   4:  "Introduction:   Market                                                                    
Challenges":                                                                                                                    
                                                                                                                                
   · Competition                                                                                                                
        o Twice the amount of supply as there is demand in                                                                      
          Asia in 2030                                                                                                          
   · Pricing                                                                                                                    
        o Prices appear to be falling                                                                                           
             ƒBuyers realize sellers were making windfalls                                                                     
               at prices linked to high oil prices and                                                                          
               increased competition among sellers                                                                              
        o Compete based on cost                                                                                                 
   · Size Burden                                                                                                                
        o Need to capture large incremental share of market                                                                     
          in short amount of time                                                                                               
        o Higher breakeven price than much of the                                                                               
          competition.                                                                                                          
                                                                                                                                
Mr.  Marks  reported  19 countries  outside  the  U.S.  with                                                                    
functioning  LNG projects  that  were looking  to serve  the                                                                    
Asian  market. He  continued that  there  were 5  additional                                                                    
projects in  the advanced stages of  market assessment, also                                                                    
hopeful of  supplying Asia.  He made the  point that  if the                                                                    
2009 nuclear  embargo was lifted,  the 1,200  trillion cubic                                                                    
feet  of gas  sitting in  the shallow  waters of  Iran would                                                                    
become an  available supply as  well. He furthered  that the                                                                    
Fukushima  disaster in  Japan  in 2009  [2011]  took all  of                                                                    
Japan's nuclear  capability offline, which accounted  for 30                                                                    
percent of  its energy  demand. Japan replaced  its resource                                                                    
with gas  causing the country's  energy prices to  rise. The                                                                    
Japanese government was very interested  in bringing most of                                                                    
its 48 nuclear  plants back online. He reported  that only 4                                                                    
of the  48 plants were  affected by the  Fukushima disaster.                                                                    
The  remaining plants  were in  good  condition. He  relayed                                                                    
that  Japan was  also  interested in  accelerating its  coal                                                                    
development  and  moving  away  from  the  use  of  gas.  He                                                                    
informed the  committee that China started  to explore shale                                                                    
and coal-bed methane  and had access to  great quantities of                                                                    
pipeline  gas   from  Russia.   He  surmised   that  despite                                                                    
encouraging market  growth prospects in Asia  and in looking                                                                    
at the  consensus and most  of the forecast, there  would be                                                                    
twice as  much supply  of LNG  as there  would be  demand in                                                                    
Asia by the year 2030.                                                                                                          
                                                                                                                                
Mr. Marks  moved to  the topic of  pricing. He  stated that,                                                                    
until recently,  LNG prices in Asia  were oil-linked causing                                                                    
prices  to  be  high,  especially  as  oil  and  gas  prices                                                                    
worldwide  seemed to  be  coupled  over the  last  10 to  15                                                                    
years. He continued  that the link appeared  to be weakening                                                                    
as buyers in Asia realized  producers were making a windfall                                                                    
on oil-linked prices and as  competition to sell gas to Asia                                                                    
increased.  Previously,  LNG  prices  were  around  $18  per                                                                    
million British  thermal units (BTU)  in Asia,  as reflected                                                                    
in old contracts.  Newer contracts were being  let at prices                                                                    
as low as $6 to $12 per million BTU.                                                                                            
                                                                                                                                
1:41:34 PM                                                                                                                    
                                                                                                                                
Mr.  Marks  reported  that Rice  University's  sophisticated                                                                    
world gas  marketing model  showed that  oil prices  in Asia                                                                    
would  be  about  $5  per   million  BTU  over  Henry  Hub's                                                                    
prediction.  The  long-term forecast  for  Henry  Hub was  a                                                                    
price  of   around  $5.  If  Rice   University's  model  was                                                                    
accurate, Asia's  price would be  $10 per million  BTU, much                                                                    
lower  than  what it  had  been.  He furthered  that,  going                                                                    
forward,  prices would  continue  to  fall, and  competition                                                                    
would have to be based on cost.                                                                                                 
                                                                                                                                
Mr.  Marks pointed  out that  Alaska was  at a  disadvantage                                                                    
regarding  cost.  He  mentioned   the  size  burden  of  the                                                                    
project. The  cost estimate  for the  total project  was $45                                                                    
billion to  $65 billion  including the gas  treatment plant,                                                                    
the pipeline, and the LNG  facilities. The cost estimate was                                                                    
done four years  earlier and did not  account for inflation.                                                                    
Alaska  was the  only LNG  project in  the world  that would                                                                    
have  a  pipeline  of its  magnitude.  Alaska  required  the                                                                    
largest  and longest  pipeline  to bring  gas  to the  point                                                                    
where it  would be liquefied.  He elaborated that,  since it                                                                    
was such  a big  and expensive  pipeline, Alaska  would need                                                                    
large quantities of gas to run  through it to lower the per-                                                                    
unit  price. He  stipulated that  the gas  would have  to be                                                                    
sold in a short amount of  time, otherwise, a pipe would sit                                                                    
half  empty for  several years  hurting Alaska's  economics.                                                                    
The producers worked  to find the ideal  pipeline size large                                                                    
enough to bring  the per-unit cost down but not  so big that                                                                    
the volume of gas could not  be sold. The volume of Alaska's                                                                    
project  would be  lower,  and the  per-unit  cost would  be                                                                    
higher. He  mentioned that in  Asia discreet sales  could be                                                                    
made  utility-by-utility,  unlike  the  United  States.  All                                                                    
three producers  [BP, ConocoPhillips, and  ExxonMobil] would                                                                    
have to sanction  the project individually in  order for the                                                                    
project to move  forward. The Asian market  was only growing                                                                    
at a rate  of 2 billion cubic feet (BCF)  per day, per year.                                                                    
Alaska's project would  generate 2.4 BCF per  day, per year.                                                                    
He suggested  that if it  took 4 years  to get the  gas into                                                                    
the  market   Alaska  would  capture   30  percent   of  the                                                                    
incremental market each year, an ambitious goal.                                                                                
                                                                                                                                
1:44:50 PM                                                                                                                    
                                                                                                                                
Mr.  Marks  moved   to  slide  5:  "New   LNG  Projects  are                                                                    
Expensive."  He  pointed  out  that  breakeven  prices  were                                                                    
estimated  at  $8  to  $13  per million  BTU  in  Asia.  His                                                                    
breakeven estimate  for the  North Slope  project, depending                                                                    
on what hurdle  rate the producers used and the  cost of the                                                                    
project, fell between $11 and  $17 [per million BTU]. Alaska                                                                    
was one of the higher cost LNG projects.                                                                                        
                                                                                                                                
1:45:28 PM                                                                                                                    
                                                                                                                                
Mr. Marks advanced to slide 6: "Timing Landscape":                                                                              
                                                                                                                                
   · Terms set up today will determine                                                                                          
        o Risks to state                                                                                                        
        o Cost of capital                                                                                                       
             ƒLong-term gas revenues                                                                                           
             ƒWhat Alaskans pay for gas in the future                                                                          
   · Options: A modified deal which may take a few months                                                                       
     to put together could create more long-term benefits                                                                       
     to state                                                                                                                   
                                                                                                                                
Mr. Marks communicated that the  state needed the project to                                                                    
begin as  soon as possible,  and terms set at  present would                                                                    
determine two  important things going forward;  the risks to                                                                    
the state  and the cost of  capital. He used the  example of                                                                    
interest on a thirty-year home  mortgage to explain that the                                                                    
cost  of  capital  determined  gas  revenues  and  rates  to                                                                    
consumers.  Lower terms  on capital  costs for  the pipeline                                                                    
would  save  significant  dollars   over  the  life  of  the                                                                    
project.  He suggested  the state  consider a  modified deal                                                                    
that,  if available,  would ultimately  lower costs  for the                                                                    
state and for consumers.                                                                                                        
                                                                                                                                
1:47:49 PM                                                                                                                    
                                                                                                                                
Mr. Marks referred  to slide 7: "High  Level Decisions under                                                                    
Proposal":                                                                                                                      
                                                                                                                                
   · State takes its production taxes and royalties as in-                                                                      
     kind gas                                                                                                                   
   · Tariffs and expansions will not be regulated                                                                               
   · TransCanada (and perhaps SOA as partner) will own                                                                          
     share of GTP and pipeline, and SOA will own share of                                                                       
     LNG facilities, commensurate with state's share of gas                                                                     
     (about 25%)                                                                                                                
   · Designed to amicably transition out of AGIA                                                                                
                                                                                                                                
Mr.  Marks  stated that  tariffs  would  be regulated  under                                                                    
Section 3 of  the Natural Gas Act geared for  LNG import and                                                                    
export  terminals and  did not  cover  tariff and  expansion                                                                    
terms. As a  result, in order to get  reasonable tariffs and                                                                    
expansion  terms  the  state  was  interested  in  owning  a                                                                    
portion of the project.                                                                                                         
                                                                                                                                
1:49:12 PM                                                                                                                    
                                                                                                                                
Mr. Marks detailed slide 8: "In-Value vs. In-Kind Gas":                                                                         
                                                                                                                                
   · Helps out the economics of the project considerably                                                                        
  · If the state takes its royalties and taxes in value:                                                                        
        o The producers pay for 100% of the capital cost,                                                                       
          incur 100% of the capital risk, but only get 75%                                                                      
          of the revenues                                                                                                       
        o Producers pay to state in taxes and royalties an                                                                      
          amount of money equal to 25% of the gas                                                                               
        o They slowly recover over time the cost of the 25%                                                                     
          of the capital costs they laid out for the                                                                            
          state's share through the tariff deduction                                                                            
        o But at a midstream rate of return, which is lower                                                                     
          than the upstream                                                                                                     
        o This waters down their rate of return                                                                                 
   · When the state takes its taxes and royalties as in-                                                                        
     kind gas, the state assumes the capital commitment for                                                                     
     its capacity either through ownership or taking on a                                                                       
     firm transportation commitment with a third-party                                                                          
   · The state does not need to own the pipeline to take                                                                        
     the gas in-kind                                                                                                            
                                                                                                                                
Mr.  Marks explained  that currently  with the  Trans-Alaska                                                                    
Pipeline System  (TAPS) the  producers realized  a midstream                                                                    
return of 8 percent.  Producers anticipated a minimum hurdle                                                                    
rate of approximately  10 to 12 percent based  on where they                                                                    
were looking for a return  on the upstream and the project's                                                                    
risks.  Taking the  oil in-value  watered down  the rate  of                                                                    
return. He also  noted that the upstream rate  of return not                                                                    
watered  down with  the midstream  increased the  producers'                                                                    
rate  of return  by  1  or 2  percent.  The breakeven  price                                                                    
dropped from $1 to $2  per million BTU, a significant amount                                                                    
based on the  scale of the project. He added  that, in terms                                                                    
of alignment, taking the gas in-kind was more important.                                                                        
                                                                                                                                
1:51:23 PM                                                                                                                    
                                                                                                                                
Mr.   Marks   reviewed   slide   9:   "Firm   Transportation                                                                    
Commitments":                                                                                                                   
                                                                                                                                
   · When the state takes its taxes and royalties as in-                                                                        
     kind gas, the state will take on a long-term firm                                                                          
     transportation liability (debt) to TransCanada (on the                                                                     
    portion of the 25 percent the state does not own).                                                                          
   · Ship or pay regardless of cost, market, reserves                                                                           
  · Used by pipeline company as collateral for financing                                                                        
   · TransCanada will have priority claims on projects cash                                                                     
     flows                                                                                                                      
                                                                                                                                
Mr.  Marks  elaborated  that   a  firm  transportation  (FT)                                                                    
commitment  was  not  an operating  expense  but  a  capital                                                                    
obligation. It  did not vary  with operations.  In financial                                                                    
terms,  TransCanada would  become the  middleman; the  state                                                                    
would  sign the  FT commitment,  TransCanada would  take the                                                                    
commitment  to the  bank, the  bank  would give  TransCanada                                                                    
cash  to build  the pipeline,  and the  state would  owe the                                                                    
money  to  TransCanada. He  stated  that  whether the  state                                                                    
owned the  pipeline itself  or took  the FT  commitment, the                                                                    
obligation and loss of debt capacity would be the same.                                                                         
                                                                                                                                
1:53:58 PM                                                                                                                    
                                                                                                                                
Mr. Marks advanced  to slide 10: "Debt  Capacity and In-Kind                                                                    
Gas":                                                                                                                           
                                                                                                                                
   · State policy is for debt service to be not more than 8                                                                     
     percent of general fund unrestricted revenues                                                                              
   · Investing in the project will put the state 2-3 times                                                                      
     over that amount                                                                                                           
   · It has been suggested that having TransCanada as a                                                                         
     partner would reduce the debt service relative to                                                                          
     state ownership                                                                                                            
   · The debt from taking the FT with TransCanada will have                                                                     
     a greater impact on the state's debt capacity than                                                                         
     debt used to finance ownership                                                                                             
                                                                                                                                
Mr.  Marks  gave an  example  that  if  the state  owned  $1                                                                    
billion of the  project and financed at 70  percent debt and                                                                    
30 percent  equity, the  debt would equal  70 percent  of $1                                                                    
billion. If  the state took  a FT commitment  to TransCanada                                                                    
for $1 billion, it would be $1 billion of debt.                                                                                 
                                                                                                                                
1:55:21 PM                                                                                                                    
                                                                                                                                
Mr. Marks turned to slide 11: "Marketing the In-Kind Gas":                                                                      
                                                                                                                                
   · By taking gas in-value the state benefits from some of                                                                     
     the best marketers in the world                                                                                            
   · Consider linking in-kind provision with agreement by                                                                       
     producers to market state's gas with their gas at the                                                                      
     same price they got                                                                                                        
        o Otherwise, risk that state may be marketing at                                                                        
          prices considerably lower than producers, which                                                                       
          could result in losing money                                                                                          
                                                                                                                                
Mr. Marks reported that with  the in-value system, where the                                                                    
state  received  a  share of  what  the  producers  received                                                                    
through taxes  and royalties, the  state would  benefit from                                                                    
some  of  the best  gas  marketers  in  the world,  the  gas                                                                    
producers. The producers would market  the gas for no fee to                                                                    
the state.  Under Section  8.3.3 of  the Heads  of Agreement                                                                    
(HOA)  it stated  that  the producers  would  be willing  to                                                                    
negotiate  an  agreement  to purchase  and  dispose  of  the                                                                    
state's  in-kind  gas.  He   suggested  the  state  consider                                                                    
linking  the gas  in-kind option  in an  agreement with  the                                                                    
producers,  where producers  would  market  the state's  gas                                                                    
with their own (including pricing)  at no cost. Without such                                                                    
a provision, the state stood  high risk. He explained if the                                                                    
three producers  sanctioned the project, the  state would be                                                                    
passively   drawn  into   participating.  The   statute  for                                                                    
taxation  specified that  producers had  the ability  to pay                                                                    
their  taxes and  royalties in-kind,  they could.  Once they                                                                    
did  so, the  state would  be forced  into an  FT commitment                                                                    
with TransCanada.  In reading the  MOU with  TransCanada, he                                                                    
found that  the state would have  to take the FT  before the                                                                    
front end engineering  design (FEED) started, at  the end of                                                                    
preliminary front  end engineering design  (pre-FEED), which                                                                    
was not  a customary  arrangement. Usually,  to get  to pre-                                                                    
FEED,  a  company  started filing  its  documents  with  the                                                                    
Federal Energy Regulatory Commission  (FERC), where the open                                                                    
season started.  Potential shippers then took  out precedent                                                                    
agreements,  much  less  binding  than  firm  transportation                                                                    
agreements. Under the Memorandum  of Understanding (MOU) the                                                                    
state  would have  to take  a  firm transportation  services                                                                    
agreement before feed started;  before the final cost, debt,                                                                    
and  equity  costs were  known;  and  before being  able  to                                                                    
assess the  market. The construction period,  if sanctioned,                                                                    
would be 5 years. If the  producers got to the market first,                                                                    
they  would  likely get  the  highest  prices and  the  best                                                                    
markets. Even  given a tight  economic climate,  the project                                                                    
would  still  potentially be  feasible  for  producers by  a                                                                    
small  margin.  However, if  the  state  ended up  marketing                                                                    
behind the  producers and thus  procuring less for  its gas,                                                                    
it  could mean  a loss  for the  state. In  addition if  the                                                                    
state was  competing with the  producers in the  same market                                                                    
it could reduce the price it  obtained in Asia if the buyers                                                                    
tried to play  the state against the  producers. Getting the                                                                    
producers to sell the state's  gas was exactly what happened                                                                    
with the in-value system. He  concluded that the state would                                                                    
have more bargaining power than through negotiation.                                                                            
                                                                                                                                
1:59:20 PM                                                                                                                    
                                                                                                                                
Mr. Marks discussed slide 12: "B. Regulation":                                                                                  
                                                                                                                                
   · Proposal under Heads of Agreement (HOA) is for FERC to                                                                     
     regulate under Section 3 of the Natural Gas Act                                                                            
        o Mainly designed for licensing the siting,                                                                             
          construction, expansion, and operation of LNG                                                                         
          import or export terminals                                                                                            
        o Terminals include facilities used to transport                                                                        
          and process gas                                                                                                       
        o Appears this would be the only pipeline in the                                                                        
          U.S where tariff for consumers' gas is not                                                                            
          regulated                                                                                                             
   · No regulation of tariffs or expansions                                                                                     
        o To get reasonable tariffs and expansions, state                                                                       
          ownership necessary                                                                                                   
        o Unclear what happens as in-state needs expand:                                                                        
                                                                                                                                
Mr.  Marks  stated  that,  as  specified  by  FERC,  an  LNG                                                                    
terminal included  a treatment  plant and a  pipeline. Based                                                                    
on FERC's  definition, the current  proposal would  not have                                                                    
any regulations on  tariffs or expansions. In  the Lower 48,                                                                    
where Section 3 was used  and included pipelines, there were                                                                    
interstate pipelines  that delivered gas to  consumers; FERC                                                                    
regulated the  pipelines under  Section 7.  After consulting                                                                    
with  research  staff  from   the  National  Association  of                                                                    
Regulatory  Utility Commissioners,  the National  Regulatory                                                                    
Research Institute,  and the  Texas Railroad  Commission, he                                                                    
discovered that the proposed pipeline  would be the only one                                                                    
in the United States in  which tariffs for consumer gas were                                                                    
not regulated.  Under the proposal,  the pipeline  would not                                                                    
be  a common  carrier or  a contract  carrier. He  continued                                                                    
that  the pipe  would  essentially be  four industrial  feed                                                                    
lines from  the North Slope  to Asia. He concluded  that the                                                                    
way  the   proposal  was   designed,  state   ownership  was                                                                    
necessary   in  order   to   get   reasonable  tariffs   and                                                                    
expansions.  He  also  surmised that  the  state's  capacity                                                                    
would possibly become the expansion source of last resort.                                                                      
                                                                                                                                
2:01:57 PM                                                                                                                    
                                                                                                                                
Mr.  Marks  directed  attention  to  slide  13:  "Example  -                                                                    
Initial Gas disposition (billion cubic feet per day)":                                                                          
                                                                                                                                
     Initial Gas Disposition (billion cubic feet per day)                                                                       
          Total Gas           2.4 bcf/d                                                                                         
               State Share    25 percent                                                                                        
          State Gas           0.6 bcf/d                                                                                       
               To Fairbanks  (0.05 bcf/d)                                                                                       
          State Gas to Asia  0.55 bcf/d                                                                                         
                                                                                                                                
Mr.  Marks  suggested  that  in five  years  if  Cook  Inlet                                                                    
production  started  to  decline  without  the  prospect  of                                                                    
recovering  and Southcentral  Alaska  needed  0.2 bcf/d,  it                                                                    
would be  difficult to ensure  production of  available gas.                                                                    
Long-term contracts  with Asia  would prevent  any obligated                                                                    
capacity  from   being  redirected  for  in-state   use.  He                                                                    
volunteered   that  the   state  could   request  the   U.S.                                                                    
Department  of Energy  revoke the  export  license based  on                                                                    
indigenous  consumption  need.   He  recommended  the  state                                                                    
consult with  the department for  more information.  He also                                                                    
suggested  including language  in  the enabling  legislation                                                                    
that would  compel producers  to produce  gas if  needed for                                                                    
in-state consumption.  Under current lease terms  it was not                                                                    
possible  for the  state to  do  so. He  suggested that  0.2                                                                    
bcf/d  was  a  relatively  small quantity  of  gas,  and  an                                                                    
alignment of  interests between the state  and the producers                                                                    
would be necessary. He recommended  the state negotiate with                                                                    
the  producers   about  the  possibility  of   expansion  if                                                                    
additional  in-state supply  was needed  after the  pipeline                                                                    
was running.                                                                                                                    
                                                                                                                                
2:04:41 PM                                                                                                                    
                                                                                                                                
Mr.  Marks addressed  what the  producers  would charge  the                                                                    
state for their gas. He  asserted that without regulation in                                                                    
place a transparent netback price  would not be available to                                                                    
determine a  reasonable purchase price. He  suggested adding                                                                    
a provision be added  to the legislation requiring producers                                                                    
to  sell their  gas to  the state,  designated for  in-state                                                                    
use,  at  a  reasonable  price. He  furthered  that  similar                                                                    
provisions were used in the state's tax statues.                                                                                
                                                                                                                                
2:06:05 PM                                                                                                                    
                                                                                                                                
Mr.  Marks  reviewed slide  14:  "Benefit  of Regulation  of                                                                    
Monopoly":                                                                                                                      
                                                                                                                                
   · Precedent for Regulatory Commission of Alaska to                                                                           
     regulate in-state and export pipeline and gas                                                                              
     treatment under AS 42.08                                                                                                   
   · Regulation is the trade-off for privilege of natural                                                                       
     monopoly                                                                                                                   
   · May enhance market efficiencies to have transparent                                                                        
     pipeline cost                                                                                                              
   · State may be conflicted as pipeline owner or partner                                                                       
     to pipeline owner for accountability                                                                                       
                                                                                                                                
Mr. Marks explained  that only one pipeline  would be built.                                                                    
The state would grant a  right-of-way lease giving the owner                                                                    
of the pipeline  a monopoly on the  business of transporting                                                                    
gas. He remarked  that Section 3 of the Natural  Gas Act was                                                                    
not  designed to  deal  with  a monopoly  power  over a  gas                                                                    
pipeline in  a marketplace  setting where  consumers receive                                                                    
gas directly.  Currently, there was a  very efficient system                                                                    
in place  for small  producers to get  their oil  to market.                                                                    
The  only producers  shipping gas  on Trans-Alaska  Pipeline                                                                    
System (TAPS)  were British Petroleum  (BP), ConocoPhillips,                                                                    
and  ExxonMobil.  It would  be  very  inefficient for  small                                                                    
producers  such as  Anadarko, Pioneer,  ENI, and  others, to                                                                    
get  into  the  gas  transportation business  based  on  the                                                                    
volume of gas they produce.                                                                                                     
                                                                                                                                
Mr. Marks  elaborated that prior  to the  Exxon-Valdez spill                                                                    
many of the producers shipped  their oil on other producers'                                                                    
tankers, an  agreement called, "contract  of affreightment."                                                                    
After  the Exxon-Valdez  spill the  small producers  started                                                                    
selling to  the "big-three" producers who  then transported,                                                                    
shipped,  and  sold the  gas.  The  small producers  took  a                                                                    
slight reduction  in their  selling price,  but in  doing so                                                                    
avoided taking  on oil spill  risk. Also, the  netback costs                                                                    
of the oil on the  slope remained transparent. However, with                                                                    
the new  legislation, the netback  value on the  North Slope                                                                    
would be a complete unknown except to the pipeline owners.                                                                      
                                                                                                                                
Mr. Marks  argued that  the pipeline  owners would  have the                                                                    
opportunity  to exploit  their  monopoly, possibly  impeding                                                                    
commercial activity  and hampering  the small  gas producers                                                                    
from exploring  for and developing  gas on the  North Slope.                                                                    
He also  noted that if  TransCanada had 25  percent capacity                                                                    
of the  pipeline in  partnership with  the state  to deliver                                                                    
gas for  in-state consumption, one  of the  most significant                                                                    
roles  of  regulation  would  be  to  make  sure  there  was                                                                    
responsible  and  prudent  spending  by the  owners  of  the                                                                    
pipeline.  However, in  the proposed  case the  owners would                                                                    
have a  monopoly, incurring costs  and passing  them through                                                                    
at  their  discretion. The  owners  would  be able  to  make                                                                    
higher  equity   investments  and  earn   higher  investment                                                                    
returns  without having  to be  responsible  and prudent  in                                                                    
their spending.  He expressed his concerns  that there would                                                                    
be no neutral place for the  consumer to go with a grievance                                                                    
without  regulation in  place.  In  the proposed  regulatory                                                                    
arrangement  the state  would potentially  be conflicted  in                                                                    
terms of accountability. He  saw accountability problems for                                                                    
prudent spending as  one of the issues to  be concerned with                                                                    
under the proposed regulatory arrangement.                                                                                      
                                                                                                                                
2:12:00 PM                                                                                                                    
                                                                                                                                
Mr.   Marks   discussed   slide  15:   "C.   Ownership   and                                                                    
Partnership":                                                                                                                   
                                                                                                                                
   · Need for ownership due to no regulation on tariffs and                                                                     
     expansion, and for lower tariffs                                                                                           
   · State does not necessarily need partner for expertise                                                                      
     assistance                                                                                                                 
        o Producer expertise                                                                                                    
        o AGDC expertise                                                                                                        
        o TransCanada's expertise in gas treatment unclear                                                                      
        o To the extent there is not a need for expertise,                                                                      
          if the state needs a cash partner, it does not                                                                        
          necessarily need a pipeline company partner, but                                                                      
          a general investment partner                                                                                          
                                                                                                                                
Mr.  Marks  recounted  the  agreement  explaining  that  the                                                                    
state,  in  partnership  with   TransCanada,  would  own  25                                                                    
percent of the  pipeline commensurate with its  share of the                                                                    
gas. TransCanada  would own the  pipeline and  the treatment                                                                    
facility with  an option for  the state  to buy into  its 40                                                                    
percent. He elaborated that the  state would own 100 percent                                                                    
of  the 25  percent  state  share of  the  LNG facility.  He                                                                    
questioned whether  the state needed  ownership, and  if so,                                                                    
whether  it  needed a  partner.  He  opined that  under  the                                                                    
proposed  regulatory   structure  there   was  a   need  for                                                                    
ownership  due to  the  lack of  regulation  on tariffs  and                                                                    
expansion and  for lower tariffs. He  reported three reasons                                                                    
outlined in the regulatory structure  why the state needed a                                                                    
partner.  First, the  state's  debt limit  problem would  be                                                                    
reduced  by having  a partner  and taking  an FT  commitment                                                                    
with TransCanada.  Second, a  partner would  bring expertise                                                                    
to the project.  Third, the state needed a bank.  He did not                                                                    
did not necessarily  agree that the state  needed a partner.                                                                    
As he  discussed earlier having  a partner and taking  an FT                                                                    
commitment with  TransCanada would actually increase  a debt                                                                    
limit problem. He  argued that the state  would already have                                                                    
the  expertise  it  needed  from   the  producers.  He  also                                                                    
emphasized  that the  state would  have  the Alaska  Gasline                                                                    
Development  Corporation's   (AGDC)  expertise.   Under  the                                                                    
current proposal nearly half of  the cost of the project was                                                                    
for the LNG facility which would  be owned by AGDC without a                                                                    
partner; AGDC  would be allowed  to take on  contractors but                                                                    
would have full ownership of the facility.                                                                                      
                                                                                                                                
                                                                                                                                
2:14:40 PM                                                                                                                    
                                                                                                                                
Mr. Marks stated that under  the Alaska Stand Alone Pipeline                                                                    
(ASAP) AGDC was appropriated more  than $400 million to own,                                                                    
build,  operate, and  finance  the in-state  line without  a                                                                    
partner. The  size of  the bullet  line project  was roughly                                                                    
equivalent  to the  state's 25  percent share  of the  AKLNG                                                                    
project.                                                                                                                        
                                                                                                                                
Mr. Marks  moved on to  discuss the gas treatment  plant and                                                                    
the pipeline.  In looking at financial  reports he commented                                                                    
that  it  was  unclear  how much  gas  treatment  experience                                                                    
TransCanada   had.   He   claimed  they   were   world-class                                                                    
transporters  of  oil  and  gas,  had  businesses  in  power                                                                    
generation  and   gas  storage,  but  lacked   much  or  any                                                                    
experience  in   gas  treatment.  He  furthered   that  when                                                                    
TransCanada  originally submitted  its  AGIA application  it                                                                    
did  not want  to do  gas treatment.  TransCanada came  back                                                                    
with a  gas treatment contract  with URS Corporation  at the                                                                    
request of the state.                                                                                                           
                                                                                                                                
Mr.  Marks  suggested  that  if  the  state  needed  a  cash                                                                    
partner,  it did  not  necessarily need  to  partner with  a                                                                    
pipeline company. He communicated  that a general investment                                                                    
partner,  such  as a  large  investment  bank or  a  private                                                                    
equity  firm, may  be a  better  fit. He  also alluded  that                                                                    
finance funding  could come from  the Alaska  Permanent Fund                                                                    
to the  tune of  approximately $3  billion. The  state could                                                                    
invest it  at 11 percent,  less than TransCanada,  and bring                                                                    
an 11 percent return which was a very equitable return.                                                                         
                                                                                                                                
2:17:14 PM                                                                                                                    
                                                                                                                                
Mr. Marks  discussed slide 16:  "State Does  Not Necessarily                                                                    
Need Partner for Cash or  Lower Tariffs: 2011 Citigroup AGDC                                                                    
Financing Plan":                                                                                                                
                                                                                                                                
   · Possibility of 100% debt financing                                                                                         
        o Combination of revenue bonds and state backing                                                                        
        o Appears to be less risky than ASAP plan                                                                               
        o Possibility of deferring most cash outflows until                                                                     
          gas starts flowing                                                                                                    
        o May have short-term impact on credit rating that                                                                      
          would reverse once gas revenues start coming in                                                                       
   · Possibility of tax-exempt bonds through Alaska                                                                             
     Railroad                                                                                                                   
       o Directed at industrial development projects                                                                            
        o Requires IRS private letter ruling                                                                                    
        o Reduces cost of debt about 25% relative to                                                                            
          taxable debt                                                                                                          
   · Would require potentially no or little equity (cash)                                                                       
     before gas starts flowing                                                                                                  
   · To the extent the state does not need a cash partner,                                                                      
     its good credit rating and potential for tax-exempt                                                                        
     debt could result in a lower cost of capital                                                                               
                                                                                                                                
Mr. Marks  reported that  AGDC brought  in Citigroup  to put                                                                    
together  its financing  plan in  2011. Citigroup  discussed                                                                    
the  possibility of  100 percent  debt  financing through  a                                                                    
combination  of  revenue bonds  and  state  backing. The  25                                                                    
percent AKLNG  project appeared less  risky than  the stand-                                                                    
alone project  in many regards. The  stand-alone project was                                                                    
projected to  be approximately $8 billion,  whereas the cost                                                                    
of  the  AKLNG project  would  only  be slightly  more.  The                                                                    
involvement of  the big-three producers  would make  it less                                                                    
risky for  investors, and  there would  be more  gas revenue                                                                    
coming to the state to underpin the debt.                                                                                       
                                                                                                                                
Mr. Marks  suggested that, with 100  percent debt financing,                                                                    
cash outflows  could be deferred  until gas was  flowing. He                                                                    
continued that  the state  could experience  some short-term                                                                    
impact on its credit rating  that would be reversed once gas                                                                    
revenues started  coming in. The  impact would  likely occur                                                                    
within  the  first five  years.  The  only time  this  could                                                                    
become a problem  was if there were  gas purchase agreements                                                                    
in  place  and  creditors  felt comfortable  that  high  gas                                                                    
prices would be coming in after construction.                                                                                   
                                                                                                                                
2:19:22 PM                                                                                                                    
                                                                                                                                
Mr.  Marks discussed  tax-exempt  bonds  through the  Alaska                                                                    
Railroad Corporation. When the  state purchased the railroad                                                                    
from the federal government in  1983 part of the legislation                                                                    
that conveyed it to the  state opened up the opportunity for                                                                    
the railroad  to issue tax-exempt  debt. The purpose  was to                                                                    
add  to  industrial  development projects.  He  stated  that                                                                    
Senator Ted Stevens authored  the legislation and believedit                                                                    
would open  the door  for the state  to get  tax-exempt debt                                                                    
through  the  railroad. Citigroup  also  believed  it was  a                                                                    
possibility. He  furthered that in  order to  get tax-exempt                                                                    
debt the state  would need a private letter  ruling from the                                                                    
Internal Revenue  Service (IRS). A legal  argument needed to                                                                    
be  made to  the IRS,  which  would be  costly to  assemble,                                                                    
approximately $100 thousand or  more. He explained that tax-                                                                    
exempt  debt  financing  ran  about  25  percent  less  than                                                                    
conventional debt.  If the state  could get  tax-exempt debt                                                                    
it  would  be  a  tremendous benefit  to  the  project;  100                                                                    
percent low-cost  debt financing would require  little or no                                                                    
equity  up  front prior  to  gas  output. The  state's  good                                                                    
credit  rating  and  potential  for  tax-exempt  debt  would                                                                    
likely result in  a lower cost of capital to  the extent the                                                                    
state did  not need a  cash partner. Higher  revenues, lower                                                                    
tariffs, and lower  cost gas to Alaskans  would also follow.                                                                    
He suggested the state bring in Citigroup as a consultant.                                                                      
                                                                                                                                
2:21:51 PM                                                                                                                    
                                                                                                                                
Mr. Marks  discussed slide 17:  "Ownership: Risk  of Failure                                                                    
to Sanction":                                                                                                                   
                                                                                                                                
   · Sponsors could spend over $2 billion to get to FID and                                                                     
     have a project not materialize, of which SOA would be                                                                      
     responsible for 25%, regardless of whether it                                                                              
     exercised ownership option with TransCanada                                                                                
   · Are producers better equipped to handle that risk?                                                                         
        o Diversification - some of their other prospects                                                                       
          will get sanctioned                                                                                                   
        o Finite capital competing not only for gas, but                                                                        
          for oil                                                                                                               
        o Where other countries do share this risk, the                                                                         
          takes are higher                                                                                                      
   · Will this money make a material difference to the                                                                          
     viability of the project?                                                                                                  
        o The more interested the producers are in the                                                                          
          project, the less they need state money. The less                                                                     
          interested they are, the more the state should                                                                        
          avoid this risk.                                                                                                      
   · Balance:                                                                                                                   
        o How near tipping point                                                                                                
        o Probability of Project                                                                                                
        o Size of the prize                                                                                                     
        o How material is $600 mm                                                                                               
   · Could pursue arrangement with producers to buy in to                                                                       
     project once it is sanctioned (or at least after pre-                                                                      
     FEED) and re-pay feasibility costs with interest                                                                           
                                                                                                                                
Mr. Marks  stated that the  project could be stopped  at any                                                                    
point. The  purpose of the  FEED process was to  spend money                                                                    
to narrow cost  uncertainties. At the time  of entering pre-                                                                    
FEED, cost  uncertainty would  be in  the area  of 20  to 25                                                                    
percent,  too uncertain  for going  forward. He  recommended                                                                    
spending  money  to get  to  the  point  where there  was  a                                                                    
confidence  level of  plus or  minus 10  percent. He  opined                                                                    
that  it would  take  about  3 to  5  percent  of the  total                                                                    
project  cost  to get  to  the  proposed level  of  comfort,                                                                    
reflected  in the  $2.2 billion  that was  estimated to  get                                                                    
through pre-FEED and FEED.                                                                                                      
                                                                                                                                
Mr.  Marks  discussed  the challenge  of  developing  a  gas                                                                    
marketing plan without knowing costs.  He specified that the                                                                    
state needed to ensure that  it could generate enough income                                                                    
to cover  its costs. He  indicated that there  were multiple                                                                    
reasons why the  state could spend a lot of  money and still                                                                    
walk away with  nothing. Other projects could  step into the                                                                    
market, prices could crash, and  exchange rates could change                                                                    
unfavorably affecting  gas prices.  He was uncertain  if the                                                                    
state  should take  the risk  of ownership  and wondered  if                                                                    
producers were  better equipped to  handle the  exposure. He                                                                    
asserted  that the  producers had  diversification in  their                                                                    
favor  compared to  the state.  He explained  that companies                                                                    
had  a  finite  amount  of capital  and  asserted  that  the                                                                    
current  project was  competing with  other LNG  projects as                                                                    
well as  higher value oil  projects. The producers  were the                                                                    
active  decision  makers while  the  state  was the  passive                                                                    
recipient.                                                                                                                      
                                                                                                                                
2:24:44 PM                                                                                                                    
                                                                                                                                
Mr.  Marks  referenced  the  Denali   project  that  BP  and                                                                    
ConocoPhillips  took on  a  few years  ago.  He stated  that                                                                    
their goal was  to spend $600 million to get  to open season                                                                    
without   an   inducement   act,    HOA,   MOU,   or   state                                                                    
participation.  He claimed  that in  other countries,  where                                                                    
they took  the risk of  incurring the costs  of feasibility,                                                                    
they  were  limited  to national  oil  companies  where  the                                                                    
government takes  were much  higher than  Alaska's potential                                                                    
project.  Additionally, he  stated that  what the  producers                                                                    
spent on sanctioning  costs would be paid  for through state                                                                    
and  federal  government  income  tax  deductions.  He  also                                                                    
claimed that the  market cap of the  big-three companies was                                                                    
about $750 billion, dwarfing the state.                                                                                         
                                                                                                                                
Mr. Marks  posed the  question whether  the money  the state                                                                    
spent would make  a material difference to  the viability of                                                                    
the project.  He believed  there was  a tipping  point where                                                                    
state participation would make  a difference. However, there                                                                    
was  no way  of  knowing  where the  tipping  point was.  He                                                                    
asserted that  the more interested  the producers  were, the                                                                    
less they would need the  state's money for feasibility. The                                                                    
less interested they are in  the project, the more the state                                                                    
should stay away from the risk.                                                                                                 
                                                                                                                                
Mr. Marks  commented that  there was  a balance  between the                                                                    
tipping point, the  probability of the project,  the size of                                                                    
the  prize, and  how materially  it  would be  if the  state                                                                    
invested $600 million  and came away with  nothing; AGIA did                                                                    
that with $350 million. He  stressed that what the producers                                                                    
needed was long-term alignment.                                                                                                 
                                                                                                                                
2:27:11 PM                                                                                                                    
                                                                                                                                
Mr. Marks discussed slide 18: "Role of AGIA in Proposal":                                                                       
                                                                                                                                
   · Public comments by administration:                                                                                         
       o Aggressive time frame to get gas to market                                                                             
        o Desire to avoid potential lengthy and costly                                                                          
          legal fight over ending AGIA license                                                                                  
        o Proposal designed to end AGIA license amicably                                                                        
   · Appears plan was crafted (at least in part) around                                                                         
     giving TransCanada a material role to avoid potential                                                                      
     AGIA liabilities                                                                                                           
   · License project assurances (treble damages) clause in                                                                      
     AGIA                                                                                                                       
   · Could there be better terms if state was not so                                                                            
     constrained by AGIA?                                                                                                       
                                                                                                                                
Mr.  Marks  claimed  that if  the  state  proceeded  without                                                                    
TransCanada there  would be  a risk  of legal  and financial                                                                    
exposure through  the license  project assurances  clause in                                                                    
AGIA,  which asserted  that if  the state  gave preferential                                                                    
tax  treatment or  a grant  of state  money for  a competing                                                                    
project  it  had to  pay  TransCanada  three times  what  it                                                                    
spent. In referring back to  the public comments made by the                                                                    
administration, he believed  that the state was  placed in a                                                                    
poor   bargaining   position    in   crafting   terms   with                                                                    
TransCanada.  He wondered  if better  terms could  be agreed                                                                    
upon if the state was not so constrained by AGIA.                                                                               
                                                                                                                                
2:29:15 PM                                                                                                                    
                                                                                                                                
Mr.  Marks  discussed slide  19:  "Areas  Where State  Could                                                                    
Possibly have Better Terms If It Had No Partner":                                                                               
                                                                                                                                
   · Possibility of full ownership of 25 percent share of                                                                       
     GTP/Pipe with 100 percent debt financing and possible                                                                      
     tax-exempt debt                                                                                                            
   · Lower cost of capital: higher gas revenues/lower cost                                                                      
     gas to consumers                                                                                                           
   · There is a misalignment of interests between shippers                                                                      
     and non-shipper partners                                                                                                   
Mr. Marks  reported in the  current project the  state would                                                                    
be the shipper and TransCanada  would be the transporter. He                                                                    
emphasized that the biggest risk  of the project (other than                                                                    
the  market)  was  cost-overruns and  expensive  expansions.                                                                    
TransCanada  would make  money  while the  state would  lose                                                                    
money on overruns.  TransCanada made money on  its return on                                                                    
equity; the  higher the  equity invested  the more  money it                                                                    
made. He  asserted that TransCanada  did not  have incentive                                                                    
to be  efficient with spending  whereas it was  critical for                                                                    
the state to avoid cost overruns.                                                                                               
                                                                                                                                
2:31:09 PM                                                                                                                    
                                                                                                                                
Mr.  Marks  moved to  slide  20:  "Areas Where  State  Could                                                                    
Possibly have  Better Terms  If It  Had a  Different Partner                                                                    
(or could re-negotiate MOU) ":                                                                                                  
                                                                                                                                
   1. Sharing failure to sanction risk                                                                                          
   2. Share in benefit of lower interest rates                                                                                  
   3. Higher ownership share than 40% (of 25%)                                                                                  
   4. Better cost of capital terms in tariff                                                                                    
     o TransCanada's terms are about the same as other                                                                          
        Canadian pipelines                                                                                                      
     o 100% or tax-exempt debt may be preferable                                                                                
     o Given producer involvement, terms on existing                                                                            
        pipelines may not be relevant                                                                                           
                                                                                                                                
Mr.  Marks   relayed  that   the  state   could  potentially                                                                    
negotiate  better  terms  by putting  the  project  out  for                                                                    
competitive  bid or  renegotiating  the  existing terms.  He                                                                    
reported that there were at  least ten pipeline companies in                                                                    
Canada  and the  United States  that were  capable of  doing                                                                    
Alaska's project. He  identified four areas of  the MOU that                                                                    
could  be  adjusted to  benefit  the  state. Currently,  the                                                                    
state assumed  all of  the risk of  failing to  sanction. He                                                                    
suggested  that  risk  could be  shared.  He  also  proposed                                                                    
sharing in  the benefit of  lower interest rates.  Under the                                                                    
current MOU TransCanada  proposed a 5 percent  cost of debt.                                                                    
If interest  rates were to  go down and TransCanada  were to                                                                    
refinance  at  a  lower  interest   rate  it  would  not  be                                                                    
obligated to pass  the lower interest rate on  to the state.                                                                    
The state would have to  continue paying the higher interest                                                                    
rate.  A  different partner  could  offer  to share  in  the                                                                    
benefit  of  lower  interest rates.  The  state  could  also                                                                    
negotiate a higher ownership share than 40 percent.                                                                             
                                                                                                                                
2:34:33 PM                                                                                                                    
                                                                                                                                
Mr. Marks  stated that the  final area in which  terms could                                                                    
be adjusted was  better cost of capital  terms. He recounted                                                                    
that  what   TransCanada  proposed  was  better   than  U.S.                                                                    
pipelines  under FERC,  and what  it received  currently was                                                                    
about  the same  as other  Canadian pipelines.  He suggested                                                                    
that the  100 percent or  tax-exempt debt was  preferable to                                                                    
what TransCanada  offered. Also, with  producer involvement,                                                                    
terms  on existing  pipelines could  be irrelevant.  Private                                                                    
equity firms could come in  wanting lower returns. Also, the                                                                    
state's  portion  of  the  pipeline   was  25  percent.  The                                                                    
remaining  75 percent  belonged  to the  producers who  were                                                                    
well-financed,  well-capitalized, well-motivated,  and well-                                                                    
experienced.  Other entities  could look  at the  project as                                                                    
less risky than terms  on existing pipelines. Another bidder                                                                    
might  need a  lower return  and might  be willing  to share                                                                    
some of the  sanction risk. He reiterated  the importance of                                                                    
going out for bids on such a significant project.                                                                               
                                                                                                                                
2:37:39 PM                                                                                                                    
                                                                                                                                
Mr. Marks directed  attention to slide 21  titled "How Bound                                                                    
is State by AGIA?":                                                                                                             
                                                                                                                                
   · The easiest way out of AGIA is abandonment of the                                                                          
     project as uneconomic (AS 43.90.240)                                                                                       
   · Official project plan is still the pipeline to Alberta                                                                     
   · Uneconomic defined as:                                                                                                     
          "predicted  costs  of   transportation  at  a  100                                                                    
          percent load factor,  when deducted from predicted                                                                    
          gas   sales  revenue   using  publicly   available                                                                    
          predictions of future gas  prices, would result in                                                                    
          a producer rate  of return that is  below the rate                                                                    
          typically  accepted  by  a  prudent  oil  and  gas                                                                    
          exploration   company  for   incremental  upstream                                                                    
          investment  that   is  required  to   produce  and                                                                    
          deliver gas to the project."                                                                                          
   · If parties disagree it is settled by arbitration                                                                           
   · If it is found uneconomic - treble damages no longer                                                                       
     apply                                                                                                                      
   · Economically, this would not be difficult to show                                                                          
                                                                                                                                
Mr. Marks  defined an "uneconomic"  project to be  one that,                                                                    
given  predicted costs  and gas  prices, had  a sub-economic                                                                    
rate-of-return. He  commented that the standard  in statute,                                                                    
referred  to  as a  preponderance  of  evidence, was  a  low                                                                    
threshold.  He explained  that  if there  was  a 51  percent                                                                    
chance  that  the  pipeline  to   Alberta  project  was  not                                                                    
economic,  the state  would  not be  bound  to the  project.                                                                    
Under  AGIA,  if  the  parties  disagreed  on  the  economic                                                                    
viability of  the project, they  would settle  their dispute                                                                    
via arbitration. He continued that  if the project was found                                                                    
to be  economic then  treble damages  would no  longer apply                                                                    
[Note:  slide reads  "If  it is  found  uneconomic -  treble                                                                    
damages no longer apply"]. He  asserted that it would not be                                                                    
difficult  to   show  that  the   project  to   Alberta  was                                                                    
uneconomic. He furthered that  he had informal conversations                                                                    
with  Don  Bullock,  at   Legislative  Legal  Services,  who                                                                    
believed that  it would  not be difficult  to show  that the                                                                    
project  was uneconomic.  Mr. Marks  reported that  the most                                                                    
recent cost  estimates for  the project  was $30  billion to                                                                    
$40 billion  excluding transportation costs from  Alberta to                                                                    
the  Lower  48.  He  surmised that  today,  given  the  cost                                                                    
estimates of  the project and  the forecasted prices  in the                                                                    
Lower 48,  the project would  lose money. He  disclosed that                                                                    
currently there was approximately  1,200 trillion cubic feet                                                                    
of gas available  in the Lower 48 closer to  the market at a                                                                    
lower cost than what Alaska could offer.                                                                                        
                                                                                                                                
2:40:41 PM                                                                                                                    
                                                                                                                                
Mr. Marks discussed slide 22: "Fiscal Stability":                                                                               
                                                                                                                                
   · Producers have continually expressed necessity                                                                             
   · Some fiscal stability may be necessary                                                                                     
   · SB 138 not stable                                                                                                          
   · Scope out producers intentions as to what constitutes                                                                      
     adequate stability.                                                                                                        
                                                                                                                                
Mr.  Marks affirmed  the necessity  of fiscal  stability. He                                                                    
believed that  it was a  serious issue based on  the history                                                                    
of the state  over the last 25 years. He  opined that SB 138                                                                    
in its current form was  not stable. He acknowledged the in-                                                                    
kind gas  provision but asserted  that there was  nothing in                                                                    
the  bill  that  would  prevent a  future  legislature  from                                                                    
coming  in  and imposing  an  additional  tax. He  suggested                                                                    
approaching the producers to find  out what they believed to                                                                    
be adequate  stability. He referenced  Section 9.3.2  in the                                                                    
HOA  that  addressed  other terms  that  made  the  contract                                                                    
predictable and durable. He did not  want the state to be in                                                                    
a  position where  it made  a $600  million investment  just                                                                    
before sanctioning only to have  producers set an additional                                                                    
stipulation such as a change in the constitution.                                                                               
                                                                                                                                
2:42:15 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stoltze  asked  if the  legislature  had  time  to                                                                    
explore everything Mr. Marks suggested.                                                                                         
                                                                                                                                
Mr. Marks  stated that he  had laid out some  questions that                                                                    
needed  to be  asked  and  some options  that  needed to  be                                                                    
explored. He posed the question  whether it would make sense                                                                    
for the state  to go forward before  answering the questions                                                                    
and exploring its options.                                                                                                      
                                                                                                                                
Co-Chair Stoltze  asked if  enough tweaks  could be  made to                                                                    
provide  a  higher  level  of   comfort  and  certainty  for                                                                    
Alaskans based on Mr. Marks' recommendations.                                                                                   
                                                                                                                                
2:43:37 PM                                                                                                                    
                                                                                                                                
Mr.  Marks  responded  with  caution   by  stating  that  he                                                                    
understood the legislature  did not want to be  told what to                                                                    
do. He reiterated that there  were some big questions to ask                                                                    
such  as whether  the state  should enter  into the  project                                                                    
prior  to  the  sanction   point.  He  suggested  putting  a                                                                    
mechanism  in place  where once  the project  was sanctioned                                                                    
the state would enter into  a commitment with the producers.                                                                    
The  state  would  then  have   the  time  to  arrange  it's                                                                    
financing  and give  the producers  the long-term  alignment                                                                    
they  needed. The  largest alignment  between the  state and                                                                    
the producers  would be  for the state  to commit  to taking                                                                    
its gas  in-kind. He suggested  that the state  consult with                                                                    
Citigroup about financing options.                                                                                              
                                                                                                                                
Mr.   Marks   recommended   declaring   the   AGIA   project                                                                    
uneconomic. The  state would  then be  free to  move forward                                                                    
without  TransCanada.  He  warned  that  if  the  state  was                                                                    
bringing  TransCanada  in because  of  AGIA,  the state  was                                                                    
really  limiting  its  options.  He continued  that  if  the                                                                    
project was put  out for bid it was possible  that the state                                                                    
would find  out that  TransCanada was  an ideal  partner. He                                                                    
contended  that   in  the  case   of  large   projects  most                                                                    
businesses  go  out   to  bid  in  order   to  consider  all                                                                    
possibilities.                                                                                                                  
                                                                                                                                
2:46:39 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stoltze  mentioned  that   the  state  would  have                                                                    
another  chance to  approve a  contract and  that a  special                                                                    
session might be on the horizon  for next year. He asked Mr.                                                                    
Marks  to  elaborate   on  how  much  the   state  would  be                                                                    
obligating itself in taking the next step.                                                                                      
                                                                                                                                
Mr.  Marks replied  that his  understanding of  the enabling                                                                    
legislation  was  that it  eliminated  the  option of  going                                                                    
forward without TransCanada. He avowed his concerns.                                                                            
                                                                                                                                
Representative Gara  asked about Mr. Marks'  availability to                                                                    
help with  amendments if necessary. Mr.  Marks confirmed his                                                                    
availability.                                                                                                                   
Representative  Gara asked  for clarification  regarding Mr.                                                                    
Marks' statement about statute rather than negotiation.                                                                         
                                                                                                                                
Mr. Marks replied  that, in terms of the  state getting what                                                                    
it wanted,  it had much greater  bargaining strength putting                                                                    
something  into  statute  than sitting  down  to  negotiate.                                                                    
However,  he   interjected  that   all  parties   should  be                                                                    
considered.                                                                                                                     
                                                                                                                                
Representative Gara  expressed his  concerns that if  he did                                                                    
not  vote for  the legislation  the state  would be  saddled                                                                    
with  the Alaska  Stand Alone  Pipeline  (ASAP) project.  He                                                                    
asked  for  further clarification.  He  also  asked why  Mr.                                                                    
Marks thought the project had a lower risk than ASAP.                                                                           
                                                                                                                                
2:50:22 PM                                                                                                                    
                                                                                                                                
Mr. Marks  remarked that  if he were  a creditor  looking at                                                                    
the two projects  he would be inclined to loan  money to the                                                                    
state for the  AKLNG project because it  appeared less risky                                                                    
than the  ASAP project. Citigroup  said that under  ASAP the                                                                    
state could  get $8  billion and  possibly 100  percent debt                                                                    
financing  at  good  interest  rates.   There  would  be  no                                                                    
producer involvement,  and a much lower  revenue stream with                                                                    
ASAP.   The  state   would  have   a   25  percent   buy-in,                                                                    
approximately $11 billion, with  producer involvement, and a                                                                    
higher revenue stream with the AKLNG project.                                                                                   
                                                                                                                                
Representative  Gara asked  if  the state  should leave  its                                                                    
options  open when  considering  the risks  and benefits  of                                                                    
revenue in-kind versus revenue in-value.                                                                                        
                                                                                                                                
2:52:01 PM                                                                                                                    
                                                                                                                                
Mr.  Marks recommended  taking the  gas  in-kind and  opined                                                                    
that it was a powerful  economic incentive for the producers                                                                    
to continue  with the project.  In considering a  project of                                                                    
its magnitude being  able to move the rate of  return by one                                                                    
or  2 percentage  points was  significant.  He also  advised                                                                    
including  the  stipulation  that  the  producers  sell  the                                                                    
state's  gas with  their gas  at  the same  price, which  he                                                                    
believed would remove significant risk.                                                                                         
                                                                                                                                
Representative  Edgmon referred  to slide  20. He  asked Mr.                                                                    
Marks if  his recommendation  would be  to explore  the four                                                                    
items listed prior to passing SB 138.                                                                                           
                                                                                                                                
Mr.  Marks  responded  strongly   in  the  affirmative.  The                                                                    
legislation  would  wed  the   state  to  TransCanada,  thus                                                                    
removing  the  option  for  a   lower  cost  of  capital  on                                                                    
TransCanada's  portion.  He   thought  the  exploration  was                                                                    
prudent in securing the best deal for the state.                                                                                
                                                                                                                                
Representative Edgmon brought up  the difference between Mr.                                                                    
Mark's  analysis  of  the  project and  that  of  Black  and                                                                    
Veatch.  He  noted  Black and  Veatch's  evaluation  favored                                                                    
TransCanada as a worthy partner  for a number of reasons. He                                                                    
cited  a reduction  in up-front  costs  to the  state of  $4                                                                    
billion  to  $7  billion,  and  the  expertise  accompanying                                                                    
TransCanada. He questioned why Mr.  Marks' assessment of the                                                                    
project differed so much.                                                                                                       
                                                                                                                                
2:54:34 PM                                                                                                                    
                                                                                                                                
Mr. Marks concurred that he  disagreed on the points offered                                                                    
by Black  and Veatch. He  specified that if the  state could                                                                    
not get  100 percent debt and  did not have the  cash, there                                                                    
were  other  possible  investors who  would  conceivably  be                                                                    
willing to  invest at  lower rates  of return.  He mentioned                                                                    
that he  had looked through the  company's financial reports                                                                    
and  did   not  find   evidence  to   support  TransCanada's                                                                    
expertise in  the business of  gas treatment.  He encouraged                                                                    
the state to have a  candid conversation with TransCanada on                                                                    
the subject. He  spoke of access to studies  done during the                                                                    
AGIA   process  of   the  pipeline   between  Prudhoe   Bay,                                                                    
Fairbanks, and  Nikiski. He believed that  the state already                                                                    
had the expertise of the producers available.                                                                                   
                                                                                                                                
Representative  Edgmon  asked   about  the  state's  current                                                                    
financial obligation to TransCanada.  Mr. Marks replied that                                                                    
pursuant to the MOU no spending had occurred.                                                                                   
                                                                                                                                
2:56:58 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg asked  why  the project  remained                                                                    
viable when  there were cheaper, closer,  and larger volumes                                                                    
of supply available on the market.                                                                                              
                                                                                                                                
Mr. Marks replied that all  of the proposed LNG projects had                                                                    
problems. The  advantage of the  AKLNG project was  that the                                                                    
gas would be produced and  ready to go. Other projects would                                                                    
require  development  along  with production.  However,  the                                                                    
advantage  was  offset by  the  cost  of the  pipeline.  The                                                                    
majority of  other projects did  not have to  incur pipeline                                                                    
costs.  Another  big  challenge of  the  AKLNG  project  was                                                                    
bearing the cost  of the treatment plant, 25  percent of the                                                                    
total cost. It was necessary  for Alaska's gas to be treated                                                                    
for  carbon  dioxide (CO2)  removal.  Both  Prudhoe Bay  and                                                                    
North Slope gas contained about  12 percent CO2, higher than                                                                    
average. In liquefying gas all  CO2 must be removed, driving                                                                    
up costs.                                                                                                                       
                                                                                                                                
Representative Guttenberg asked about tax-free debt.                                                                            
                                                                                                                                
Mr. Marks  explained that if  the state owned 25  percent of                                                                    
the  project and  could acquire  tax-exempt  debt, it  could                                                                    
issue  tax  exempt bonds  for  25  percent of  the  project,                                                                    
unlike TransCanada. Since  the bond holders did  not pay tax                                                                    
on their earnings,  they would accept lower  return rates on                                                                    
tax-exempt  bonds. He  reported  that  generally tax  exempt                                                                    
bonds were about 25 percent lower  than a taxable one, a big                                                                    
savings in the cost of capital on the pipeline.                                                                                 
                                                                                                                                
Representative   Guttenberg  asked   for  clarification   on                                                                    
TransCanada's  role to  the state.  He asked  if the  entity                                                                    
would operate as a bank to the state.                                                                                           
                                                                                                                                
3:01:29 PM                                                                                                                    
                                                                                                                                
Mr. Marks replied that TransCanada  was a bank for the state                                                                    
as well  as a  resource for its  expertise on  the pipeline.                                                                    
Regarding the  tax-exempt debt,  any piece  that TransCanada                                                                    
owned was a piece the state could not borrow against.                                                                           
                                                                                                                                
Co-Chair Austerman  reiterated Mr.  Marks' comment  that the                                                                    
liability of the  project was enhanced by  Alaska taking its                                                                    
gas  in-kind  and selling  it  alongside  the producers.  He                                                                    
furthered that, from Mr. Marks'  comments, it was beneficial                                                                    
to the  producers. He wanted  to know what the  most optimal                                                                    
plan was for the state and what that meant for Alaska.                                                                          
                                                                                                                                
Mr. Marks replied  that Alaska taking its  gas in-kind would                                                                    
likely determine  whether the project moved  forward. Moving                                                                    
the  rate  of  return  one  or  two  percentage  points  and                                                                    
lowering the  breakeven price $1  to $2 could make  or break                                                                    
the project.                                                                                                                    
                                                                                                                                
3:03:32 PM                                                                                                                    
                                                                                                                                
Co-Chair  Austerman addressed  the possibility  of producers                                                                    
selling  the  gas for  the  state.  He  asked Mr.  Marks  to                                                                    
comment about concerns producers had about competition.                                                                         
                                                                                                                                
Mr.  Marks responded  that he  believed  the producers  were                                                                    
able to find the best buyers  and command the best price for                                                                    
gas ahead of the state. Given  how much gas would need to be                                                                    
sold if  the state  was fourth  in line to  sell its  gas it                                                                    
could potentially  lose a  few dollars  per million  BTU, an                                                                    
excessive  dollar  amount;  it  could  mean  the  difference                                                                    
between making  and losing money  on the project.  The state                                                                    
could opt for hiring a  gas marketer; however, the producers                                                                    
had experience  and contacts in  the Asian market.  Once the                                                                    
producers  sanctioned   the  project  the  state   would  be                                                                    
passively "all  in". He furthered  that the  producers could                                                                    
pay their  taxes in-kind  forcing the state  to take  the FT                                                                    
commitment and to sell its  own gas. He reemphasized that if                                                                    
the state  fell to fourth  place in the marketplace  then it                                                                    
could end  up with  several dollars less  per unit  than the                                                                    
well-connected producers.                                                                                                       
                                                                                                                                
Co-Chair  Austerman wanted  to  know if  there  would be  an                                                                    
anti-competition issue.  Mr. Marks responded that  the state                                                                    
would  have separate  and  succinctly  different deals  with                                                                    
each of the producers.                                                                                                          
                                                                                                                                
3:07:12 PM                                                                                                                    
                                                                                                                                
Representative  Gara  asked  about firm  transportation.  He                                                                    
also asked how the state could  limit its risk of paying for                                                                    
capacity  in  the  pipeline  that  went  unused.  Mr.  Marks                                                                    
responded  that the  risk  was low.  He  furthered that  the                                                                    
investment  made   by  the  producers  would   serve  as  an                                                                    
incentive to keep gas in  the pipeline unless there was some                                                                    
unintentional damage  to the  reservoir preventing  gas from                                                                    
being produced.                                                                                                                 
                                                                                                                                
Co-Chair Austerman  reminded members  that any  requests for                                                                    
services from any  of the state-hired consultants  had to be                                                                    
written  and  processed  through Senator  Anna  Fairclough's                                                                    
office.                                                                                                                         
                                                                                                                                
3:09:24 PM                                                                                                                    
                                                                                                                                
JANAK   MAYER,   PARTNER,    ENALYTICA,   encapsulated   the                                                                    
discussions,  issues,  and  questions  from  previous  weeks                                                                    
regarding  the project  into one  fundamental theme;  making                                                                    
choices and commitments. He focused  on the state's approach                                                                    
related to how  much it should commit to at  present and how                                                                    
much  it  should  negotiate over  time.  He  understood  the                                                                    
difficulty,  from  a   legislative  perspective,  in  making                                                                    
decisions with only  tools of statute, rather  than tools of                                                                    
direct  negotiation.   He  referred  to  the   Stranded  Gas                                                                    
Development  Act   (SGDA),  which   he  indicated   set  the                                                                    
fundamental terms of the agreement  prior to any money being                                                                    
spent on feasibility or further  stages. The approach to the                                                                    
AKLNG project  was about  setting initial  framework, having                                                                    
all of the partners  together committing money and resources                                                                    
to finding out  more about the project, and  making a series                                                                    
of stage commitments  as the process unfolded.  He wanted to                                                                    
further   discuss  the   fundamental   question  of   making                                                                    
decisions at  present versus making decisions  in the future                                                                    
(i.e. A  project now versus  a different project  later, the                                                                    
state  trying   to  be  carried   through  the   process  of                                                                    
feasibility without  having to  currently devote  funds, and                                                                    
the role of TransCanada).                                                                                                       
                                                                                                                                
Representative Edgmon clarified that  Mr. Mayer's main point                                                                    
to the committee was not to  get too overwhelmed with all of                                                                    
the information,  as the  project was  only in  the pre-FEED                                                                    
stage. Mr. Mayer agreed.                                                                                                        
                                                                                                                                
3:13:58 PM                                                                                                                    
                                                                                                                                
NIKOS  TSAFOS,  PARTNER,  ENALYTICA,  believed  the  biggest                                                                    
question  that  needed  to  be   answered  was  whether  the                                                                    
legislation in  front of the  committee should be  passed or                                                                    
if the  state should choose  another path. He  surmised that                                                                    
the most difficult part of  LNG projects was that everything                                                                    
had  to happen  in  parallel, rather  than  in a  sequential                                                                    
process.  Gas could  not  be  sold if  people  did not  have                                                                    
confidence  in supply  availability. Marketing  would be  an                                                                    
impossible  task without  pricing,  and  financing would  be                                                                    
difficult  to obtain  without cost.  He  contended that  the                                                                    
overarching challenge  of the project  was to  determine the                                                                    
approach. He suggested there were  two approaches; first was                                                                    
to make all  of the decisions up front then  carry them out.                                                                    
He favored the  second approach which was  to recognize that                                                                    
there were  multiple parallel paths that  were dependent and                                                                    
built  upon  each other.  He  noted  that the  fiscal  notes                                                                    
included the state  committing to less than  $100 million in                                                                    
the pre-FEED stage. He also  suggested that projects changed                                                                    
over time.  New partners could  come in and  possibly reduce                                                                    
the state's  exposure. He emphasized things  would change as                                                                    
the project progressed.                                                                                                         
                                                                                                                                
3:16:40 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer  discussed the  state's  exposure  over the  next                                                                    
couple  of  years. He  relayed  that  the HOA  outlined  the                                                                    
state's role  as an equity  partner contributing  25 percent                                                                    
of  the costs  through  the pre-FEED  and  FEED process.  He                                                                    
furthered that the state would  ultimately be liable for its                                                                    
equity portion no  matter TransCanada's participation. There                                                                    
were  some  concerns  raised  whether the  state  was  in  a                                                                    
position  to assume  the proposed  risk. Risk  for producers                                                                    
was  spread among  a number  of LNG  projects, whereas,  the                                                                    
state had  a compelling  interest in  only one  project. The                                                                    
current  framework  included  in   the  HOA,  a  non-binding                                                                    
agreement of  the parties  that outlined  the vision  of the                                                                    
project.  He  asserted  that  the  agreement  was  appealing                                                                    
because  the parties  agreed  to  encounter the  feasibility                                                                    
process  without  having all  of  the  details defined.  The                                                                    
alternative  was  to  start  from  scratch  with  the  state                                                                    
assuming  less  exposure  and  negotiating  a  comprehensive                                                                    
contract. The  agreement would  encompass the  entire fiscal                                                                    
framework  and the  exact nature  in which  the state  would                                                                    
participate prior to moving forward.                                                                                            
                                                                                                                                
3:20:03 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer  emphasized  understanding   the  nature  of  the                                                                    
project and investing incrementally  over time as opposed to                                                                    
committing  upfront without  much information  just to  save                                                                    
money  in  the  first  year of  the  feasibility  stage.  He                                                                    
claimed  that when  he looked  at both  options it  was more                                                                    
appealing  for the  state to  enter  into slowly  escalating                                                                    
commitments  in tandem  with details  of  the project,  thus                                                                    
minimizing  risk. He  reiterated the  question came  down to                                                                    
making choices now or later.                                                                                                    
                                                                                                                                
Mr. Tsafos added an additional  point about marketing to his                                                                    
discussion  from   the  previous   day.  He   cautioned  the                                                                    
committee about  committing to have  the producers  sell the                                                                    
state's  gas  on  their  same  terms.  Although  intuitively                                                                    
appealing, gas was very contract  dependent, unlike oil. One                                                                    
of the  particular features of contracts  were measures that                                                                    
allowed the state  to limit its volatility such  as having a                                                                    
floor  or ceiling  in a  contract.  He suggested  that as  a                                                                    
sovereign the  state might want  a different  exposure level                                                                    
than that  of the  producers. The  producers had  assets all                                                                    
over  the world  and  viewed risk  management and  commodity                                                                    
exposure in a fundamentally different  way than the State of                                                                    
Alaska. He  wanted to caution  and challenge  the assumption                                                                    
that if  the producers  sold the state's  gas on  its behalf                                                                    
that the  terms would  automatically be  the best  terms for                                                                    
the state. It  was highly possible that  the producers' risk                                                                    
tolerance  differedfrom  the  state's. It  was  also  highly                                                                    
possible that the contract that  producers signed would have                                                                    
a risk  exposure quite different  from what the  state would                                                                    
like.                                                                                                                           
                                                                                                                                
Mr. Tsafos  addressed the  broad idea  of making  a decision                                                                    
today versus  in the  future. He alleged  that if  the state                                                                    
set certain  marketing terms at  present it would  also take                                                                    
on certain  risk exposures  that it  would not  have control                                                                    
over. Whereas if  the state waited one, two,  or three years                                                                    
out it might  have more say in managing its  risk. The state                                                                    
could clearly ask for its gas  to have a guaranteed floor of                                                                    
$10 and  a ceiling of  $15, for example, with  certain terms                                                                    
attached. The producers  might not want to  market their gas                                                                    
in  such a  way. However,  if  the state  agreed to  receive                                                                    
whatever the producers  collected, it would also  have to be                                                                    
willing to  adopt their  risk tolerance  appetite, something                                                                    
the state needed to know more about.                                                                                            
                                                                                                                                
3:25:07 PM                                                                                                                    
                                                                                                                                
Mr. Mayer  discussed some  of the specifics  of the  MOU and                                                                    
the  role of  TransCanada.  He indicated  that  he had  some                                                                    
concerns  about  certain  terms  of  the  MOU.  He  prefaced                                                                    
himself by saying there were  many things he liked about the                                                                    
relationship  with TransCanada.  He opined  that TransCanada                                                                    
was  a highly  capable  partner with  a  strong interest  in                                                                    
expansion. However,  he had  substantial concerns  about the                                                                    
sharing of risk and reward  in the contract. He also pointed                                                                    
out  there were  concerns  about  what to  do  if the  state                                                                    
sought  to  finance its  portion  entirely  on its  own.  He                                                                    
wanted  to know  the state's  true financial  capacity, true                                                                    
cost of  capital, and  how the two  things compared.  If the                                                                    
legislature was  asked to  firmly commit  to the  project in                                                                    
partnership  with TransCanada  before  other decisions  were                                                                    
made  he would  be very  concerned. As  the legislation  and                                                                    
agreements traveled  through both legislative bodies  he had                                                                    
been  asked  a multitude  of  questions  about the  specific                                                                    
timing of  things. He  had a higher  degree of  comfort with                                                                    
what  was proposed  because of  what he  had learned  in the                                                                    
process about the  timing involved. He relayed  that the MOU                                                                    
was a term  sheet that identified the terms that  would be a                                                                    
part  of   subsequent  agreements   that  the   state  would                                                                    
negotiate  in more  detail  at a  later  date. He  mentioned                                                                    
three fundamental  agreements including a  pre-set agreement                                                                    
setting  out  basic  terms,  an   equity  option,  and  most                                                                    
importantly  a firm  transportation services  agreement. The                                                                    
signing  of the  transportation services  agreement was  the                                                                    
point  at which  the state  would  make a  firm and  binding                                                                    
commitment  with  TransCanada  to  build and  be  bound  for                                                                    
several decades to pay for  the capacity built. The terms of                                                                    
the  agreement would  be negotiated  over the  next year  or                                                                    
more and brought before the  legislature for approval. Until                                                                    
then, the initial preceding  agreements would be implemented                                                                    
including the  termination of AGIA.  One of the  things that                                                                    
gave  him  additional  confidence  in the  project  was  the                                                                    
requirement found in the  enabling legislation that mandated                                                                    
the  state  to conduct  a  study  of its  financing  options                                                                    
without TransCanada's involvement. He  would feel capable of                                                                    
understanding the state's choices being  able to look at the                                                                    
study  and assess  costs and  benefits associated  with each                                                                    
option.                                                                                                                         
                                                                                                                                
3:29:56 PM                                                                                                                    
                                                                                                                                
Mr. Mayer  reiterated the focus on  current decisions versus                                                                    
decisions later.  He proposed  that the  state wait  for the                                                                    
negotiation process  to take place before  making decisions.                                                                    
He  believed making  a  decision and  getting  locked in  at                                                                    
present, would not be in the state's best interest.                                                                             
                                                                                                                                
Co-Chair Austerman indicated he  would allow some questions.                                                                    
However, he  cautioned members to  study the  bill. Co-Chair                                                                    
Stoltze added that SB 138  was officially transmitted to the                                                                    
committee.                                                                                                                      
                                                                                                                                
Representative Holmes asked  about having the administration                                                                    
come  back   to  the  committee  to   review  the  sectional                                                                    
analysis.    Co-Chair    Stoltze    confirmed    that    the                                                                    
administration would  come before  the committee  again. Co-                                                                    
Chair Austerman  indicated the  importance of  reviewing the                                                                    
bill in order to know what questions to ask.                                                                                    
                                                                                                                                
Representative Gara  asserted that fundamental  policy calls                                                                    
should   be  made   at  present   rather   than  later.   He                                                                    
communicated that  the current  contract required  the state                                                                    
to reimburse TransCanada hundreds  of millions of dollars if                                                                    
the  project did  not  move forward.  The  state would  have                                                                    
invested millions without knowing  whether the project would                                                                    
be  successful. He  mentioned  market  changes and  producer                                                                    
decisions that  could influence or stop  forward progress of                                                                    
the project, items  out of the state's  control. He recalled                                                                    
Mr. Marks  specifying that with  the risk of paying  so much                                                                    
money  up  front,  other sovereigns  received  higher  state                                                                    
shares than was  anticipated for Alaska. He  asked Mr. Mayer                                                                    
to comment.                                                                                                                     
                                                                                                                                
3:33:16 PM                                                                                                                    
                                                                                                                                
Mr. Mayer  did not  agree that all  sovereigns had  a higher                                                                    
state  share. He  agreed  with  Mr. Marks'  characterization                                                                    
that by-and-large  sovereigns that  took the most  risks did                                                                    
so through national oil companies.                                                                                              
                                                                                                                                
Representative    Gara    reiterated   that    by-and-large,                                                                    
sovereigns  that took  the most  risk received  the greatest                                                                    
return, larger than Alaska's share.                                                                                             
                                                                                                                                
Mr. Tsafos responded  that he was not sure  if the causation                                                                    
was  correct.  He  commented that  states  that  had  bigger                                                                    
shares and  had a 70 or  80 percent share of  an LNG project                                                                    
naturally assumed the  costs of studying an  LNG project. He                                                                    
was not sure the causation was  that the less the state paid                                                                    
up front the more the state received later.                                                                                     
                                                                                                                                
3:34:33 PM                                                                                                                    
                                                                                                                                
Representative Gara asked about  the maximum state liability                                                                    
for the  state's share  and TransCanada  reimbursement costs                                                                    
if the project was halted at decision time.                                                                                     
                                                                                                                                
Mr. Tsafos  referred to slide  30 [SOA'S Cash Calls  and Off                                                                    
Ramps]  of   the  presentation  from  March   28,  2014.  He                                                                    
estimated  the total  cost  to  the State  of  Alaska to  be                                                                    
approximately $600  million through the  pre-feasibility and                                                                    
feasibility stages  with the  exclusion of  TransCanada. The                                                                    
costs could  increase with  additional studies.  The state's                                                                    
liability  to TransCanada  was whatever  portion  of the  25                                                                    
percent  ownership  TransCanada   financed  plus  7  percent                                                                    
interest. If  the state  was to abandon  the project  at the                                                                    
time the  work was done,  it would be liable  to TransCanada                                                                    
for $150 million to $400  million. However, he conveyed that                                                                    
spending  would increase  as confidence  in sanctioning  the                                                                    
project increased  based on the  results of the  studies. If                                                                    
the studies provided doubts on  the viability of the project                                                                    
the  state would  be less  likely  to spend  its money.  The                                                                    
range of what the state  would owe depended upon whether the                                                                    
state exercised the equity option.                                                                                              
                                                                                                                                
Representative Gara restated his  question about the maximum                                                                    
dollar amount  the state would be  liable for at the  time a                                                                    
decision  was  made  whether to  abandon  the  project.  Mr.                                                                    
Tsafos responded  with $700 million including  the 7 percent                                                                    
interest paid to TransCanada.                                                                                                   
                                                                                                                                
3:38:13 PM                                                                                                                    
                                                                                                                                
Representative   Wilson   wondered    if   partnering   with                                                                    
TransCanada  was  the best  way  out  of  AGIA or  the  best                                                                    
partner for  the State of  Alaska. She inquired  whether Mr.                                                                    
Tsafos would  seek TransCanada  as a  partner for  the AKLNG                                                                    
project.  She expressed  her concern  about the  concessions                                                                    
the state would make with  TransCanada based on its previous                                                                    
agreement under AGIA.                                                                                                           
                                                                                                                                
Mr. Tsafos  responded that rather  than advocating  in favor                                                                    
or against  a partnership  with TransCanada  his job  was to                                                                    
assist  lawmakers  in  examining  potential  trade-offs  and                                                                    
options for  the state. He  opined that the state  would not                                                                    
be on the path that it  was currently on if the AGIA license                                                                    
and obligation were  not at play. If the  state was starting                                                                    
from  scratch  there would  be  several  options for  it  to                                                                    
consider. He suggested  that one of the  questions the state                                                                    
needed  to  ask itself  was  whether  it wanted  a  pipeline                                                                    
partner.  A  partner  such  as Citibank  did  not  have  the                                                                    
technical expertise  that another  partner would be  able to                                                                    
offer.  The  state  needed  technical  knowledge  and  could                                                                    
either hire it or find it  in a partner. He furthered that a                                                                    
partner with a  stake in the results of  the decisions being                                                                    
made would have  more of a buy-in than a  consultant. He was                                                                    
unclear  whether  or   not  it  would  be   worth  hiring  a                                                                    
consultant   versus   paying   TransCanada  7   percent   of                                                                    
approximately  $50 million  over the  next 18  months for  a                                                                    
pre-feasibility study.                                                                                                          
                                                                                                                                
3:41:56 PM                                                                                                                    
                                                                                                                                
Mr.  Tsafos   discussed  alternatives  to   TransCanada.  He                                                                    
referenced  a  benchmark study  that  he  reviewed with  the                                                                    
committee  previously regarding  tariff terms.  He mentioned                                                                    
that, in  particular, the 75/25 capitalization  ratio, which                                                                    
yielded a low tariff return,  was attractive. PFC Energy put                                                                    
out a  document called the  "PFC Energy 50" that  provided a                                                                    
list of the  50 largest market capital  companies. He looked                                                                    
at  the   segment  analysis   of  the   different  companies                                                                    
including the midstream  infrastructure segment. The ranking                                                                    
of market  capitalization companies as of  December 31, 2013                                                                    
included  Enterprise  with  a market  cap  of  $62  billion,                                                                    
Kinder Morgan  with a  market cap  of $37  billion, Enbridge                                                                    
with  an  market cap  of  $36  billion, TransCanada  with  a                                                                    
market cap of  $32 billion, Energy Transfer  Partners with a                                                                    
market cap  of $24  billion, Williams with  a market  cap of                                                                    
$22  billion etc.  Although "market  cap" was  not the  only                                                                    
measure to  look at, it  indicated which companies  would be                                                                    
willing  and able  to take  on a  $6 billion  commitment. He                                                                    
indicated  TransCanada,  the  only  company  that  qualified                                                                    
under AGIA, emerged out of  a process. He recommended asking                                                                    
why there were more parties  interested in the AKLNG project                                                                    
than the AGIA project,  understanding that the projects were                                                                    
fundamentally different.  He remarked  that it  was possible                                                                    
for the state  to negotiate a better deal, but  he could not                                                                    
guarantee  it. He  reemphasized the  importance of  the firm                                                                    
transportation agreement  and knowing  when it  would become                                                                    
final.                                                                                                                          
                                                                                                                                
3:44:38 PM                                                                                                                    
                                                                                                                                
Representative Wilson suggested that  all of the consultants                                                                    
come  back to  the  table  at the  same  time  in order  for                                                                    
committee members to address their questions and concerns.                                                                      
                                                                                                                                
Co-Chair Austerman indicated that  he shared the concerns of                                                                    
other committee  members. He was  unsure if  TransCanada was                                                                    
the  right  choice or  if  the  state  should find  its  own                                                                    
funding and join together with  the producers out to bid. He                                                                    
hoped  some  answers to  his  questions  would become  clear                                                                    
looking at  the bill.  He stated that  he had  more concerns                                                                    
with the  MOU than  with the  HOA. He  intended to  focus on                                                                    
better understanding the MOU.                                                                                                   
                                                                                                                                
Co-Chair  Stoltze commented  that  although the  consultants                                                                    
could not  give the  state its  answers, they  could provide                                                                    
tools  and the  best information  possible. He  relayed that                                                                    
the committee  would do its  best with the limited  time and                                                                    
information it had.                                                                                                             
                                                                                                                                
Co-Chair Austerman discussed the schedule. Co-Chair Stoltze                                                                     
announced that public testimony would be taken in the                                                                           
morning at 8:00 am and discussed additional housekeeping.                                                                       
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
3:48:08 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 3:47 p.m.                                                                                          

Document Name Date/Time Subjects
AKLNG Roger Marks Evaluation Report 4-11 HFIN.doc HFIN 4/11/2014 1:30:00 PM
AKLNG SB138
Marks SB 138 HFIN AKLNG 4-11-14.pdf HFIN 4/11/2014 1:30:00 PM
SB 138