Legislature(2007 - 2008)HOUSE FINANCE 519
05/04/2007 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB177 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 177 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
May 4, 2007
1:43 P.M.
CALL TO ORDER
Co-Chair Chenault called the House Finance Committee meeting
to order at 1:43:30 PM.
MEMBERS PRESENT
Representative Mike Chenault, Co-Chair
Representative Kevin Meyer, Co-Chair
Representative Bill Stoltze, Vice-Chair
Representative Harry Crawford
Representative Les Gara
Representative Mike Hawker
Representative Reggie Joule
Representative Mike Kelly
Representative Mary Nelson
Representative Bill Thomas Jr.
MEMBERS ABSENT
Representative Richard Foster
ALSO PRESENT
Representative Mark Neuman; Bill Walker, Project Manager,
General Counsel, Alaska Gasline Port Authority (AGPA),
Anchorage; Paul Fuhs, Legislative Director, Alaska Gasline
Port Authority (AGPA), Anchorage; David Keane, Vice
President of Policy and Corporate Affairs, BG North America,
LLC; John Norman Chair, Alaska Oil and Gas Conservation
Commission, Anchorage; Brian Andrews, Deputy Commissioner,
Treasury Division, Department of Revenue; Deven Mitchell,
Executive Director, Alaska Municipal Bond Bank Authority,
Department of Revenue
PRESENT VIA TELECONFERENCE
Kathy Foerster, Commissioner, Alaska Oil and Gas Commission,
Anchorage; Frank Ingrassia, Managing Director, Goldman
Sachs, New York; Tim Romer, Managing Director, Goldman
Sachs, Los Angeles
SUMMARY
HB 177 An Act relating to the Alaska Gasline Inducement
Act; establishing the Alaska Gasline Inducement
Act matching contribution fund; providing for an
Alaska Gasline Inducement Act coordinator; making
conforming amendments; and providing for an
effective date.
HB 177 was HEARD & HELD in Committee for further
consideration.
TESTIMONY taken from:
Alaska Gasoline Port Authority (AGPA)
BG North America, LLC
Alaska Oil and Gas Conservation Commission (AOGCC)
Palin-Parnell Administration: Financing
HOUSE BILL NO. 177
An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline
Inducement Act coordinator; making conforming
amendments; and providing for an effective date.
1:45:23 PM
ALASKA GASLINE PORT AUTHORITY (AGPA)
BILL WALKER, PROJECT MANAGER, GENERAL COUNSEL, ALASKA
GASLINE PORT AUTHORITY (AGPA), ANCHORAGE, pointed out the
handout, which he intended to follow during a power point
presentation. (Copy on File).
Mr. Walker referenced.
Slide 2 - Project Description:
· Gas conditioning plant in Prudhoe Bay
· Pipeline from Prudhoe Bay to Valdez
· LNG facility in Valdez
1:47:15 PM
Slide 3 - A phased-in project to provide for better cost
overrun risk management:
· The 800 mile pipeline would be 100% adjacent to
Trans-Alaska Pipeline System (TAPS) & 100% in
Alaska;
· With the infrastructure in place for the entire line
including roads, bridges, camp pads, and etc.;
· A LNG project with a lower overall cost over-run
risk;
· A phased approach with LNG project proceeding with
the first 2/3 less cost, equaling a 2/3 less risk;
and that
· Phase 1 would proceed with only one producer, rather
than three.
1:51:31 PM
Slide 4 - Project Status:
· Project route permitted
· 12 senior permits acquired
· Bechtel cost estimates, complete & updated
· Marine transportation/Jones Act
· Access to multiple markets
· Anticipated financing @ 80% federal loan guarantee &
20% private funding
Co-Chair Meyer asked if the loan guarantee would be
available only if that gas was shipped within the United
States. Mr. Walker advised that the facilities on the West
coast applying for permits are Long Beach, California, Coos
Bay & Braidwood, Oregon, one in Washington State and one in
British Columbia.
1:58:54 PM
PAUL FUHS, LEGISLATIVE DIRECTOR, ALASKA GASLINE PORT
AUTHORITY (AGPA), added that when shipping to Mexico, it is
considered the United States (U.S.). The Jones Act
addresses final destination points, not delivery. He stated
that only the U.S. gas will need to be clarified as that law
is not clear. Co-Chair Meyer pointed out that would be
assuming, they use the same loan guarantee.
2:00:10 PM
Mr. Walker continued the power point presentation.
Slide 5 - The indicative Alaska Gasoline Port Authority
(AGPA) project structure, highlighting the Port Authority's
involvement during the project as the facilitator.
Financing of a project this large, requires world-class
participants.
Mr. Fuhs acknowledged that Alaska has not had a lot of
experience with the Port Authority; but instead, used
extensively for big public projects around the world and
always done with private sector companies.
2:02:42 PM
Mr. Walker commented that:
Slide 6 - AGIA would be good for Alaska. The AGIA process
consists of:
· Being open, transparent and competitive
· Identifying clear evaluation criteria
· Inducements for project applicants in exchange for
specific commitments
· Empowering selected applicants to build successful
consortium, leading to an open-season
· Separating the mid-stream from the upstream
· Bringing additional interested parties to help
develop Alaska's gas resource
2:04:26 PM
Mr. Walker continued:
Slide 7 - AGIA recommends amendments regarding:
· If additional gas reserves were needed, a budget and
timeline for the exploration portion
· Analysis of making liquids available in Alaska for
value added processing
· Current project cost estimates required with an
application
Mr. Walker addressed AGIA benefits in advancing a gas
pipeline:
· Rolled in rates would be good for Alaska's future
· Allowing for an independently owned infrastructure
· Following successful models used in other countries
that use rolled in rates and independently owned
pipelines
· $500 million dollars "skin in the game", sends a
positive message about Alaska's desire to
commercialize the gas
· Supporting low tariffs
2:08:57 PM
Mr. Walker referenced the handout from the TransCanada, a
proven basin developer, an independent pipeline model with
rolled in tolls. (Copy on File). He suggested that it
would be wrong to compare the economics of a small line to a
larger one, but instead, determine which line could be built
now and accommodate an expansion. He thought that the Port
Authority's proposal was similar to that of Trans-Canada.
The market indicates that Alaska has the best opportunity
for movement of the resource. He believes that it is a low
risk and a good fit for Alaska and the federal legislation.
2:12:02 PM
Representative Crawford understood that last year, it was
indicated that Alaska could adjust for a 4.5 billion cubic
feet (BCF) per day; however, presently the 4.5 BCF
projections is causing a disruption. He asked how the pipe
would be sized for a 2 BCF a day. Mr. Walker envisioned a
larger line (48") to Delta Junction and then a smaller one
from Valdez, with the actual size to be determined. AGPA
has been advised that with the compression, they would be
able to take it up to 5.9 BCF. He reiterated that the
project is the right size for the off-take of Prudhoe Bay.
There were many bids presented during the process; he
thought there is an advantage to Alaska's stability.
Mr. Walker pointed out that when the effort started in 1998,
there were issues, which changed significantly with no
federal loan guarantees. He believed that the market price
forecast of $5.50 was appropriate.
2:15:58 PM
Representative Gara asked about a number recommended other
than $500 million dollars. He understood that the Port
Authority was comfortable with putting the $500 million up-
front; however, recommended receiving it back in the event
of a successful project. Mr. Walker thought that concept
was possible and applauded anything that could reduce the
tariff.
Representative Gara emphasized the provision is generous to
the State. AGIA recommends the State paying 80/20 ratio
from the open-season to certification. Mr. Walker commented
they were receptive to the proposal and that the Port
Authority would continue even after an unsuccessful open-
season. Mr. Walker thought that a small volume during the
initial open-season would be adequate for AGPA.
Representative Gara stated there are other options for pay-
back as part of the bidding criteria.
2:20:47 PM
Representative Gara inquired the type of authority needed
for re-flagging. Mr. Walker responded that AGPA had been
advised by the U.S. Congressional staff that it could be
done through the Coast Guard Reauthorization Act. At this
time, there are questions regarding the process.
Mr. Fuhs pointed out that much of the re-flagging was done
during the conversion of the U.S. 200-mile limit. It is not
controversial and that it is separate from the Jones Act.
Representative Kelly pointed out that ConocoPhillips is the
most aggressive of the producers. He asked if the proposed
approach would bring only them to the "table". Mr. Walker
said yes because of their ownership of the gas in Prudhoe
Bay.
Representative Kelly asked if it could be guaranteed
bankable. Mr. Walker commented that the producer's
financial market would not take a reserve risk. If the
producers coming to the project have sufficient control and
access, that should be sufficient for financing.
Representative Kelly summarized that with relationship to
capacity, only one player would need to be involved;
however, he did not think they had sufficient reserves to
make the project work. Mr. Walker countered that one
producer could have enough reserves for the project.
2:26:11 PM
BG NORTH AMERICA, LLC
DAVID KEANE, VICE PRESIDENT OF POLICY AND CORPORATE AFFAIRS,
BG NORTH AMERICA, LLC, referenced the handout, BG North
American Legislative Hearings. (Copy on File).
2:26:51 PM
Mr. Keane pointed out:
Slide 3 - BG Group snapshot:
· A world leader in natural gas
· A FTSE 20-company listed in both the Long Island &
New York Stock Exchanges
· Market capitalization of over $49 billion dollars
· Production circa of 70% gas & 30% oil
· Employs approximately 4,700 staff - with 64% outside
of the United Kingdom (UK)
2:28:04 PM
Mr. Keane continued:
Slide 4 - Indicates the business model, connecting the
natural gas to the necessary markets through transmission
and distribution.
2:29:08 PM
Mr. Keane explained:
Slide 5 - Identifies the countries and current operations,
with over 25 countries including Canada, Bolivia, Argentina,
Egypt, India, China, Thailand & the Philippines.
Slide 6 - Highlights the gas market focus for connecting gas
to the market.
The developed markets are in:
· North America
· UK/Europe focus
The developing markets are:
· Bolivia/Brazil
· India
2:30:49 PM
Mr. Keane pointed out that:
Slide 7 - Highlights global gas trade during the recent
past.
Slide 8 - Indicates global gas trade gradually evolving into
a globalizing gas industry.
2:32:12 PM
Mr. Keane stated that:
Slide 9 - Shows a couple supply projects that BG is
currently involved with, the Atlantic LNG, Trinidad/Tobago &
Egyptian LNG.
Slide 10 - Identifies the U.S. market summary:
· Lake Charles import terminal
· Phase I expansion Q4 2005
· Phase II expansion Q2 2006
· Elba Island import terminal
2:33:05 PM
Mr. Keane continued:
Slide 11 - Provides a chart highlighting the LNG imports
from 2003 to present and that BG has been the largest U.S.
LNG importer from 2003 to 2006.
2:33:29 PM
Mr. Keane indicated that:
Slide 12 - Identifies the Alaska E&P with 2.1 million acres
located in the Foothills of the Alaska North Slope (ANS) and
.2 million in the ENS.
Slide 13 - Addresses the AGIA plan:
· BG is investing in Alaska and exploring along the
North Slope and ENS.
· BG supports AGIA because the process is fair, open
and inclusive; BG supports the mandatory provisions
on access and rates and BG will encourage new
explorers to invest in Alaska.
· AGIA provides input opportunities for interested
parties & legislators during the initial
legislation, when pipeline applications are
submitted and during the legislative review of the
winning application.
2:35:09 PM
Mr. Keane addressed:
Slide 14 - The AGIA Plan:
· AGIA addresses BG's concerns by providing a level
playing field for all participants. It will provide
certainty that when gas is discovered, there will be
access to pipeline capacity, providing a mechanism
to ensure reasonable rates.
· AGIA creates competition to build the pipeline and
perhaps an LNG export facility.
· AGIA spells out what is required of any applicant.
· AGIA clearly identifies the "must haves" for Alaska.
· BG's "must haves" are a regulated pipeline, open
access provisions in the tariff and just and
reasonable rates.
2:36:09 PM
Slide 15 - Outlines the key message of BG:
· AGIA is good for Alaska and for the natural gas
industry.
· AGIA will encourage the continued development of
Alaska's untapped natural gas reserves.
· AGIA's purpose is to facilitate commercialization of
the North Slope gas resource; to promote exploration
and development of oil and gas resources on the
North Slope; maximize benefits to the people of the
State from development of oil and gas resources in
the State; and encourage oil land gas lessees and
other persons in the State to commit natural gas
from the North Slope to a gas pipeline system for
transportation to markets in the State or elsewhere.
2:36:42 PM
Representative Kelly asked if there were provisions in AGIA
that could cause project failure. Mr. Keane noted that
would happen if the Legislature was "not on board".
Representative Kelly asked the connection between BG and BP.
Mr. Keane replied that they are completely separate yet both
are head-quartered in the UK.
2:38:52 PM
Representative Gara inquired about the fears & threats
presented by the three major producers. Mr. Keane said he
could not speak for the producers. He anticipated that
shareholders would expect their companies to bid and to
commit their reserves to capacity. He could not imagine
that if the project is economically viable, why reserves
would not be moved to market.
Co-Chair Chenault noted the pressures placed on producers by
the State, the federal government and the shareholders; he
did see shareholders carrying much weight in those
decisions.
2:43:03 PM
ALASKA OIL AND GAS CONSERVATION COMMISSION (AOGCC)
JOHN NORMAN, CHAIR, ALASKA OIL AND GAS CONSERVATION
COMMISSION (AOGCC), ANCHORAGE, discussed the AOGCC's role in
the North Slope gas sales by providing a status report.
He indicated that most knowledgeable Alaskans know the
significance of 35 TCF of natural gas; however, few realize
millions of barrels of oil and condensate could be lost if
gas off-take is not correctly managed. Mr. Norman stressed
that oil is Alaska's nest egg. The AOGCC is responsible for
setting the gas off-take allowable from the North Slope oil
fields to ensure that there is no harm to the investment.
Maintaining reservoir pressure enhances oil recovery, but
producing gas depletes reservoir pressure. Therefore, gas
reserves in most fields are usually sold only after most of
the oil has been produced. Until that time, the gas that is
produced with the oil is used to promote increased liquid
production.
Mr. Norman pointed out that North Slope gas sales are going
to involve trade-oils between oil and gas recovery. It is
not practical to get all oil out of the ground before
starting gas sales.
2:47:33 PM
Mr. Norman advised that the AOGCC does not take such a
position; however, the State needs to ensure that the trade-
offs result in greater recovery of both gas and oil. It is
important to understand that Prudhoe Bay does have an
existing gas off-take allowable, which is 2.7 BCF per day.
That rate was set in 1977. The AOGCC usually waits for an
application from the operator to modify pool rules including
off-take rates. In 2005, it was recognized that:
· Serious discussions were taking place concerning
major North Slope gas sales;
· The 2.7 BCF per day gas off-take allowable for
Prudhoe Bay was set in 1977, when the field first
began to produce. The off-take rate was based on
the best information available at that time;
however, now the State has 30 years and 11 billion
barrels of production and production-related data to
help determine a better number;
· Most of the publicly discussed pipeline options
could require more than 2.7 BCF per day off-take
from Prudhoe Bay;
· Performing the necessary studies to determine an
appropriate current off-take rate would take time;
and
· AOGCC does not intend to be the cause of any project
delays.
Mr. Norman continued, therefore, to acquire the most current
information, BP and the other Prudhoe Bay working interest
owners agreed to provide the AOGCC staff and consultants
access to the simulators including the underlying
engineering, geologic, and geophysical information. They
voluntarily set up a data room in BP's Anchorage offices,
equipped with computers and software, allowing for the
review of simulator results.
2:50:33 PM
Mr. Norman said it is important to note that data and
information provided falls within the standards of AS
31.05.035(d) and 20 AAC 25.537(b), governing confidentiality
of information. On February 28, 2007, AOGCC published a
summary report, which is now available on the website - a
multi-variable equation. The right off-take volume will
depend on when sales start how aggressively the oil has been
produced and what the mitigating steps are in-place and
planned. There are legal restrictions on what results of
the study can be shared. As soon as an application is
received or they otherwise have enough information to make a
meaningful determination, AOGCC will convene public hearings
to make information available as needed and legally allowed
to support changes in the allowable off-take assigned
natural gas.
2:53:08 PM
Mr. Norman added, there is sufficient information in the
record to support any decision that the Commission reaches.
Representative Gara asked if the AGOCC statutory mandate
requires that it be the most efficient means of reaching gas
and oil or if there is flexibility, while not destroying the
project. Mr. Norman affirmed there are some general
principles, one which address gas off-take, natural
deterioration recoverability.
Representative Gara questioned if the gas efficiency could
be off-loaded and if there was a chance to loose the
pipeline project. Mr. Norman explained they could consider
practical considerations to an extent but that the
Commission can not excuse waste of the resource. He
clarified that for each day the oil passes through the
pipeline, the conservation risks become less. The Commission
recognizes a point of diminishing returns; the oil and gas
must both contribute to the economics of the project.
3:01:14 PM
Mr. Norman addressed Slide 4, pointing out the intent to
complete the evaluation by holding hearings and making a
final ruling on allowable gas off-takes for both Prudhoe Bay
and Point Thomson in time for the "open season" process. At
this time:
(1) The later the gas sales begin, the smaller the oil
losses;
(2) The lower the off-take rate, the smaller the oil
losses;
(3) The more the oil production is accelerated before
gas sales start, the smaller the oil losses;
(4) The more that is done to mitigate detrimental
effects of gas sales, the smaller the oil losses;
(5) Oil loss is more sensitive to the acceleration of
oil production and mitigating steps than it is to
start-up timing or off-take rates;
(6) Depending on the life of the North Slope
infrastructure, delaying gas off-take too long can
result in a decreased gas recovery.
By the time a pipeline project is ready, selling gas from
Prudhoe Bay could proceed at a higher off-take rate than the
current 2.7 BCF per day, provided BP and its partners
continue working toward:
· Accelerating oil production; and
· Mitigating gas losses.
3:02:37 PM
Co-Chair Chenault asked the limiting factors from removing
oil out of the ground.
KATHY FOERSTER, (TESTIFIED VIA TELECONFERENCE),
COMMISSIONER, ALASKA OIL AND GAS COMMISSION, ANCHORAGE,
explained that the Prudhoe Bay owners were working within
the constraints of the number of rigs & people available.
Currently, every available rig is working, testing water
injection into the gas cap while undertaking multi-lateral
drilling. They are working to capacity.
3:04:42 PM
Mr. Norman stressed all possible interruptions need to be
avoided and that any shut downs will increase the risk and
defers production, which ultimately, creates competition for
future gas.
3:05:48 PM
Representative Crawford voiced surprise with Ms. Forester's
comments. He understood that oil production was down
because it had been maxed-out with what the facilities could
handle.
Ms. Foerster clarified that they are looking for wells with
a higher oil cut and lower gas & water cut, replacing more
marginal wells. Another option is a facility expansion, but
those are very expensive. She recommended that BP be asked
the question. Representative Crawford asked if a facility
expansion would be the place to hold the gas, such as a
pipeline. Ms. Forester did not think that would be a good
facility expansion.
Representative Crawford suggested that there will come a
point during the life of Prudhoe Bay that the gas could be
taken in addition to the oil. Ms. Forester agreed and was
optimistic that by the time the State has a pipeline, gas
sales would be right; now is too soon.
Representative Gara worried about the seriousness of the
producer's attitude since they have not requested AOGCC's
for the new off-take ruling.
3:10:48 PM
Mr. Norman acknowledged that he expected an off-take
petition. Ms. Foerster added that the producers were asked
to work with the Commission. If a filing had been made
before the study was complete, the process would have been
extended.
3:12:46 PM
Mr. Norman referred to the Commission's mitigation plan; she
wanted to see the mitigation measures employed. If the
slate is wiped clean of any oil discoveries, Prudhoe Bay
[with just the remaining oil] would still be the largest in
the United States. Prudhoe Bay has reserves of 2 billion
barrels remaining, which equates to $120 billion dollars in
gross revenue, approximately $15 billion in royalties. He
stressed the importance of the oil to the State.
3:15:34 PM
Representative Kelly asked if the Commission might conclude
that the capacity of the pipeline was too small. Mr. Norman
explained that the Commission has received confidential
information, which allows certain considerations. The AOGCC
works like a court in that they wait for parties to come to
them, before a ruling can occur. The AOGCC can act if they
believe waste is eminent. It would be improper for the
Commission to declare a number at this time, without the
public process. The Commission can not provide specific
numbers. They are as comfortable as they can be with the
information they have at this time. Discussions have been
happening for a number of years, and explained the
Commission intends to work with the producers. He noted
that there are a number of variables; the Commission is not
as comfortable with Point Thomson as it is with Prudhoe Bay.
3:20:43 PM
Representative Kelly referenced the first phase of Prudhoe
Bay; he asked how comfortable they were. Mr. Norman
stressed it is important not to get ahead of the public
process. He observed that estimated numbers of off-take
continue to change. The Commission needs a specific &
tangible project; otherwise, they are speculating. The
AOGCC has gathered information and believe they could rule
quickly on Prudhoe Bay.
3:23:59 PM
Mr. Norman commented the AOGCC is confident that unless a
substantial delay occurs, they will be adequately prepared
to make a determination of the correct Prudhoe Bay gas off-
take allowable rate when the application is received.
Mr. Norman added, there is confidence in Point Thomson. A
year ago, AOGCC and Exxon agreed on a similar process for
studying allowable gas off-take from that area. The AOGCC
contracted reservoir evaluation consultants to assist the
technical staff in performing that study. Exxon and its
partners agreed to give the AOGCC staff access to data from
the Exxon's Houston office. Unfortunately, AOGCC was not
able to follow the required time line; there were delays in
preparing the Exxon data room and information. The process
was finally slated to begin late last year; since then the
study has been pending resolution for legal issues. Without
a thorough study, it is difficult for the AOGCC to have
sufficient information to make a gas off-take ruling on
Point Thomson; it remains a "wild card".
3:26:57 PM
Mr. Norman summarized:
· There is a lot of oil and condensate at risk if
Alaska does not manage their natural gas off-take
properly.
· The AOGCC is charged with setting gas off-take
allowable that will prevent loss to the State's
valuable hydrocarbon resources.
· The AOGCC intends to perform its function before an
open season in order that the project is not
delayed.
· The AOGCC has done the technical work to address
Prudhoe Bay's off-take without causing a delay.
· A lot of work remains for the Point Thomson area;
delay is quite possible.
3:28:03 PM
Representative Gara asked if the AOGCC statutes allow for
the encouragement of the producers to drill & produce
faster. Mr. Norman replied they do not; it is not the place
of the Commission to dictate development, but rather, the
landowner determines the developmental functions.
Representative Gara pointed out that timing is not as
imperative in the lower 48, emphasizing that Alaska has one
shot at a pipeline.
3:31:26 PM
Representative Hawker referred to Point Thomson and the
reservoir's dynamics. He summarized that liquids are
removed and the gas is taken off at the end of the field's
life. He noted that Point Thomson has unknown factors
relating to high pressure and questioned if the structure
would change. Mr. Norman responded that the Point Thomson
reservoir is counter intuitive. Until recently, it has been
treated as an oil reservoir. It is below the threshold of a
reservoir. The Commission will need to have a plan for
development from the operator. Ms. Forester added that in a
retrograde reservoir, pressure is the key & when dropping
below a certain pressure, the hydrocarbon liquids drop out
in the reservoir, impeding the production. Pressure is
essential for maximum gas production.
3:35:52 PM
Representative Hawker inquired if there could be a situation
in which the gas & the condensates must be produced
simultaneously early or re-injecting at high pressures to
protect the condensates. Ms. Forester acknowledged that
without regard to economics, only maximizing the hydrocarbon
recovery could be accomplished by re-injecting the gas. The
reservoir pressure must be retained.
Representative Hawker questioned if regulation would be
different for oil versus gas field. Ms. Forester replied it
would & explained that a gas field does not need an off-take
allowance; it is classified as an oil field, then the AOGCC
would need to do an off-take. If classified as a gas field,
indicates that the gas/oil ratio was above 100,000 standard
cubic feet per barrel, which would stipulate that the liquid
recovery was lean and a secondary concern.
Representative Hawker asked if there should be a legislative
change identifying Point Thomson as an oil feet and not a
gas field. Ms. Foerster said yes.
Representative Hawker asked how a producer could go about
declaring Point Thomson a gas field. Ms. Foerster explained
that they would have to go to someone other than the AOGCC.
The AOGCC is charged with maximizing hydrocarbon recovery &
preventing waste. Representative Hawker inquired if that
would be a legislative decision. Mr. Norman affirmed that
the Legislature has the authority to override the
Commission; however, he cautioned that the rest of the world
would be watching and questioning.
3:41:27 PM
Representative Hawker concluded that the probability of
having Point Thomson as a gas field, discounting oil was
nil. Mr. Norman recommended the best approach is to move
forward, obtaining more information. He stated that no one
has come before the Commission providing a vehicle to answer
these questions. Representative Hawker applauded the work
of the Commission and noted his confidence in their
abilities.
3:44:12 PM
Representative Crawford commented there is a dropping
production; he questioned why Point Thomson has not been
developed. He asked how much gas has been used in the
production of Prudhoe Bay to operate the field and how much
has been lost from attrition. Mr. Norman advised that
questions regarding production should be directed toward the
operators, noting the Commission would be delighted to see
Point Thomson active.
Representative Crawford thought that [the producers] want
new wells with a lower cut of gas and water & higher oil.
Mr. Norman observed that Point Thomson presents its own set
of challenges. He observed that they have received well
applications that are two years away.
3:48:27 PM
Ms. Forester explained that it will be more involved than
simply drilling wells at Point Thomson. There will need to
be a lot of investment infrastructure in production
facilities before production can actually occur.
Representative Crawford suggested a spur will need to be
determined.
AT EASE: 3:49:51 PM
RECONVENE: 3:57:46 PM
PARNELL ADMINISTRATION: FINANCING
BRIAN ANDREWS, DEPUTY COMMISSIONER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, referenced the handout, The Alaska
Gasline Inducement Act - Alaska Gasline Project from the
Lender's Perspective. (Copy on File).
He mentioned his investment experience and provided
perspective from his understanding. The Administration has
received much enthusiasm in the AGIA project within the
investment community. He described the fundamental
considerations of lenders:
· Capacity and the debt repayment capability of the
pipeline project;
· Collateral and the secondary source of debt
repayment;
· Character/Credit and the project sponsors who are
experienced in the pipeline industry, with solid
credit history;
· Commitment, both financial and non-financial
commitments from sponsors indicating their
incentives to the success of the pipeline project;
and
· Conditions for future markets including regulatory,
economic and environmental conditions could impact
the viability of a project.
Mr. Andrews continued, the critical items for agreement of a
natural gas export pipeline from Alaska include a firm long-
term commitment to ship natural gas at a price, quantity and
term sufficient to service and repay the necessary debt
financing; equity funding typically at 20%-30% of the
project's forecast capital structure; and division of cost
overrun risks among the parties, which have the financial
strength and skills to manage that risk; and Federal Energy
Regulatory Commission (FERC) and other regulatory approval.
Each of the critical elements are magnified due to the size
of the project and that federal loan guarantees would be
helpful to maximize the quantity of debt and to limit the
cost of the pipeline debt financing.
Mr. Andrews pointed out the firm transportation commitments
to ship natural gas at a price & quantify to service and
repay the debt financing; the bulk of the shipper
commitments would likely come from the parties that own a
gas supply. Equity commitments are a pre-condition to debt
financing and federal guarantees; the FERC regulation
pipeline project would be funded with 20%-30% base equity
given the opportunity to attract equity sponsors. Cost
overruns are a key financing concern. Substantial increases
in cost of large capital projects have occurred in recent
years across the globe. He noted that because of the market
conditions and the project size, there is a limited ability
to shift cost overrun risks to the contractors and
suppliers. The magnitude of the cost overrun risks and the
modest equity returns typically associated with the pipeline
equity will drive the need for sharing the risk between
equity investors and shippers.
The Alaska Natural Gas Pipeline Act of 2004 gave the U.S.
Department of Energy the ability to issue up to $18 billion
dollars in loan guarantees in support of the project. The
key loan guarantee provisions are favorable. Favorable
legislative terms may be limited by practicalities of the
Department of Energy implementations.
Mr. Andrews summarized that AGIA has helpful elements:
· Up to $500 million dollars of risk sharing;
· FT commitments; and
· Requirements that an application should describe the
means for preventing & managing cost overruns.
A pipeline would not be built without lenders' debt
financing and the financing of the pipeline project should
be supported by firm transportation commitments and a robust
federal guarantee. He acknowledged that there are many
questions and unknowns within the project; however, there is
nothing in AGIA that precludes project financing.
4:04:18 PM
FRANK INGRASSIA, (TESTIFIED VIA TELECONFERENCE), MANAGING
DIRECTOR, GOLDMAN SACHS, NEW YORK, reinforced previous
comments that there is nothing in the legislation that would
prevent successful financing of the pipeline. The
legislation in its current state is a "skeleton that needs
meat on the bones", to allow for successful financing. The
project needs:
· Firm transportation commitments;
· Positive project economics including a cost
structure resulting in gas prices well within the
forecast of the commodity prices; and
· A tight contractual structure with an appropriate
risk allocation [construction risk];
· A strong, credit worthy team with a record of
success in other large project financings.
Mr. Ingrassia reiterated the legislation is permissive,
putting out a financable plan. He offered to answer
questions of the Committee.
4:09:00 PM
Co-Chair Chenault asked if there would be concerns for a
federal loan guarantee with gas moving through foreign
countries. Mr. Andrews knew that a federal loan guarantee
could be used through Canada; he was uncertain of gas sales
through other countries.
4:10:03 PM
Representative Gara noted that since the loan guarantees
were backed by the federal government, would it be possible
to secure a lower interest loan. Mr. Andrews said that the
guarantees allows for an increased quantity of debt as well
as lower cost tariffs.
4:11:08 PM
HB 177 was HELD in Committee for further consideration.
ADJOURNMENT
The meeting was adjourned at 4:11 P.M.
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