Legislature(2013 - 2014)HOUSE FINANCE 519
04/10/2014 01:00 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Rick Harper, Black & Veach and Enalytica - Discussion of Natural Gas Issues | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 10, 2014
1:08 p.m.
1:08:00 PM
CALL TO ORDER
Co-Chair Austerman called the House Finance Committee
meeting to order at 1:08 p.m.
MEMBERS PRESENT
Representative Alan Austerman, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Mark Neuman, Vice-Chair
Representative Mia Costello
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Lindsey Holmes
Representative Cathy Munoz
Representative Steve Thompson
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Rick Harper, Energy of Business Consulting Associates;
Janak Mayer, Partner, enalytica; Nikos Tsafos, Partner,
enalytica; Deepa Poduval, Principal Consultant, Black and
Veatch.
SUMMARY
^RICK HARPER, BLACK & VEACH and ENALYTICA - DISCUSSION OF
NATURAL GAS ISSUES
1:08:28 PM
Co-Chair Stoltze discussed the meeting agenda.
RICK HARPER, ENERGY OF BUSINESS CONSULTING ASSOCIATES,
discussed his professional background related to oil and
gas, consulting, and work with the State of Alaska. He
highlighted his work on liquid natural gas (LNG) projects
in the U.S., Canada, and Oregon. He had been involved in
consulting for 22 years; his firm was located in Houston.
His firm specialized in everything transactional in the oil
and gas business (e.g. lease writing, joint operating
agreements, asset management agreements, and other). He
provided a list of various clients including [but not
limited to] Shell, Chevron, Anadarko, Intel, and other. He
had significant experience in royalty taxation issues. He
had been retained by the Legislative Budget and Audit
Committee; his current work for the state was qualitative
and not quantitative. He had been asked to look at studies
and economic modeling that had been done; his role was not
to duplicate or evaluate the studies. Given his past
involvement in the Stranded Gas Development Act contract,
the Alaska Gasline Inducement Act (AGIA), and other tax
measures he had been asked to compare and contrast the
items with current considerations. His report utilized his
past background.
1:14:56 PM
Mr. Harper shared that his primary concern for the state
revolved around royalty-in-kind (RIK) versus royalty-in-
value (RIV) issues. He was in support of development,
pipeline, LNG, export, and instate development. He was in
full support of the project and its timing; he thought it
was well thought out. Aside from his concerns about the
project's internal workings he believed that in terms of
the market, time was of the essence. He did not disagree
with information provided by Black and Veatch or enalytica
related to the market. He was concerned about the structure
involvement from the state's perspective. He stressed that
the window of opportunity for marketing in Asia and the
Pacific Rim was not open-ended. He believed there was a
real sense of urgency on the producers' part; he noted that
he had not had the same view on some prior projects. His
approach was to ask committee members numerous questions he
thought they should consider. He referred to his testimony
as a "gut check" for members. He advised that a flawed
project premise would lead to a flawed outcome. He asked
members to consider the project objectives (e.g. expedite
infrastructure, lower capital costs and financial
thresholds, and other). He commented on the different
backgrounds of committee members.
1:18:42 PM
Mr. Harper began at a "20,000 foot level." He asked why a
fiscally conservative individual who believed in small
government would opt to design the project in a way that
would expand government. He opined that if RIK occurred it
would probably be the biggest intrusion into the free
market on the part of a sovereign state in U.S. history.
He stated that the situation would not be like bailing out
General Motors or Chrysler. The real discussion was about
entering into the business in a competitive way should the
state decide to take its own product to market. The project
would be a long-term business enterprise that would expand
longer than a generation. If members believed the structure
of the arrangement would lead to higher state revenues, he
asked them to consider whether the state could really
compete for the sale of LNG with ExxonMobil, BP,
ConocoPhillips, Shell, and other major oil and gas
companies. He reminded the committee that the project
involved gas from a single source; whereas, competitors had
multiple sources. For example, the state may have a single
tanker contract against competitors with access to a
multitude of facilities. He spoke to the complexity of the
transaction proposal and understood that additional
negotiations would be going forward. He offered that the
complexity of the present structure would be significantly
increased in one to two years when the legislature was
asked to approve the agreements in finality. He provided
the following quote from Albert Einstein:
Any fool can make things more complex. It takes a
touch of genius and a lot of courage to move in the
opposite direction.
Mr. Harper advised members to think about how much more
complex the transaction was likely to be. He also advised
members to consider the potential that it may be the lone
group standing in the way of an economic advancement for
Alaska and the nation if it did not accept the proposal. He
queried whether the state had an opportunity to affect the
transaction at present or in the future in a substantive
way.
1:21:36 PM
Mr. Harper understood from prior experience that the
legislature's role related to advice and consent. He
communicated that his role was limited to advice. He
provided the presentation: "Observations on the Memorandum
of Understanding, the Heads of Agreement and the Alignment
of the State's Interest" (copy on file). He had no concerns
about the design of the project including the building of
the pipeline, the LNG facility, the markets, or other. He
opined that the proposal was a significant step forward
from the past Stranded Gas Development Act contract days;
however, the proposal was built on the same "chassis." He
detailed that the state would adopt a dramatically
different role than in the past in its role as lessor,
royalty owner, and regulator. The proposal contemplated
moving from RIV to RIK. He believed that the fundamental
premise that RIK was a net benefit to the state was flawed.
He asserted it was a concession to producers and introduced
substantial risk to the state. He relayed that when faced
with a multitude of documents pertaining to a large,
complex project, the natural inclination was to focus on
the internals and debate whether economic drivers were
given sufficient weight.
Co-Chair Stoltze handed the gavel to Vice-Chair Neuman.
1:23:54 PM
Mr. Harper continued that frequently people made the
mistake of failing to view a project on a macro level. He
believed his role was to encourage the committee to think
about the project in a macro context. He asserted that the
state would abandon its implied and explicit covenants that
benefited the state under the leases when moving to RIK if
the proposal was adopted as is. He highlighted that there
was over 100 years of history in dealing with RIV issues.
He remarked that the topic was never free of conflict;
there were always questions to consider about the
appropriate deduction, cost, price, and other. He relayed
that the history had given rise through the courts and
common law to include explicit and implied covenants in
leases. He underscored that all of covenants would be gone
if the system changed to RIK. He stated that every lease he
had ever seen in the oil and gas industry included the
right for a party to take its share in-kind; however, he
had not ever seen the right exercised. He relayed that the
right had been exercised typically under special and
limited circumstances. He shared that the state could
choose to use RIK, but it would be breaking new ground.
Mr. Harper highlighted that moving to RIK would make the
state a direct competitor [with producers] with a sole
source of production. He was aware that producers would
likely offer an option for marketing assistance, but it
would be for a fee and substantial cost. Under current
lease proposals the producers had an implied duty to market
gas for the state at no cost and to only take reasonable
and actual deductions. He discussed that the state would
have a minority stake in terms of the North Slope and
globally.
1:26:41 PM
Mr. Harper disputed the notion that the state's interest
may be better aligned with RIK rather than RIV. He believed
it would work in the opposite direction. He explained that
with RIV, notionally the producer received seven-eighths
(or other lease percentage) of the value of proceeds
received after the deduction of appropriate costs. The
assumption was made that interests were aligned because
both parties made money. Additionally, the state benefitted
by economies of scale under RIV. Under RIK the producers'
scale would remain substantial whereas the state's scale on
a relative basis would not be. He communicated that the
state would not be on equal footing with producers; it
would not be a working interest owner and would not be
privy to working interest owner meetings, decisions,
information, and other. There was also a question about
where the state would take its gas in-kind. He believed the
decision to go with RIK was workable, but he encouraged the
state to take its interest in-kind as far downstream in the
process as possible. He asked the state to consider
separating in its mind why it would own an interest in the
pipeline and the LNG facility from the decision to take its
gas, own capacity, or have a party own and manage on the
state's behalf. He believed that under the circumstance it
was easy to see why the state would take an ownership
interest in the pipeline, LNG, or any other facility in
order to lower the cost of capital and accelerate the
project development.
Mr. Harper believed it was impossible to anticipate all of
the complexities that entering in the commercial business
as a state would offer.
1:30:03 PM
Mr. Harper shared that it was unusual for producers to own
a pipeline and the capacity. He communicated that the
concept introduced a new set of dynamics. He relayed that
unlike the oil industry, the natural gas industry was not
vertically integrated; typically producers often subscribed
for capacity in order to meet objectives, but they did not
own, build, and control the capacity of a pipeline on a pro
rata basis. He added that there was nothing wrong with the
concept, but he wanted the state to understand that it was
unusual. He found the state's potential participation under
the scenario to be concerning (specifically related to the
state engaging itself commercially).
Mr. Harper discussed that vertical integration raised the
issue of control over current and future basins. He relayed
that the topic most closely manifested with the
determination of the rate design; if pricing was rolled in
and a large producer stepped in with major volumes they
were encouraged because all parties would have a pro rata
share. He compared it to an interstate highway system where
everyone paid equal tolls. He noted that there was a middle
ground. He had seen amendments that were discussed in the
Senate and in the House Resources Committee about going
with incremental pricing, but as additional volumes came
on, tariffs could be lowered initially until the looping
stage; rolled in rates could be allowed and capped. He
reiterated that he would be concerned about basin control
and the larger producers.
1:32:59 PM
Mr. Harper believed the economic modeling conducted by
Black and Veatch was excellent, but he did not believe it
took in the full effect of the downside risk of the state's
participation in the commercial marketplace. An old
analysis suggested that a decrement to state's net present
value (NPV) could be as much as 10 percent as a result of
taking its share in-kind. The question of jurisdiction of
the facilities would impact how they were managed and the
degree of open access the pipeline would be. He believed it
was generally presumed that the project would be regulated
by the Federal Energy Regulatory Commission (FERC), but it
did not have to be the case. He advised the committee to
consider what fundamental tenets would govern capacity and
tariffs if the project was overseen by the state and was
not FERC regulated.
Mr. Harper shifted the discussion to fiscal issues. He was
more concerned about the state's fiscal stability than that
of the producers. He relayed that from the producers'
perspective fiscal stability was typically a code word for
reducing taxes and royalties. He conceded that producers
should look after their interest as vigorously as possible,
which they did well. He stated under the given context
there was really no such thing as fiscal stability. He
referred to constitutional prohibitions about one
legislature binding the hands of future legislatures. He
advised the committee to use caution about bearing the
pressure of fiscal stability in a large-scale project. He
opined that based upon economics, the project would stand
on its own without fiscal concessions towards the
producers. He suspected the project would be done with or
without the state's participation albeit not as quickly. He
surmised that under those circumstances the state would
probably not have an opportunity to impact design. He
believed the Black and Veatch economics showed the project
to be robust under a number of scenarios. He reiterated
that his testimony acted as a gut check for members related
to legislation and the legislature's interaction with the
process going forward. He had a high regard for members of
the administration. He urged the committee to think about
the importance of continuity in government positions in
relation to long-term projects.
1:37:21 PM
Representative Guttenberg referred to Mr. Harper's
testimony that producers had a duty to market for the state
at no cost. He asked Mr. Harper to elaborate. Mr. Harper
replied that producers were not entitled to deduct a
marketing fee in the calculation of royalties they paid the
state for its share of production under the RIV system. He
relayed that the requirement would vanish under RIK.
Representative Guttenberg wondered if the requirement was
included in the lease agreements between producers and the
state. Mr. Harper replied that the requirement was based on
two things. He relayed that the producers' duty to market
was an obligation under the lease. There was an implied
duty that as a reasonably prudent operator that they
receive the highest price reasonably attainable for the
state's share of production. Additionally, the producers
were generally precluded from assessing any marketing fees
to the state. The duty was part of a benefit of the
bargain. He mentioned joint testimony that he and former
colleague Spencer Hosey had discussed the producers'
affirmative duties and obligations. He suggested locating
the old testimony to give the committee a background to
compare what the proposal may mean if it abandoned RIV.
1:40:02 PM
Representative Guttenberg asked when the testimony had been
given to the legislature. Mr. Harper guessed it had been
2007 or 2008.
Representative Gara referred to basin control. He wondered
what the state could do to ensure that independent parties
could get as much explored gas into the pipeline as
possible in order to increase employment, revenue, and oil
and gas production.
Mr. Harper answered that the issue revolved around what
diameter line to install initially and how compression
worked against the design and maximum allowable operating
pressures in the pipeline. He stated that there was a game
to be played. A system should be designed in order to be
expanded as much as possible with compression. He stated
that those were the cheapest capacity increments on the
line. There were also similar considerations related to LNG
facilities design and expansion. The issue needed to be
dealt with first and foremost before tariffing and rate
treatment because its impact could be just as significant.
1:43:05 PM
Vice-Chair Neuman wondered if the state could use its
portion of capacity in the pipeline to allow for expansion.
Mr. Harper replied that he had heard the option discussed;
however, he had never seen a scenario where the pipeline
was "basically a condominium." He detailed that throughput
control and ownership of the pipeline were separate in all
agreements he had seen. He surmised it could be done, but
it would take careful craftsmanship by the administration.
He thought it would be difficult for a minority owner to
achieve.
Vice-Chair Neuman believed there was related language in
the Heads of Agreement (HOA) for the Trans Alaska belt and
the incorporation of minority and majority partners. Mr.
Harper agreed that the issue had been addressed, but
deserved further thought.
Representative Gara highlighted that under the contract the
state had the ability to initiate expansion; however, if
the pipeline reached expansion capacity the state would be
responsible for paying the full looping cost. He believed
it was a problem if there was not a rolled-in rate sharing
mechanism. He had been told that expansion by compression
was cheap enough that a new party could come in and pay the
full cost. He believed that for the size of the pipeline
under discussion there was room for up to a possible
billion cubic feet (bcf) expansion. He surmised that if
expansion involved the construction of a new pipeline and
costs were not shared, a new company would not have the
opportunity to be involved. He remarked that the state
could be a zero to 10 percent owner of the pipeline and a
25 percent owner of the gas.
Mr. Harper agreed. He elaborated that the construction of a
new pipeline would be a very serious investment, which
normally discouraged expansion unless a new and large scale
resource was discovered. For more conventional exploration
and production in addition to state reserves the parties
would not be able to afford the cost of looping on their
own.
1:47:09 PM
Representative Gara wondered whether under the current
contract gas would get to the pipeline if expansion
required the construction of a new pipe and the state had
the ability to bring on another partner in its share.
Mr. Harper replied that he was unsure. He believed the
concern was serious. He detailed that incremental pricing
was generally favored in the Lower 48, but FERC had
identified Alaska as different in the past. He elaborated
that Alaska was different because projects involved
greenfield pipelines and unknown reserves to support the
pipeline outside of Prudhoe Bay, Point Thomson, and
satellite fields. He expressed concern about anything but
rolled-in pricing or a lid on incremental pricing. He
stated that the issues did not necessarily apply to
offtakes and other. The idea of bearing the full financial
responsibility for the addition of new pipeline could be
discouraging and inhibiting. He added that natural gas in
Alaska was a special situation; the issues were not present
in Texas, Louisiana, Wyoming, and other.
1:49:24 PM
Representative Costello pointed to the HOA and the
Memorandum of Understanding (MOU). She remarked on the
importance of momentum when dealing with the MOU.
Additionally, it would cost the state financially if it put
on the brakes. She wondered if the state would gain
something by slowing down and researching the issue
further.
Mr. Harper did not believe the state needed to slow down
because the issues had been identified. The question was
whether the legislature wanted to force the issue. He
detailed that current pressures associated with the project
were minor compared to pressures the legislature would face
in future years. He equated the HOA and MOU to "agreements
to agree" and noted that they were not binding contracts.
He did not put confidence in any potential assurances from
the industry to trust that the issues would be dealt with
during negotiations. He stated that the producers were some
of the finest in the world and were looking out for their
own interests. He feared that the legislature's ability to
provide advice would be very limited in one to two years
without resolving what the state really wanted in terms of
level of complexity and whether it wanted expansion of
government and government involvement in free enterprise
for years to come.
Representative Costello understood there would be future
points when the legislature would address the project
including at the pre-FEED [Front End Engineering and
Design] and FEED [Front End Engineering and Design] stages.
She asked about the different options the state had with
TransCanada. She wondered when the deal would be finalized.
Mr. Harper answered that he was not the best source on
steps associated with the project. He spoke to
strengthening the state's involvement and ability to
provide real input at meaningful points in time.
1:53:10 PM
Vice-Chair Neuman wondered if there was sufficient
engineering data to prepare an economic feasibility study.
He noted that there had been substantial work done with
instate gaslines (e.g. the Stranded Gas Act, AGIA, and
other). He remarked that substantial money had been
invested by multiple parties. He was interested in the
timeline.
Mr. Harper replied that it was difficult to answer the
question without more specific information. He imagined
that based on extensive former studies it would not take
much more to put design parameters in place. He added that
there was no new technology involved. He was certain that
issues related to right-of-way and the location of
environmentally sensitive areas were known because of prior
work by the state, producers, and contractors.
Vice-Chair Neuman pointed to the testimony related to a
concern about basin control. He noted the HOA included a
timeline commitment from TransCanada Alaska Development
Corporation on the signing of the bill. He wondered if the
state should have other commitments. He asked if the
contract language was standard.
Mr. Harper replied that he did not have comments or
concerns to offer in relation to the instate offshoot of
the larger project.
Vice-Chair Neuman believed it had been a concern. He spoke
to a time value of money. He addressed the concern about
the substantial money the state would put in and when
producers would actually produce the product.
Mr. Harper agreed with the concern. He believed it was
associated with RIV versus RIK. He shared that the
producers would control ownership in the pipeline and the
majority of its capacity, but they would also control
decisions about when and how much gas to produce, which
impacted the basin control issue and the state's share of
gas. The state needed to recognize the items as a risk
factor.
Vice-Chair Neuman pointed to Mr. Harper's concerns related
to rolled-in rates or future expansion. He believed it
would be a great thing if the volume of gas for sale
required a new pipeline. Mr. Harper referred to the
scenario as a "high class problem." Vice-Chair Neuman
believed it would be a good problem to have. Mr. Harper
believed the state would have it.
Representative Guttenberg surmised that generally a
pipeline was built at the minimum level so capacity could
be extended up. He wondered if the facilities on either end
were built to the same capacity. He wondered when the
construction of new LNG or gas treatment plants became
economical.
1:58:33 PM
Mr. Harper referred to prior discussion on the importance
of design parameters. He stated that it was not unusual to
oversize a pipeline in a greenfield situation; examples
given included the Rockies Express Pipeline, Kern River,
and other. There was a limit to how much could be done
economically and under FERC rules, but it was highly
desirable to create as much capacity as possible at the
start.
Representative Guttenberg wondered how the state would
influence the outcome without FERC in the equation. Mr.
Harper answered that the state would influence the outcome
through negotiations.
Representative Guttenberg asked for confirmation that the
state could influence the outcome as a 25 percent partner
via negotiations. Mr. Harper responded affirmatively. He
spoke to the state's desired outcome and noted that its
interests would diverge from other parties.
Representative Gara pointed to page 5 of the report related
to risks associated with the state paying for the shipment
and sale of its gas. He referenced a study mentioned by Mr.
Harper citing that the arrangement could reduce the state's
NPV in excess of 10 percent. He wanted to be able to vote
for the plan, but wanted there to be a better balance of
risk and reward. As a taxing authority with the oil
pipeline the state did not have to worry about owing great
liability because it received taxes based on the amount of
oil shipped. However, if the state had to sell the gas and
it had no control of gas coming down the pipeline, it still
had to pay TransCanada for shipping capacity. He wondered
whether it was feasible to develop an agreement that
producers would be liable to pay the shipping capacity fee
if there was not sufficient gas in the pipeline.
Mr. Harper agreed that the risk should be addressed
upfront. He classified it as a real risk.
2:01:57 PM
Vice-Chair Neuman discussed RIK versus RIV and the
associated risks. Under RIK the state faced risk associated
with the cost of product at the wellhead, transportation,
and preparation for market; however, the chance to make
more on the market helped offset those risks. He spoke to
the legislature's work to determine where to set the rate
timelines. He observed that if risks were not taken there
would be no reward. Under RIV the state would receive value
at the wellhead alone.
2:03:07 PM
Mr. Harper agreed. He disputed the premise offered to the
legislature that RIK was a benefit to the state. He
believed the move to RIK represented a concession on behalf
of the state. He believed it was conceivable that the state
could be better off with RIK, but it created a downside
risk that it did not currently have. He did not believe the
risk/reward balance was symmetrical. He remarked that there
were other elements to include in the balance as well.
Vice-Chair Neuman asked if risks under RIK would be
diminished due to the large gas volume and pipeline.
Mr. Harper replied that the volume was large, but in terms
of competing in the marketplace, the volume was small. He
stated that sole sourcing and the commitments required for
the state to ship gas to the Pacific Rim on its own meant
that deliveries had to be guaranteed. Buyers would not
accept a contract that did not guarantee delivery. He
relayed that ExxonMobil and BP had their own LNG in
addition to established trading operations. The producers'
risk profile was much different than that of the state. He
pointed to potential delays due to a lost tanker or a field
shutdown. He was concerned about the idea of the state sole
sourcing a relatively small volume into a very
sophisticated large market. However, there were people who
believed the risk could be managed.
2:06:42 PM
Representative Wilson asked about risks the state would
face if the project was not initiated. She spoke to the
lack of affordable energy in Fairbanks and rural areas. She
pointed to the refineries' current dependence on diesel.
Mr. Harper replied that he supported her concern, but going
with RIV or RIK did not change the metrics; the same volume
of gas would move. He believed the project was robust and
compelling as designed. His concerns related to the
internal workings of the ownership structure. He opined
that the project would be done and that instate service
would be a part of it.
Vice-Chair Neuman asked whether RIK versus RIV was
currently Mr. Harper's primary concern. Mr. Harper replied
in the affirmative. He added that he would have concerns if
the state was doing business with second or third-tier
subsidiaries of one of the big producers. He cautioned the
state to be careful who it agreed with and whether or not
the parent company of the entity was backstopping the
obligations. He stated that there were no guarantees in
business, there were guarantors.
Vice-Chair Neuman remarked that ensuring that the state had
good contracts would address the concerns. He commented
that ExxonMobil had to amortize its investment of the
billions of dollars it had put into Point Thomson. He
stated that the only way for the company to amortize its
investment was with a pipeline. He suspected a pipeline
would be built with or without the state's involvement.
Mr. Harper believed the metrics were radically different
than they had been ten years earlier. Producers had
urgencies that resulted from Point Thomson development as
well as the change in the gas/oil ratio. Producers also had
the need to book and monetize the asset. He stated that the
world was moving to natural gas, which he believed was a
major part of the corporate initiative for a company like
ExxonMobil. He had not thought the same thing ten years
earlier. He believed the companies had reasons to be and
were serious now.
2:11:10 PM
Representative Gara referred to the requirement that the
state would pay TransCanada for shipping capacity even if
there was no gas in the pipeline. He wondered if the
potential was a real risk to the state. Mr. Harper replied
that it was a serious concern. For example, he had worked
as an advisor to Sunrise Energy Corporation, a company that
had gone bankrupt over a single firm transportation
agreement. He referred to the argument that there were
trillions of cubic feet of gas at Point Thomson and Prudhoe
Bay. He stated that it was fine if the state could get
comfortable that the producers would be motivated to
produce gas at the maximum rate allowable and would not use
the fields as storage or as a buffer to other producing
fields. However, it had and could happen catastrophically.
2:13:46 PM
AT EASE
2:18:13 PM
RECONVENED
Vice-Chair Neuman pointed to concern on RIK versus RIV. He
asked for the opinion of the consultants. He discussed
measuring risk for RIK beginning at the wellhead through to
market; however, there was the availability to get a profit
on the end. He compared it to RIV that offered value at the
wellhead.
JANAK MAYER, PARTNER, ENALYTICA, began by differentiating
between questions of transactional risk around when and
where an entity took custody or title of gas, how ownership
was transferred, and transportation obligations. He
disputed the idea that under RIK an entity was more exposed
to things like price and cost risk, but the risks were
taken in the hopes of a higher reward. He stated that the
idea was appealing and intuitive; it had been his immediate
intuition. He had questioned whether the state wanted to
take on risks associated with price, cost, and construction
that went along with RIK and equity. He determined his
intuition had been wrong after developing models and
looking at changes caused by price fluctuation and
different construction costs and timing. He provided a
disclaimer that he separated questions of price and cost
risk from the specific workings of transaction details. He
believed one of the strongest reasons for taking RIK and
project equity was that risk was actually mitigated. He
noted that enalytica had used different models, but had
come up with very similar results to Black and Veatch. He
detailed that there was less upside and less downside with
RIK. He referred to his past testimony on where value
resided in dollar per barrel equivalent terms. He discussed
scenario that included $100 per barrel of oil, which
translated into $80 per barrel for LNG in Asia and
transportation costs of $60 to $70 per barrel. He referred
to the small amount of value once the fixed amount was
taken out. The fundamental difference between RIV versus
RIK with equity participation was that RIV guaranteed the
$60 to $70 transportation cost. Unless there was no value
left at the wellhead RIV served to guarantee the shipping
amount so that when prices rose and fell the return was
always steady; what varied was what the state would
receive. One of the biggest reasons to consider RIK and
equity was that everyone would rise and fall together; when
prices were high returns were not as high they would be
under RIV, but returns were better when prices were low. He
referred to a model that illustrated his point
quantitatively.
2:24:32 PM
NIKOS TSAFOS, PARTNER, ENALYTICA, believed the big question
was whether there was a project could be accomplished with
RIV and if the state's role was limited to a taxing and
regulating authority. He spoke to the importance of the
question. Under RIV the state would deduct costs from the
final sales price to come up with a taxable barrel of LNG.
He discussed the history of oil and the litigation
associated with a Trans-Alaska Pipeline System (TAPS)
tariff of $5 to $6. He questioned how much disagreement
would occur with a tariff of $60. He presumed that the
disagreement could occur enough that in anticipation of
such disputes, the state did not want to make the
investment until it had reassurance that it was not
starting another 30 to 40 year legal battle between it and
producers. The crucial question was to completely
understand what was being compared. For purposes of
illustration enalytica had run RIK and RIV projects to
demonstrate the different economics. The broader question
went back to whether there was an RIV project.
Vice-Chair Neuman asked the presenters to avoid using
acronyms.
Mr. Tsafos agreed. He continued to address RIK versus RIV.
He questioned whether producers would be willing to make an
investment under RIV based on items he had outlined. Under
an RIV scenario, he put the probability of producers making
an investment in the project at a fairly low number.
DEEPA PODUVAL, PRINCIPAL CONSULTANT, BLACK AND VEATCH,
agreed with Mr. Mayer and Mr. Tsafos. She added that in a
Black and Veatch royalty study one of the significant risks
was RIK. The study had concluded that there would be a risk
of eroding significant value for the state with RIK. She
detailed that the largest component of the risk related to
the state's ability to compete with producers in the global
LNG market. She believed the current HOA helped to reduce
the risk; it included the offer of the producers to
negotiate and market the state's share of LNG. She opined
that for the state to have the option of writing the
producers' contract brought the advantage of RIV into the
RIK world. Therefore, the state would not lose value by
taking a lower price contract than what the producers were
able to achieve in the market.
2:29:50 PM
Mr. Mayer added that when thinking about tariff disputes it
was important to consider that the liquefaction terminal
would likely be regulated under FERC Section 3 (regulation
of permitting, but not of the tariff). He reasoned that
there was a possibility that the pipeline would also be
regulated under the section, which meant the project could
become a $50 billion project with no direct regulatory
oversight over the tariff or debt to equity ratio. He
elaborated that there was an enormous possibility of
shifting costs to create the highest tariff possible (on
the liquefaction end and potentially the entire project).
There was enormous incentive to do it. One of the most
appealing aspects of the RIK with equity was that it took
all of those potential issues off the table.
Representative Wilson wondered about the weaknesses and
strengths in partnering with TransCanada versus a company
that was used to shipping and other issues. She was
concerned about the state's 25 percent [equity ownership]
and whether TransCanada would be the strongest player at
the table. She understood that TransCanada was not going to
sell the state's gas. She shared that she would feel
differently if the state was partnered with a company like
BP that knew how to get the most return for its LNG sales.
She acknowledged the benefit of the state's partnership
with a company that knew how to build a pipeline, but she
was concerned about being in a position to trust
competitors to sell the state's gas at their price or
better.
Mr. Tsafos replied that it was important to understand that
TransCanada was irrelevant in terms of how the state would
sell its gas. He detailed that under the current structure
TransCanada would be an owner in some of the infrastructure
and would be paid a tariff for providing a service for
processing and shipping gas. The typical structure was that
the pipeline company would not own the gas; the state would
own the gas. He pointed out that the concern about how the
state would market its gas had been identified by Black and
Veatch as well. He made several observations related to the
issue. First, he appreciated that trying to sell the
state's gas in the global market may seem daunting. He
shared that he had worked with a number of companies that
started from the same position; the companies had decided
to learn how to sell the gas. He had observed that it did
not take much to develop the expertise to sell LNG in the
global market. He spoke about marketing teams of former
clients that had consisted of seven to ten people. He
believed learning how to market gas was different than
learning how to build a liquefaction facility or a
pipeline. He relayed that marketing LNG was not as
complicated as it seemed upfront. He believed the cost of
developing a sophisticated marketing operation was not that
high. His opinion was based on experience with a number of
players that had no former marketing experience. There were
two ways to market the gas; one way was to sell it to
someone, another way was to pay someone to sell it on the
state's behalf. The HOA contemplated both of the options;
it had not been determined what the state would choose. He
detailed that the state could choose both options for its
gas.
2:36:58 PM
Mr. Tsafos continued to answer. He expounded that paying
someone to sell gas on another party's behalf was not a
typical model because there was not significant upside. The
large producers made money by selling gas, but not by
selling another party's gas. However, the option helped the
state to understand what the costs were. The state's other
option was to sell its gas. He detailed that selling gas
would involve the state issuing a request for proposal to
Asian buyers to determine how much they were willing to pay
for the LNG. He observed that if the state directly worked
with Asian markets for six to nine months on selling its
LNG it would gain a good idea about what it could sell gas
for. He relayed that the state's challenge was not
associated with competing against its partners, but with
other locations with much higher volumes of gas. He
reiterated his expectation that it would not take the state
long to determine what constituted a fair deal for its gas;
the number of people the state would need to hire to make
the determination was low. He stipulated that it was no
guarantee that the state would not regret the deal it
signed later; it was always possible to get the market
wrong. For example, parties that signed deals in the Lower
48 with the expectation that gas would be imported
regretted the decision; however, they had signed deals that
were at the market at the time. He understood that the task
may seem daunting, but the challenge may not be as large or
insurmountable as it may seem at present.
2:39:43 PM
Representative Gara remarked that enalytica was consulting
for the governor's office. He expressed concern that the
bill presumed the state would be able to tax the gas and
that RIV would be the methodology used unless the
commissioner found it was in the state's best interest to
go with RIK. He believed that based on testimony in the
meeting it sounded like the decision to go with RIK had
been made.
Mr. Mayer clarified that enalytica worked for the
Legislative Budget and Audit Committee and not the
administration. He stated that the HOA posited a vision,
future, and project structure that would use royalty and
tax in kind, but only if it was in the state's best
interest. The focus on RIK with an equity share was an
endpoint that was envisioned, but not predetermined.
Additionally, much of the debate had been about whether RIK
could or would be desirable for the state. Ultimately, if
the state could not come to an agreement on RIK it would
need to change direction, which would probably require much
of the project structure to be reconsidered. He stressed
that the state was not committed to RIK, its commitment was
to pursue the route to determine if it was possible to
overcome the issues.
Ms. Poduval added that the HOA specified that the election
to take RIK would be subject to arriving at satisfactory
arrangements for the disposition of the state's LNG. She
explained that the language did not contemplate that RIK
was a done deal. She did not believe the best interest
findings had been presupposed in any way. Discussions
related to the state taking equity participation in the
project were separate from the decision to take RIK or RIV.
2:43:53 PM
Representative Gara apologized for his misstatement about
the testifiers' representation. He referred to enalytica's
testimony that under RIV the downside risk was not as
great. He spoke to risks the state would take on if it sold
the gas itself. First, the state had no control over
production on the North Slope and how much gas it would
receive. Second, the state would owe TransCanada for
shipping gas even when gas was not shipped. He thought the
risks were substantial. He observed that under RIV the
risks did not exist. He wondered why he should take the
risks so lightly.
Mr. Tsafos relayed that the conditions and possible
compensations of the failure to deliver gas would be
negotiated in the agreements in the next couple of years.
He stated that technically speaking only the operator had
control over production, which could affect all parties
involved. He could not think of a scenario where producing
gas would go against any of the parties' interest. He
stated that the producers could compensate and meet the
obligation to deliver gas to Japan with other supply
sources, but it would be a poor economic decision. He
elaborated that each party would invest significant capital
and revenues would be made by selling gas. He added there
would be a commitment to sell the gas for 15 or 20 years
prior to the start of the project. It was possible that
accidents or outages may occur resulting in less or no
production; the state would not be the only one that would
have a claim or complaint against the operator. He stated
that the issues would be settled contractually. He believed
the idea that there was any economic incentive to not
produce gas ignored the fundamental goal of LNG
investments.
2:48:44 PM
Vice-Chair Neuman surmised that if an entity had $45
billion in debt it would have incentive to sell as much gas
as quickly as possible. Mr. Tsafos agreed.
Representative Gara believed the assumption was missing a
component. He noted that the state did not know about the
goals of producers. He surmised that producers may find
that during a given period they could make more money by
using their gas to produce oil instead of shipping it. He
discussed a scenario where TransCanada agreed to produce
less gas because the price of oil had spiked. He wondered
if the risk was valid.
Ms. Poduval replied that it was not a coincidence that LNG
projects worldwide operated at over 90 percent utilization.
She stressed that the economics did not make sense once
billions had been spent to not run a project at full
capacity. She noted there was always the possibility for
unplanned outages. She reasoned that using Prudhoe Bay as a
storage field would be an extremely expensive storage field
at $45 billion to $50 billion. She summarized that every
party would have incentives lined up to maximize natural
gas production from the slope and to run the project at its
highest utilization.
Mr. Mayer added that parties would also have 15 to 20 year
take-or-pay commitments to customers in Asia; if the
commitments could not be met through the project, the
parties would be required to locate the gas elsewhere,
which would involve a significant financial penalty in many
cases. Additionally, in most instances parties would have
significant debt obligations that were guaranteed directly
from the project's cash flows or by the parent entity.
Parties would also have to justify the reason for letting a
$50 billion project sit idle without earning the return
promised to their boards. He could not imagine any
incentive to not maximize gas production. He acknowledged
that there could be situations where production could be
interrupted that created a range of risks the state would
need to manage. He agreed that the difficulty, onus, and
complexity of managing the risks was higher in an RIK world
than in a pure taxing regulating authority world. The risks
were the reason for the host of agreements to be negotiated
in upcoming year including the balance of offtake from the
fields and how the agreements compared with obligations on
the sale of the state's LNG. He noted that there were many
pieces to understand and stated that the "devil was in the
details." For instance, under what circumstances the state
would be obligated to sell LNG to counterparties in Asia
and what its obligation would be if it could not provide
the gas. He spoke to understanding what constituted "force
majeure" events, when the obligation to provide LNG was no
longer in place, and how it matched against the state's
contractual assurances with producers that it would have
the gas. He stated that the ability to balance and manage
the items was not unprecedented; there were any number of
global projects where the project owner did not directly
control or own the upstream, but the projects had to be
carefully negotiated and thought through. He agreed that
Representative Gara was right to be concerned.
2:53:46 PM
Mr. Tsafos expounded that if there was an outage, the
producers would not earn money on their capacity, but the
state would have a tariff that it could be required to pay
even without production. He pointed to the difference
between a TransCanada versus a no-TransCanada scenario for
the state. He stated that it was no different economically
than taking on debt. He compared the situation to an
owner's requirement to pay the mortgage on a building
whether or not it was rented. The economic downside risk to
the state of being on the hook for a commitment even when
gas was not flowing through the pipeline. He explained that
with no TransCanada the state would owe debt to the bank.
He pointed out that the scenarios were not too dissimilar.
Representative Munoz referred to testimony by Mr. Harper
that moving to RIK would be a concession to producers. She
asked for a comment.
Ms. Poduval did not agree that going to RIK was a
concession to producers. She referred to advantages to RIK
including price protection during low price circumstances
where the state actually fared better with RIK. She noted
that going to RIK with equity participation was the package
that increased the commercial attractiveness of the project
for the producers. From the perspective of commercial
attractiveness the question was not necessarily between RIK
and RIV, but between the possibility of having or not
having a project for the state to participate in. She
discussed preservation of value to the state and incentives
the state could offer to producers in a way that would
transfer value back to the state as opposed to a fiscal
concession that reduced the royalty or tax percentage.
Additionally, she addressed at what point the value of the
state's equity participation and gas share would equal the
value it would have received from a theoretical project
under RIV without equity participation.
2:57:48 PM
Representative Munoz expressed concern about the idea that
going with RIK could be a risk to the state and the project
NPV. Ms. Poduval answered that if anything, the risk to the
state would come from making upfront investments alongside
the producers. She agreed that the state could risk losing
up to $400 million of investment if the project did not
reach an affirmative final investment decision (FID). In a
success-case scenario at FID the state would have sold the
LNG, locked in the project debt, determined cash flows, and
the NPV would be significantly positive. She believed the
real risk to the state would be prior to the FID to the
extent that the state was a partner in the project through
the pre-FEED and FEED stages.
Vice-Chair Neuman asked for comment on the capitalization
structure. He wondered about the costs for gas treatment,
pipelines, transportation. He referred to the 70 percent/30
percent (70/30) debt equity structure during the
development and construction stages. He asked why structure
would be changed to 75/25 two years after the initial
startup date through the term of the transportation
agreements. He wondered why the numbers optimal.
3:00:56 PM
Ms. Poduval relayed that during AGIA, TransCanada had
proposed and accepted a 70/30 debt equity structure. She
detailed that higher debt was better for the project
shipper because debt was less expensive than equity, which
meant the state's rate was lower.
Vice-Chair Neuman asked Ms. Poduval to elaborate.
Ms. Poduval explained that under the state's deal with
TransCanada the cost of debt was 5 percent whereas the
return on equity was 12 percent; therefore, the state was
paying more for the equity portion of TransCanada's
capitalization structure than for the debt. She summarized
that the higher the debt in the structure, the cheaper the
cost of the transportation capacity would be for the state.
She elaborated that moving to a 75/25 debt to equity
structure two years after the project begins was a
concession the state had achieved during negotiations. She
relayed that a 70/30 capitalization structure was not
unusual for LNG projects. She noted that the topic was
covered in the royalty study that benchmarked a number of
global LNG projects. She explained that 70/30 was the most
aggressive debt heavy structure. Several of the other
projects the study included had 60/40 or 50/50 structures,
which made projects more expensive. She added that a couple
of projects had been financed completely with equity off of
the sponsors' balance sheets. She provided the Gorgon LNG
project as an example. She summarized that a 70/30
structure was in the "fairway" of what a prudent or
attractive capitalization structure would be for LNG
projects.
Mr. Mayer referred to previous debt-to-equity information
they had presented that included an analysis of FERC data
for U.S. pipeline companies. He relayed that there tended
to be a ceiling around the 60/40 ratio, which was typically
a common ratio for pipelines. He stated that a 70/30 ratio
was aggressive and 75/35 was even more aggressive. The
consultants believed that the overall rate structure with
TransCanada was attractive. He added the stipulation that
certain items could change (e.g. a potential change in rate
tracker and the actual debt and equity costs) before FID.
He concluded that the 75/25 debt-to-equity structure was
attractive.
3:04:36 PM
Vice-Chair Neuman remarked that TransCanada had committed
approximately $6 billion at 5 percent debt with risers. He
asked if the 70 percent debt benefited the state.
Ms. Poduval requested clarification.
Vice-Chair Neuman noted that there was 70 percent debt
during the development/construction phase. He referenced
that TransCanada would construct the pipeline and gas
treatment facility for about $6 billion at 5 percent debt
with risers. He wondered if the benefit to the state would
increase if the debt was 75 percent.
Ms. Poduval replied that 75 percent debt was optimal; the
more debt the better, from the state's perspective. She
stated that the 75/25 ratio throughout the life of the
project was even more attractive than the 70/30 ratio
during the construction phase.
Vice-Chair Neuman assumed that the reason lay behind
TransCanada's commitment to a 5 percent interest rate on $6
billion. Ms. Poduval responded in the affirmative, but
noted it was subject to trackers.
Representative Guttenberg discussed the RIK and RIV. He
recalled that the modeling displayed that RIV was a better
deal for the state but that the commissioner would make the
final decision. He wondered what would tip the scale the
other direction.
3:07:14 PM
Mr. Mayer replied that the scale would be tipped to RIK if
existing hurdles could be overcome. He detailed that it was
necessary to know the LNG sale terms, understanding the
nature of offtake and balancing agreements, the state's gas
share and how it may change over time, and what potential
events of production interruption meant. He elaborated that
it would necessary to take a look at the change to
understand the different obligations and how they were
connected.
3:08:13 PM
Representative Guttenberg surmised that more would be known
about RIK versus RIV in one to two years when terms,
conditions, and contracts had been put in place.
Mr. Tsafos replied that the key variable to the
attractiveness of RIK related to how well the gas had been
sold. He noted that in the next 1.5 years there may be a
range of finality on terms; the state may have preliminary
agreements to sell gas and other more final agreements. He
did not think the state would have nailed the whole issue
down in the next 1.5 years; the process began with an MOU
and HOA and turned into final contracts. He added a comment
on the broader discussion of RIK versus RIV. He stated that
whether RIK or RIV was more favorable to the state depended
on the cost and price. He underscored that there was not a
scenario where RIK or RIV was always better. He pointed to
the importance of understanding that there were tradeoffs
with both RIK and RIV; depending on the market, one or the
other could yield more money for the state.
3:11:23 PM
Representative Guttenberg stated that at some point the
state would need to balance the risk. He surmised that in
15 months when parties came back to the legislature there
would continue to be tradeoffs under each scenario. He
hoped the range would be narrowed with a better
understanding of the world market and interest. He noted
that the state would not have the ability to make changes
after that point. He wondered about the chances that the
project would do what the state wanted it to do.
Ms. Poduval looked at RIK and RIV separately from equity
participation. She theorized that if in 1.5 years the state
had negotiated an agreement that producers would sell the
state's share of LNG at the same price as their own, it
would give the state comfort that using RIK would not be
worse than RIV.
Representative Guttenberg wondered when the state should
have concern that an agreement did not look as favorable
for the state as possible. He wondered what warning signs
to look out for.
Ms. Poduval replied that an agreement for the producers to
sell the state's gas with significant costs would be a red
flag that the state may receive less under an RIK scenario.
Additionally, it would be unclear whether RIK or RIV was
better for the state if the producers purchased the state's
LNG outright rather than selling it along with their own
LNG to the market; the state would not have visibility on
the price the producers received for their own oil. Offtake
and in-balance agreements could go either way and involved
volume related risks the state would take with RIK that it
may or may not manage directly with RIV. She advised that
risk of volume imbalances or interrupted gas flow was
shared equitably with producers or that producers had
mitigated the state's risks associated with the items.
3:15:30 PM
Mr. Tsafos recommended paying close attention to who
agreements were with if the state was marketing its own
gas. He stated that it was always possible to find someone
to sell gas to, but it did not mean it would be in the
state's best interest. He explained that the state would
make decisions based on the credit-worthiness of its
counter parties. He advised that there were a range of
customers from good to bad. He would be concerned that the
market was not being receptive to Alaskan gas if all
willing buyers were inexperienced without strong balance
sheets.
Vice-Chair Neuman wondered what the consultants' studies
showed as the minimum gas market price that would cover the
state's costs.
Mr. Mayer answered that enalytica had conducted a number of
stress case analyses. He emphasized that all figures were
preliminary. One scenario combined a substantial increase
in the project's capital cost, an 80 percent pipeline
utilization rate, and a price of gas of $7 per mmbtu. Under
the "almost perfect storm" of negative outcomes it did not
reach a point where the state was actually losing money on
an annual basis although the project would generate a
fairly poor return. Once FID had been reached, the
fundamental risk was that the project may or may not
achieve returns the state had hoped for. He stated that a
key part of considering RIK versus RIV was looking to see
whether the economics looked more attractive to the state
than to producers. He explained that the producers lost
money in a low price scenario much faster than the state
because the state was a commercial participant in the
project in addition to a sovereign that took corporate
income and property tax from the companies (companies were
also subject to federal income tax whereas the state was
not). He detailed that the relative fall in value was a
much shallower slope for the state than for producers. He
drew comfort from the state entering into the project with
three experienced and capable companies who went into the
project with eyes wide open and facing greater risks
associated with price downside than the state.
Vice-Chair Neuman wondered about the breakeven price that
would make a $50 billion pipeline project economically
viable.
3:19:53 PM
Mr. Mayer deferred the question to Black and Veatch.
Vice-Chair Neuman referred to charts showing $4 billion
profit on $17 per mmbtu gas. Ms. Poduval shared that Black
and Veatch had run a stress case for the House Resources
Committee. She deferred to her colleague for the numbers.
She stated that under the worst case scenario as outlined
by Mr. Mayer, the state's cash flows and NPV remained
positive given the state's receipt of property tax and
other non-price sensitive sources of revenue from the
project. Prices would need to be less than $7 per mmbtu in
order for the state's cash flow reach zero or below.
Vice-Chair Neuman asked for verification that Ms. Poduval
was referring to $7 [per mmbtu] to the Asian market. Ms.
Poduval replied in the affirmative.
Co-Chair Austerman referred to earlier discussion about
facility expansion and the cost of service. He asked for
detail on the difference between roll-in versus incremental
rates.
Mr. Mayer answered that future expansions and their
economics would hinge on the initial design capacity of the
system, the diameter of the pipeline, and how easy or
difficult it was to expand it through additional
compression. He believed the issue was the most important
item the state should be concerned about pertaining to
potential bottlenecked facilities or additional use for
instate gas. He believed the issue made direct state
involvement in the project important because it was not
necessarily clear that the state interest was perfectly
aligned with the producers by themselves. He detailed that
the producers had a fairly well known and defined asset and
some took on additional exploration more than others, which
could lead to the discovery of additional gas. He could
envision a case where the primary incentive for producers
would be to have a well-defined capacity for the initial
project, to keep the costs at a minimum, and to know it
would make the desired return. Alternately, he could
envision a scenario where the state's interest was broader
than the previous case. Where it was in the state's best
interest to spend extra money on a larger diameter pipeline
with lower initial pressure and greater future expansion
capability. He stated that how the costs and benefits would
play out was not currently known. He believed there were
costs and benefits to using TransCanada as a partner, but
in the present case he believed its involvement would offer
a significant benefit. He elaborated that the benefit would
come from having a pro-expansion minded party at the table
when court decisions were made around engineering, pipeline
size, and the costs of future expansions. He stated that
the items would have a much bigger impact on the
expandability of the pipeline than the question between
rolled-in versus incremental rates. He relayed that under a
rolled-in rates scenario if the total per unit capital cost
of the pipeline was increased through an expansion the
additional cost was borne by everyone, whereas on an
incremental basis the additional cost was borne by the
expansion participants only. He discussed the importance of
understanding that for the initial participants, gas would
be sold under 15 to 20-year contracts to parties in Asia
with very little ability to change the terms once they were
set. He reasoned that the prospect of a substantial
increase in a tariff when the increase could not be passed
on to an end-consumer, would be a substantial risk. He
elaborated that there would be numerous circumstances where
it would be against the best interest of the state and
producers to have additional pipe laid in response to a
small discovery of gas.
3:26:17 PM
Mr. Mayer relayed that when it came to expansions beyond
compression there would be overwhelming hurdles unless they
were for a large new discovery with export potential
regardless of rolled-in versus incremental rates. He
believed it was fundamental to establish that the state's
interest was well represented in the initial design
capacity decisions on the pipe size and other design
considerations related to expandability.
Co-Chair Austerman surmised that it may benefit the state
and TransCanada in the long-term if the expansion was done
early on rather than doing it afterwards. He assumed there
would be a cost savings in the strategy.
Mr. Mayer replied that there were a multitude of variables
to consider when contemplating future expansion. He relayed
that it could be in the state's interest to spend more on
the pipe to ensure the possibility of solid expandability
through compression before adding additional pipe.
Ms. Poduval expounded that it was important to have all of
the facilities designed in a way that would facilitate
expansion.
Vice-Chair Neuman opined that $7 gas used in the
consultants' stress case seemed phenomenally low. He
believed there was a specific type of gas used in Asian
markets, which was the reason for a 2,500-plus psi line. He
asked what the value of gas had to be to ship, go through
liquefaction, and other.
Ms. Poduval answered that for the state's portion of the
project the total was just under $8.
Vice-Chair Neuman asked if the figure included wellhead to
market.
3:30:12 PM
Ms. Poduval replied that the figure did not account for
shipping; with shipping it would be $9.
Vice-Chair Neuman asked whether the figure was based on $2
or $3 gas. Ms. Poduval replied in the negative. She
detailed that the cost did not assume a gas cost; the
figure included the cost to move the gas through the
infrastructure.
Vice-Chair Neuman referred to a question by Co-Chair
Austerman related to expansion. He wondered about the
design of the pipeline related to size. He wondered what
the design decisions were based on. He remarked on the
relative inaccessibility of 48-inch pipe compared to 42-
inch pipe.
Mr. Mayer replied that they could not speak to the issue in
detailed terms. He relayed that a smaller pipeline with
high compression could have a lower initial capital cost in
some circumstances. At some point with larger pipe it
became difficult to source the material. He discussed his
understanding that the proposed project envisioned a 42
inch line. One of the benefits of state involvement ensured
that a broader range of options were evaluated in addition
to how the state's interest in future expansion may compare
to the producers' interest.
Ms. Poduval noted that the details had not been worked out.
The initial concept selection had designated a range for
the pipeline's diameter. She believed the size would be
resolved through pre-FEED.
3:33:09 PM
Representative Guttenberg surmised that there were
different ownership components between the gas treatment
plant, the pipeline, and the LNG plant. He believed every
time there was a seam it presented vulnerability to
exposure on additional cost. He wondered how normal it was
for a project to have the various ownership structures.
Ms. Poduval answered that she did not believe the project
was sliced up in the way mentioned. She explained that it
was envisioned to be an integrated project; therefore the
same project team would work its way through the gas
treatment plant, the pipeline, and the LNG plant. She
discussed that it made sense from a management perspective
for a large project to have an integrated structure in
order to keep the various project components in sync. She
addressed that TransCanada would hold a portion of the
state's share in the gas treatment plant and the pipeline;
any uncertainty related to the issue would be resolved in
the enabling contracts between TransCanada and the state.
She elaborated that the transportation services agreement
would guarantee the state passage through the pipeline and
gas treatment plant. Under the current proposal the LNG
plant would be held by AGDC; the state would have a
liquefaction services agreement for the LNG plant. She did
not believe the structure created seams; it created
commercial agreements that would define how the state's
share of the gas would move through the project.
Mr. Tsafos added that the structure was highly integrated
with the exception of the TransCanada portion. He
elaborated that worldwide, LNG projects had many different
models. He detailed that some resource owners had no
ownership of the infrastructure, in other circumstances all
of the pipelines were owned by the state and export
facilities were owned by private companies. Additionally,
there were projects where the components were integrated.
Usually the resource drove how the project was structured;
it was easier to use integration when there was a large-
scale resource with a fairly similar player ownership. He
explained that if the gas was owned across 15 different
fields with 10 owners, an integrated structure would
probably not be used.
3:37:17 PM
Vice-Chair Neuman pointed to the various presentations. He
advised members to take advantage of the consultants. He
asked Mr. Harper to provide any closing comments. He
referred to discussions on RIK, RIV, and the cost of
deliverable gas to the Asian market.
Mr. Harper agreed with some of what was said by the
consultants. He agreed that the initial design parameters
(i.e. pipeline diameter) would have a significant impact on
future access to other players and initial costs. He
believed there may be incentive for producers to downsize
the project as negotiations moved forward because it would
result in a lower initial cost. He had heard some
conflicting statements about RIK. He disputed earlier
remarks that learning to market LNG was not a difficult
task. He stated that it was not just a matter of finding a
buyer. He detailed that under RIV the state would not take
on the purchaser's credit or shipping contract risks.
Additionally, the state would not take the risk that its
source of production may decline. He pointed to a recent
trial that had resulted in a judgment in excess of $400
million as a result of Prudhoe Bay going down for an
extended period of time. He believed there had been a
remark that RIK could be potentially viewed as a
concession. He believed that if the state received other
counterbalances a concession would be fine. He relayed that
RIK rights were present in virtually every lease in North
America. He stressed that it had never been availed to any
degree by a lessor. He pointed to the federal Minerals
Management Services that had come close to using RIK, but
after taking a close look it decided against it. He stated
that RIK was typically not used. He agreed that it could be
done and could be used as a concession or tradeoff to
advance the project. He agreed completely with the
discussion on rolled-in versus incremental rates and
variances associated with capital structure.
3:42:32 PM
Representative Gara asked for verification that Mr. Harper
had been citing a state consultant's data when he testified
that taking RIK could result in a 10 percent loss to NPV.
Mr. Harper agreed. He relayed that the study had been
conducted by the Lukens Energy Group (Black and Veatch had
acquired Lukens). He suggested contacting Ken Alper
[legislative aide] for a copy of the study.
Representative Gara addressed issues that had been
discussed during the meeting including who would sell the
state's gas, would the state get a good deal for its gas,
what would happen if the state did not get the gas but was
liable for shipping cost to TransCanada, and issues on
expansion. He remarked that the response had been that each
item would be determined in negotiations. He wondered if
the state should address as many of the items as possible
in the legislation. He believed that when negotiations were
complete the state would be told to take the deal or leave
it.
Mr. Harper replied that it would be better to address the
items sooner rather than later. He believed that in 18
months or so the state would be dealing with a "fait
accompli." He did not believe the process was ill
intentioned, but that the negotiations would have been down
a long road with many tradeoffs. He stressed that all
decisions were made on incremental costs in the oil and gas
business.
ADJOURNMENT
3:46:45 PM
The meeting was adjourned at 3:46 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Rick Harper HFIN 4-10-14.doc |
HFIN 4/10/2014 1:00:00 PM |
AK LNG |