Legislature(2015 - 2016)HOUSE FINANCE 519
11/02/2015 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Senate Bill 138 and Aklng Project Overview | |
| HB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB3001 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
HOUSE FINANCE COMMITTEE
THIRD SPECIAL SESSION
November 2, 2015
2:06 p.m.
2:06:24 PM
CALL TO ORDER
Co-Chair Neuman called the House Finance Committee meeting
to order at 2:06 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Marty Rutherford, Deputy Commissioner, Department of
Natural Resources; Martin Schultz, Attorney General,
Department of Law; Craig Richards, Attorney General,
Department of Law; Mark Myers, Commissioner, Department of
Natural Resources; Representative Dave Talerico,
Representative Liz Vazquez, Representative Lora Reinbold,
Representative Shelley Hughes, Representative Geran Tarr,
Representative Cathy Tilton, Representative Andy Josephson,
Representative Sam Kito III, Speaker Mike Chenault,
Representative Paul Seaton
SUMMARY
HB 3001 APPROP: LNG PROJECT & FUND/AGDC/SUPP.
HB 3001 was HEARD and HELD in committee for
further consideration.
^PRESENTATION: SENATE BILL 138 AND AKLNG PROJECT OVERVIEW
Co-Chair Neuman reviewed the agenda for the day. The
presentation would review SB 138 [legislation that passed
in September of 2014 - Short Title: Gas Pipeline; AGDC; Oil
& Gas Prod. Tax]. Senate Bill 138, the heads of agreement
(HOA) between the project partners, and the memorandum of
understanding (MOU) with TransCanada defined the Alaska
Liquefied Natural Gas (AKLNG) Project. He reported asking
the administration to outline the roles and
responsibilities of the different state entities as
outlined in SB 138 and to recall the responsibilities of
each state entity in the path going forward. Along with the
presentation there was a document from the SB 138 committee
record in 2004 which showed the expected timeline for
certain preliminary agreements to be negotiated. He asked
that the sheet be updated showing the status of the
agreements and any future agreements. He relayed that it
compared the charts from 3 years previous in SB 138. It was
the same chart but updated.
2:07:25 PM
HOUSE BILL NO. 3001
An Act making supplemental appropriations; making
appropriations to capitalize funds; making
appropriations to the general fund from the budget
reserve fund (art. IX, sec. 17, Constitution of the
State of Alaska) in accordance with sec. 12(c), ch. 1,
SSSLA 2015; and providing for an effective date.
2:08:21 PM
MARTY RUTHERFORD, DEPUTY COMMISSIONER, DEPARTMENT OF
NATURAL RESOURCES, introduced herself and turned the
presentation over to Mr. Schultz.
2:09:42 PM
MARTIN SCHULTZ, ATTORNEY GENERAL, DEPARTMENT OF LAW,
relayed that he worked extensively on gas pipeline matters.
He was would be providing information on the roles and
responsibilities of the different state entities that were
working on the gas line project. He introduced the
PowerPoint Presentation: "Senate Bill 138 and AKLNG Project
Overview." He explained SB 138 laid out the blueprint for
the state's involvement in the project. He noted a detailed
sectional of SB 138 handed out to committee members that
provided significant detail about each section in SB 138
and the current status of work relating to each section. He
noted a table included that had a list of agreements to be
negotiated related to the gas line project: some by Alaska
Gasline Development Corporation (AGDC), the Department of
Natural Resources (DNR), and the Department of Revenue
(DOR). The PowerPoint in front of the committee was meant
to hit key provisions of SB 138.
2:10:13 PM
Mr. Schultz turned to slide 2: "SENATE BILL 138":
Passed April 2014
• Provides Authority for the AKLNG Project
• AGDC: Infrastructure
• DNR & DOR: Gas
• Legislature: Contract Approval
• Provides New Provisions for Tax as Gas (TAG)
• Amends Oil & Gas Production Tax Statutes
• Created Municipal Advisory Gas Project Review Board
• Requires Reports to Legislature
Mr. Schultz recalled that SB 138 was heard during the
regular session [in 2014] by a number of committees, had
extensive committee hearings with many experts presenting
on various facets, and passed during the session. It
provided authority for the state to participate in the
AKLNG Project. Alaska Gasline Development Corporation had
primary responsibility for the infrastructure in the
project. As it was contemplated then, AGDC would own the
state's 25 percent interest in the liquefied natural gas
(LNG) plant. TransCanada would have the state's interest in
the gas treatment plant (GTP) and the pipeline. The
administration was asking the legislature to fund an amount
to pay TransCanada and for AGDC to assume TransCanada's
role in the GTP and pipeline.
Mr. Schultz explained that DNR and DOR were the gas owners
under SB 138. The Department of Natural Resources, on
behalf of the state, owned the state's royalty gas. He
reported a significant change related to production taxes.
If DNR decided to take its royalty as gas instead of as
money, then producers could elect to pay their production
taxes as gas. The Department of Natural Resources would be
paid in gas instead of in money and the two shares (the
royalty and production tax amounts) would be the state's
gas share.
Mr. Schultz communicated that the legislature had a
continuing and very important role with regard to SB 138
and the gasline project. Contracts in length of more than 2
years entered into by DNR had to be reviewed and approved
by the legislature.
Mr. Schultz relayed that SB 138 amended some other
provisions relating to production tax and corporate income
tax statues. The legislation also created a municipal
advisory gas project review board, a group of
municipalities impacted by the project either because the
infrastructure would be in their localities or because
construction activities would impact their localities. It
provided for a municipal group to meet with DNR to design a
property tax mechanism for the gas pipeline project. He
added that SB 138 required reports to the legislature.
2:13:17 PM
Mr. Schultz slide 3: "Provides Authority for AKLNG Project:
AGDC." He explained that the slide concerned Alaska Gasline
Development Corporation (AGDC) and some of the sections in
the bill relating to AGDC. The Department of Natural
Resources and AGDC worked together on many facets of the
project including expansion of the AKLNG infrastructure if
additional gas was available and third party access for
other producers on the North Slope and elsewhere to get
their gas into the project. The Department of Natural
Resources and AGDC were working together to determine the
appropriate size of the pipe. Alaska Gasline Development
Corporation was primarily responsible for the
infrastructure, which was to be distinguished from DNR and
DOR's role as the gas owners.
Mr. Schultz continued that AGDC had authority under SB 138
to own all components of the project, clear under enabling
statute. In other words, AGDC could own the LNG plant, the
GTP, and pipeline.
2:15:11 PM
Mr. Schultz pointed to slide 4: "Provides Authority for
AKLNG Project: DNR." He indicated that the slide related to
the responsibilities of DNR for the AKLNG project. He noted
the key provision listed relating to DNR's enabling
statutes. It gave the DNR commissioner the authority to
enter into key project-enabling agreements of less than 2
years and if it was a contract for more than 2 years, which
the vast majority of the contracts would be, it gave the
DNR commissioner the authority to negotiate those contracts
and bring them back to the legislature for review and
authority to enter into them. It also gave DNR the
authority to do lease modifications to take either royalty-
in-kind (RIK) or royalty-in-value (RIV) for the initial
project term, which was expected to be 20 or 25 years. It
also gave DNR authority to convert net profit share and
sliding scale royalties to fixed royalty rate leases.
2:16:18 PM
Mr. Schultz turned to slide 5: "Provides Authority for
AKLNG Project: DOR." He pointed out that the slide repeated
some of the provisions from the previous slide relating to
DNR just to note that DNR and DOR worked together in
consultation on the agreements relating to gas supply, gas
balancing, marketing, and upstream agreements. It also
affirmed that DOR commissioner directed the revenues
received from production taxes taken as gas.
2:16:59 PM
Mr. Schultz continued to slide 6: "Provides Authority for
AKLNG Project: LEGISLATURE." He noted that the legislature
had an important role in reviewing contracts over 2 years
in length that the state entered into and in giving the
governor authority to execute them. He explained that
Section 77 of the bill noted that the legislature would
receive quarterly project briefings, which it had.
2:17:20 PM
Mr. Schultz advanced to slide 7: "Tax Provisions: TAG and
Taxes." He indicated that the slide related to tax as gas
(TAG). He clarified that he was referring to production tax
as gas. The state had received production taxes in the form
of money, but the producers could choose to pay production
taxes in the form of gas.
2:17:43 PM
Mr. Schultz highlighted slide 8: "Municipal Advisory Gas
Project Review Board: MAGPR Board." He informed the
committee that SB 138 directed the governor to establish a
Municipal Advisory Gas Project Review Board, which he had
done. The board was chaired by the commissioner of DOR. The
board was tasked with coming up with a property tax for the
gas project. Both impact payments during construction and a
floor related property tax after gas started flowing
through the project. He announced that the next MAGPR board
meeting would be held following the ending of the current
session in December [2015].
2:18:21 PM
Mr. Schultz discussed slide 9: "Requires Reports to
Legislature: Required." He detailed that the slide listed
reports required under Section 73 and 76. The important
reports related to a report that DNR submitted in
consultation with AGDC about in-state gas and the cost
benefits and risks associated with a pipeline larger than
42 inches (the 48 inch study). The report was being drafted
and would be submitted during the regular session in 2016.
He continued that Section 76 of SB 138 required DOR to
submit a report about financing options and also investment
opportunities for residents of the state, municipalities,
and regional corporations to invest in the gas line
project. He referred to an interim report that was
distributed to legislators and indicated that the final
report would be released in the following year.
2:19:26 PM
Mr. Schultz explained slide 10: "Heads of Agreement (HOA)."
He included the slide to remind members that the HOA was
signed by all the AKLNG participants including the
producers, TransCanada, AGDC and the state. It was signed
before the regular session in January 2014. It laid out a
roadmap for the parties and what they hoped to achieve. It
describe enabling legislation in the HOA which later became
SB 138 authorizing the state entities to do what was
currently being discussed in the meeting.
2:20:12 PM
Ms. Rutherford turned to the chart on slide 11: "AKLNG
Project Status: Provided to Legislature in 2014." She
indicated that the schematic was provided in 2014 and
defined a schedule going forward. Co-Chair Neuman asked
that the timeline be updated to reflect any changes.
2:20:49 PM
Ms. Rutherford pointed out the new timeline on slide 12:
AKLNG Project Status." She indicated that overall the
project was where AGDC had projected it would be. The pre-
front end engineering and design (pre-FEED) phase on the
first schematic from 2014 showed that it would be completed
by December 2015. However, December was only a target date.
The underpinning HOA and joint venture agreement (JVA)
suggested that pre-FEED might take longer and carry over
into 2016 as seen on the updated schedule. She reported
that another difference between the two timelines was that
the FEED dates in the original schematic showed that FEED
went from 2016 through 2018. Whereas, the updated timeline
went from 2017 through 2019. It was not a slippage but
rather a current reflection of the dates provided for in
the original documents which was not fully captured in the
original schematic. She highlighted that the construction
start date remained the same in both schematics; 2019. The
end date shown in the old schematic was 2023 versus the
2025 end date in the new schematic. Again, the underpinning
documents stipulated an end date of between 2024 and 2025.
She highlighted that the overall costs had not changed. The
estimates remained the same and the project was moving
forward. She noted, however, that the commercial agreements
were not progressing as quickly. The delay in commercial
agreements could be costly if they were not executed on
schedule. The timeline would begin to slip significantly.
2:23:11 PM
Ms. Rutherford scrolled to slide 13: "AKLNG Commercial
Status." She reported that the state was in active
negotiations with all of the parties. Although the list was
not comprehensive, some of the larger agreements were
listed at the bottom of the slide. The document handed out
separately to the committee was a much more comprehensive
list (Title: "Preliminary Agreements to be Negotiated
Should Enabling Legislation Pass") (copy on file). Some of
the agreements were controlled by DNR and some by AGDC. For
instance, the governance agreement and the expansion and
third party access agreements were lead by AGDC but the
state was very involved because it had a vested interest in
its future lease sales and the ability of third parties
outside of the project to get gas into the project to
monetize it. No one had ever explored for gas on the North
Slope, they had always been looking for oil and found gas.
If there was a reasonable way to deliver gas to market
under reasonable terms, then potentially there would gas
exploration occurring alongside oil exploration. She
reiterated that as a sovereign the state cared
significantly about third party access and expansion. The
state was also negotiating fiscal and withdraw agreements.
She added that the state hoped there would be the ability
to have the withdrawing parties commit their gas to the
project should they no longer be interested in being equity
owners. Some of the more important negotiations had to do
with the state's ability to get to a RIK finding, specific
byproduct handlings (CO2). Since the state was not a
working interest owner, it had to pay close attention to
the upstream cost agreements; what cost the state paid to
each unit. As the state took its gas it would have to
ensure that there was a regular supply of gas to meet its
sales and supply contracts with the Asian market. She
relayed that the lease modifications the state was involved
with were specifically about flattening net profit share
leases and how the state would deal with its current
prerogatives to switch between RIK and RIV (RIV would not
work in an LNG project), long-term sales, and contract
environments. She indicated she was only talking about
those commercial negotiations happening currently.
2:26:18 PM
Ms. Rutherford reviewed the project timeline on slide 14:
"State AKLNG Timeline: Key steps to FEED":
KEY STEPS TO FEED
1. Withdrawal Agreement, Gas Balancing, Gas Sales
Agreement by December
2. Lease Modifications
3. RIK
4. RIK/RIV Decision
5. Finalize Other Agreements
6. Executable Agreements to Legislature for Approval
7. Constitutional Amendment to Legislature for
Inclusion on Ballot
8. Governor Executes Approved Agreements
9. November 8, 2016 Public Vote on Amendment
10. FEED
Ms. Rutherford the slide listed the steps necessary to
allow the parties to enter into a FEED agreement, which the
state was hoping to do by the end of 2016. She explained
that the constitutional amendment on the list would allow
the State of Alaska to freeze its gas taxing prerogatives
for a period of 20 to 25 years. It was the intention of the
department to bring the legislature a set of executable
commercial agreements by the end of the following regular
session.
2:27:24 PM
Ms. Rutherford revealed slide 15: "State AKLNG Timeline."
She explained that the slide reflected the state's
perspective on the necessary timeline to get a
constitutional amendment change on the general election
ballot for a vote on November 8, 2016. She admitted that
the timeline was tight and aggressive. The state had been
in negotiations for a significant amount of time. She
believed that the timeline was feasible but added that
every commercial negotiation only occurred as fast as the
slowest party. If the legislature appropriated the money
for the TransCanada precedent agreement termination, the
state would have one less party with which to negotiate.
Negotiations would be limited to the three producer
companies and the sovereign.
Ms. Rutherford continued that by the end of December 2015
DNR would have to have the gas balancing agreement in
place. She noted that the State of Alaska was not a party
to the gas balancing agreement but needed to be familiar
with it because it was the underpinning or threshold
document upon which several other documents relied. It was
something the producers would have to agree on in order to
move the rest of the upstream commercial agreements
forward. The department hoped to have the gas balancing
agreement between the producer parties in place and would
like withdrawal and gas sales agreements in place to allow
the project to continue should a party decide to withdraw
from participation. If and when one of the gas lease owners
decided to withdraw the state would need to have the gas
volume to maintain viable economics for the project.
Ms. Rutherford discussed that by the end of the first
quarter in 2016 the state needed to have DNR lease
modifications completed. She noted that the department was
making forward progress on the modifications and she did
not foresee any problems reaching those agreements. She
furthered that it was necessary to have the RIK commercial
agreements completed in order to base the RIK decision on
actual data. She continued that the differences associated
with the field costs and the disposal costs could have a
significant impact to the state's economics. Certain data
sets were necessary for the legislature to make informed
decisions about whether to take RIK or RIV.
Ms. Rutherford informed the committee that after the
commercial agreements were in place the state would take
approximately 60 days to complete the RIK decision.
Therefore, by the end of the first quarter the state would
have to the commercial agreement in place to trigger the
final analysis for the royalty for the finding.
Ms. Rutherford advised that by the second quarter of 2016
the state needed to complete the RIK and RIV findings, and
submit the commercial agreements to the legislature for
review. It was DNR's opinion that the state would have to
have an agreed set of commercial agreements and an agreed
upon constitutional amendment ready by no later than June
20, 2016 allowing the state to meet the deadline for the
constitutional amendment vote to appear on the November
2016 general election ballot. The state would also be
closing out the pre-FEED deliverables from the project.
2:31:14 PM
Ms. Rutherford conveyed that the information on slide 16:
"State AKLNG Timeline: October - December 15," provided
more detail of what she just spoke of previously. Between
the present time and the end of December [2015] gas
balancing and gas supply had to be completed. The state
would continue its work with the producers on marketing,
governance, expansion, and access. It was the department's
intention to have the TransCanada termination completed
including the transference of assets to AGDC prior to
December 4th. Alaska Gasline Development Corporation would
then be able to participate in the work plan and budget
vote on December 4, 2015.
2:32:06 PM
Ms. Rutherford advanced to slide 17: "State AKLNG Timeline:
January - March 16." she remarked that the timeline of the
first quarter in 2016 would be incredibly intense. Between
January and March the state would have to complete the
ongoing commercial negotiations and would need to have
completed all of the royalty upstream negotiations to make
a RIK finding. The agreements needed to be completed in
executable form by the attorneys for the legislature to
review. She noted that by April [2016] if the state did not
have a good sense that things were progressing towards
closure, the state would know whether it would meet its
deadlines.
2:33:02 PM
Ms. Rutherford turned to slide 18: "State AKLNG Timeline:
April - June 16." She explained that April through June
2016 the state would finalize the RIK determination. The
Department of Natural Resources had been putting the
structure together for the previous several months. The
structure, background, and modeling were completed and all
that remained was to plug in the numbers reflected in the
final commercial agreements. In turn, the department would
provide the legislature with a list of implications of the
commercial agreements to the state for the long-term. The
Department of Natural Resources would also submit the
commercial agreements to the legislature for review and
approval or denial. The constitutional amendment would be
in front of the legislature as well. The amendment had to
be submitted to the Division of Elections by June 20, 2016.
If the state could not meet the deadlines outlined in the
timeline, she opined that the project would begin to slip.
She relayed that DNR had been asked many times what the
legislature could do to assist. She thought it was
important for all of the parties of the AKLNG project to
embrace being on a very tight timeline. She opined that
Alaskans, the Alaska State Legislature, and the executive
branch did not want the project to slip. The current
timeline to bring Alaska's gas to market was critical, 2024
or 2025. Falling behind in any of the components such as
the agreements and the constitutional amendment placed the
project in jeopardy. She emphasized the need to work
diligently to find a middle ground to move agreements
forward.
2:35:16 PM
Ms. Rutherford continued to slide 19: "State AKLNG
Timeline: July - December 16." She reported that in July
through December 2016 the state would be in the final
review of the pre-FEED deliverables and would be making
recommendations on a full FEED decision. One of the most
important and significant dates was the general election
date of November 8, 2016 where the state would be casting
its ballot on a constitutional amendment.
2:35:44 PM
Ms. Rutherford concluded with slide 20: "Conclusion." She
indicated that the administration believed it was in full
compliance with SB 138. The administration had no
recommendations for changes to SB 138 and hoped to provide
the legislature with the executable agreements by March or
April of 2016.
2:36:12 PM
Co-Chair Neuman thought she had just said she did not
anticipate suggesting any changes to SB 138. Ms. Rutherford
responded affirmatively.
Co-Chair Neuman referred to slide 14. He asked if there was
anything in SB 138 that talked about withdrawal agreements.
Ms. Rutherford responded, "Not specifically."
Co-Chair Neuman asked if she responded in the negative.
Ms. Rutherford confirmed her response was no. She explained
that SB 138 was a process. She furthered that it did not go
into great detail on any of the issues and that only
provided some of the commercial agreements that were
necessary to protect the state's interest. She agreed that
it did not directly discuss withdrawal agreements but made
provisions for it.
2:37:24 PM
Co-Chair Neuman referred to slide 15. He asked if the gas
withdrawal, gas balancing, and withdrawing agreements
needed to be in place by the end of December 2015. He asked
if he was accurate.
Ms. Rutherford responded that it was DNR's hope. She added
that 2 of the 3 producer companies had indicated to the
governor that they were working towards that outcome.
Co-Chair Neuman remarked, "If gas is commercially viable."
Ms. Rutherford responded that should one of the parties
withdrawal their gas would be made available to the project
either through a gas sales agreement or a tolling agreement
through the project.
Co-Chair Neuman suggested having the attorney general
answer the question.
2:38:26 PM
CRAIG RICHARDS, ATTORNEY GENERAL, DEPARTMENT OF LAW
introduced himself.
Co-Chair Neuman asked Attorney General Richards if he would
advise Governor Walker to reject the TransCanada vacancy
proposal if the withdrawal agreements were not completed by
December 31, 2015.
Attorney General Richards stated that he would not advise
the governor what action to take. He would advise him of
what legal actions he could take and would advise him of
the options the executive branch had based upon his
understanding of the agreements.
Co-Chair Neuman believed the Alaska Constitution stated DNR
was in charge of marketing Alaska's resources. He wondered
if that was accurate.
Ms. Rutherford responded affirmatively. She added that it
was also in statute.
2:40:14 PM
Co-Chair Neuman asked whether DNR would be in charge of the
contracts for selling gas and the associated commercial
agreements.
Ms. Rutherford responded positively.
Co-Chair Neuman asked if DNR would take the lead.
Ms. Rutherford responded in the affirmative.
Co-Chair Neuman asked Attorney General Richards about the
role of his office. He wondered if it was to assist DNR in
answering legal questions.
Attorney General Richards Thought his assessment was fair.
The job of his office was to provide the legal resources
needed to answer a series of questions.
Co-Chair Neuman asked whether it was the job of the
Department of Law to negotiate commercial contracts.
Attorney General Richards confirmed that part of the job of
the Department of Law was to negotiate commercial contracts
on behalf of DNR and numerous other state agencies.
2:40:59 PM
Co-Chair Neuman believed they had a disagreement. He
relayed that SB 138 specifically stated that DNR was to
take the lead in commercial negotiations. The committee had
just heard from the deputy commissioner confirming DNR's
role. He was hearing two things.
Attorney General Richards did not mean to suggest there was
an inconsistency between what he had said and what the
deputy commissioner had said. The Department of Law
provided legal support for the documents. It did not make
the substantive decisions related to the contents of the
documents. The Department of Law along with outside counsel
were responsible for the actual pinning of the documents
and parts of negotiations, the standard role that lawyers
took in any complex commercial negotiation.
Co-Chair Neuman stated that legislators had asked enalytica
and several other advisors about the jobs of the particular
attorneys involved in the project and the job of DNR. The
committee had been told that the standard policy was that
the Department of Law was available to advise and write
laws rather than negotiating. They did not generally take
the lead in negotiations.
Attorney General Richards agreed with Co-Chair Neuman that
he was mostly correct. He mentioned some instances in which
some of the attorneys, particularly some of the outside
attorneys would take the lead in certain negotiating
sessions related to the documents. However, they were
always subject to reporting to and taking direction from
their client (DNR, DOR, or AGDC).
2:43:20 PM
Representative Guttenberg commented that the overview had
been expansive. In reviewing the 35-year history of Trans-
Alaska Pipeline System (TAPS) and related issues, he did
not think the state had been adequately represented. He was
concerned about the inability for the parties to speak to
each other because of confidentiality restrictions. There
were several pieces to the project including AGDC managing
the governance of the project and DOR doing the
commercialization of the project. He did not want the state
to be at a disadvantage by not having access to certain
information due to confidentiality agreements. He also
expressed concern about a constitutional amendment because
once it was locked in it would be difficult to overturn
later time. He also asked how there could be a
constitutional challenge when no one had paid any taxes to
date.
2:45:41 PM
Attorney General Richards responded that in answer to
Representative Guttenberg's second question he thought the
governor had been clear that his expectation was that the
legislature would have the fully termed agreements to
review prior to taking a vote. It was the expectation that
although the negotiations were largely confidential under
the existing confidentiality agreements the agreements
themselves would come before the legislature for review as
laid out in the timeline. He did not believe it would be
necessary to have a judicial challenge by the producers if
the constitutional amendment was voted on by the
legislature and went to the people of Alaska for a vote and
passed. He had heard talk about there being a potential
court test about whether the deal was legal. He thought it
was related to a concern without an amendment to the
constitution as to whether it could still be done. Because
there would be a constitutional amendment it would not be
necessary. That was his understanding and added that the
producers could have a different point of view.
2:47:21 PM
Co-Chair Neuman mentioned the information enalytica
provided regarding withdrawal agreements [HB 3001 enalytica
additional slides (copy on file)]. He recounted that
enalytica emphasized the major risks for the state in
entering certain withdrawal and sales agreements at
present.
2:48:26 PM
Representative Guttenberg asked about the effects of the
potential constitutional amendment. He wondered about
obligating other legislatures.
Attorney General Richards answered that the constitutional
amendment would primarily grant the legislature the power
to surrender the power of taxation. Currently the
constitution provided that one legislature could not bind
another legislature in terms of current tax policy. Many
states had similar provisions, some with exceptions and
some without. He explained that the constitutional
amendment, as formulated, would allow the surrendering of
the power of tax for purposes of the AKLNG project and gas
delivery.
2:49:45 PM
Ms. Rutherford commented that Representative Guttenberg had
pointed out the toll on the Trans Alaska Pipeline system.
She stated that one of the advantages of becoming an equity
owner in the AKLNG project was that the state would be
setting its own tolling structure. The legislation
specified a cost-of-service toll, a lower tolling structure
than what a third party might provide the state for its
gas. She highlighted that if TransCanada's precedent
agreement was terminated and its interest was purchased by
the state, the state would not be entering into a firm
transportation service agreement (FTSA) with TransCanada.
However, the state would be entering into a FTSA with AGDC.
She reported that the FTSA was one of the documents that
would be brought to the legislature along with a list of
others for approval. She elaborated that each of the
agreements had to be fully termed and completely available
in order for the legislature to be able to make an informed
decision whether the agreements were in the state's
interest.
2:51:26 PM
Representative Guttenberg asked if the state would be able
to compare the state's relationship with each one of the
producers.
Ms. Rutherford explained that there were a few
distinctions. Some of the agreements that were specifically
between AGDC and the other project parties might not be
available but all of the commercial agreements that had to
be signed by the State of Alaska providing long-term
commitments for the state would be transparent and
available to the public and to the legislature.
2:52:29 PM
Representative Gara wanted to see the project move forward
as quickly as possible. The timeline that she was reviewing
was not strict such that it was defined in statute. He
suggested that if Exxon were to say that it was not selling
any gas to the state because it wanted to make more money
on the project and things took longer, the statute did not
say the project was dead but rather delayed.
Ms. Rutherford stated that he was correct.
Representative Gara commented that although it would be
ideal for all parties to negotiate reasonably, the state
had a constitutional obligation to maximize the benefit for
the public while the three companies (BP, Exxon Mobile, and
Conoco Phillips) had a legal obligation to maximize their
profits for their shareholders. He believed that there was
a chance that one of the major oil companies would decide
not to sell their gas without better terms. They could also
use leverage against the state and in turn the governor
might have to use leverage slowing down the process.
Ms. Rutherford responded affirmatively and expanded that it
was critical for Alaska to protect its long-term interests
in the commercial negotiations. The state was taking on a
new level of risk, and an entirely different model. It was
important that the state fully understood what it was
giving up and what it was getting in exchange. The risk
scenarios needed to be fully developed for the public and
the legislature. She asserted that the administration would
not enter into agreements that were not in the state's
interest. She opined that it was difficult to reach an
agreement where all parties were comfortable progressing
with a project of its magnitude.
Representative Gara pointed out the timeline was great and
that the state wanted the project to move as quickly as
possible. However, if one of the oil producers wanted to
leverage the state it would likely slow things down, moving
the timeline backwards. He wanted people to be aware that
the timeline was not in statute.
Co-Chair Neuman asked if it was his opinion.
Representative Gara noted that it was not a statutory
timeline. He did hope the project moved quickly.
2:56:09 PM
Representative Wilson referred to gas in Cook Inlet. She
wondered if the state took payment in RIK or RIV.
Ms. Rutherford believed it would be a mix subject to
negotiated contracts. Any contracts lasting over a year
would be brought to the legislature for approval.
Representative Wilson asked for a response in writing. She
had heard that the state was not taking any royalty in Cook
Inlet.
Co-Chair Neuman believed they had 30 days to decide.
Representative Wilson was unclear about the confidentiality
agreement. She was concerned with the state putting someone
at the table with only partial access to information.
Attorney General Richards did not fully understand her
question. He relayed that the people doing the negotiations
and the decision makers had access to the information they
needed to make the decisions.
Representative Wilson clarified that in the previous day's
conversation the committee was told specific confidential
agreements had to be executed in order to participate. She
was aware that AGDC representatives had been asked to leave
the room on numerous occasions because of not having the
right agreements in place. She furthered that regulations
under consideration would not allow them (the state) to
enter into the agreements that the producers wanted signed.
Members of AGDC would continue to be asked to leave during
certain discussions sometimes slowing the project down. She
wondered why the state would want to put itself in such a
situation rather than a partner such as TransCanada who
would sign the agreements.
Attorney General Richards was not aware of the factual
circumstances she was talking about in terms of anyone form
AGDC having to leave the room during negotiations. He added
that his understanding was that the parties had access to
all necessary information to make decisions.
Representative Wilson encouraged Attorney General Richards
to listen to the audio of the previous day's meeting. She
wanted the project to move forward. However, it was clear
to her that the state was not able to stay in the room for
the entire negotiation discussions.
2:59:42 PM
Representative Wilson expressed concerns about the proposed
salary of $840 thousand for a new position. She summarized
that the base pay was about $400 thousand to $500 thousand
accompanied by a bonus which made up the difference to
total a salary of $840 thousand. There was also a 20
percent stipend for moving expenses and the cost of a
benefit package. She was confused as she read that the
state did not provide bonuses. She asked how the state
would give out a bonus before an employee did anything. She
wondered if there were things that a government entity
could not do but was required in the private sector.
Ms. Rutherford agreed that in the private sector a
marketing lead would have a base salary of $400 thousand to
$500 thousand and based on performance they would receive a
bonus, a practice not allowed within the State of Alaska.
The Department of Natural Resources proposed building the
bonus into the base salary. Obviously, the state would
always have the option to terminate employment if the
person hired did not fulfill their job. However, it was a
difficult issue for DNR because the state was entering into
a new environment as an equity partner and taking gas in-
kind. The inherent risk associated with it was tremendous.
She suggested that while it would be better to provide
someone with a base salary of $400 thousand to $500
thousand and then provide a bonus for doing a good job, it
was more risky not to have a good lead marketer
representing the states interest. It was imperative to have
a representative when the state was either competing or
joint-venture marketing with some of the best marketers in
the world.
Ms. Rutherford anticipated that one of the more difficult
issues the State of Alaska would face was negotiating gas
sales agreements. She explained that typically the
purchasers did not want the terms of the contract to become
public information. Other risks included gas prices
plummeting which would lead to a payout to participate in
the project. The marketing lead would be a crucial position
to the success of the project. The state of Alaska would be
one of the largest marketers of LNG in the world when the
project was in operation.
3:03:52 PM
Representative Wilson asked about how the bonus would be
incorporated into the salary and whether goal setting would
be involved.
Ms. Rutherford explained that DNR had not looked at how to
incorporate the bonus. There was one alternative the
department had considered. In discussing compensation with
potential applicants, DNR would indicate that the state was
paying a higher base salary rather than a bonus.
3:04:43 PM
Representative Munoz returned to the topic of withdraw
agreements and the information committee members had
received from enalytica prior to the meeting. She relayed
that the information specified that withdrawal agreements
in the current stage of the process carried significant
risk for the State of Alaska. The right to purchase at the
current point could result in an obligation to buy in the
future and could result in billions of dollars in
additional costs. On the list of agreements to be
negotiated and the reason the withdrawal agreement on page
2 was not an agreement required to be approved by the
legislature.
Ms. Rutherford asked if Representative Munoz was referring
to the second page of the handout.
Representative Munoz stated that committee members had a
list of agreements to be negotiated. Many of the agreements
that obligate the state for more than 2 years would require
legislative authority.
Ms. Rutherford responded that since the agreements were
being negotiated currently DNR thought that they would not
in and by themselves commit the state to anything long-
term. Instead, they would provide a structure by which
parties agreed about how withdrawals would be handled. A
gas sales agreement required legislative approval. Unless
things changed the withdrawal agreement did not bind the
state to anything. The state currently had showed as a
"No." If the withdrawal agreement evolved or changed and
began to bind the state to something, it would then require
legislative approval.
Representative Munoz opined that committing the state to
any price currently would not be in the best interest of
the state. She advised that the committee had an
opportunity to review and approve the agreements.
Ms. Rutherford added that there were two withdrawal
agreements. The first agreement associated with withdrawing
from the governance structure would be submitted to the
legislature. There was also a withdrawal agreement for a
party that decided to remove themselves but continued to
supply gas through a tolling agreement or a gas sales
agreement. She furthered that the document was an evolving
commercial agreement.
3:08:22 PM
Representative Munoz stated that her response further
affirmed her belief that the state needed to take a second
look at the agreements when they came before the
legislature.
Co-Chair Neuman remarked that it was part of the structured
process he was looking at.
3:08:34 PM
Vice-Chair Saddler referred to the handout, "Agreements to
be Negotiated: Current Understanding - November 2, 1015."
He noted the withdrawal agreement listed on page 2. He
wondered where the other agreement was that Ms. Rutherford
had referred to.
3:08:58 PM
Attorney General Richards responded that the withdraw
agreement itself would likely be an agreement signed by
AGDC because it governed the structure of the relationship
between the parties. It was the government's document which
was why it stated, "No."
Ms. Rutherford referred to the gas supply agreement on line
4, page 2 of the handout [Agreements to be Negotiated:
Current Understanding - November 2, 1015.] which did
require legislative approval. Anything that committed the
state to arrangements associated with the supply of gas by
a withdrawing party would have to be approved by the state.
The withdrawal agreement the third from the bottom on page
2 was part of the governance agreement with AGDC.
3:10:21 PM
Vice-Chair Saddler clarified that the intention was to
execute each of the agreements by the fourth quarter 2015,
approximately 5 weeks from the present day. He wondered if
she had confidence that the documents could be completed by
December 4, 2015.
Ms. Rutherford answered that it would be very challenging
to get the job done within the required timeframe.
Vice-Chair Saddler had developing concerns that the focus
on protecting the exit ramp would lead the state to failure
and not progress to success. He wondered if the
administration would support going forward with the process
with a vote "Yes" on the work programming and budget on
December 4th if either or both of the withdrawal agreements
were not signed before December 4th.
3:11:30 PM
Attorney General Richards suggested asking AGDC or the
governor because they were ultimately the policy makers.
Vice-Chair Saddler asked for his answer.
Attorney General Richards responded that he did not know
the answer. He commented that obviously the governor had
created an expectation of the documents being completed by
December 4th. Two of the partner committees had committed
to the same date. He believed everyone agreed that all
parties should work towards the goals. The consequences of
not meeting them would be faced at the time.
3:12:08 PM
Vice-Chair Saddler asked if the governor could make the
decision to withhold administrative support of the work
plan and budget absent approval of either or both of the
withdrawal agreements
Attorney General Richards responded that AGDC could make
the decision if the approval of TransCanada went through.
If TransCanada remained in the deal the governor would have
the authority through DNR to make the decision.
Vice-Chair Saddler asked for clarification.
Attorney General Richards explained that currently the way
it was structured the State of Alaska could direct
TransCanada's vote for the work plan and budget. If
TransCanada was not in the deal then the vote would be
directed by AGDC. It would ultimately be AGDC's vote and
the vote of its board.
Vice-Chair Saddler asked the Attorney General Richards, as
the general council for AGDC, if he would recommend to the
board that they should reject the work plan and budget
absent a withdrawal agreement.
Attorney General Richards replied that it would not be his
advice to his client to reject it or not reject it.
Vice-Chair Saddler asked if Attorney General Richards'
answer was no.
Attorney General Richards stated that it was a "No."
Vice-Chair Saddler stated that the attorney general's
advice to AGDC would be that they should reject it absent
the withdrawal agreements.
Attorney General Richards clarified that he was not going
to give advice to his client either way what they should or
should not do in relation to what strategic decisions the
board made. Instead, what he would do was tell them they
had the option if they chose legally not to go forward with
the work plan and budget, just like all of the producer
companies had the option not to approve the work plan and
budget.
3:13:59 PM
Vice-Chair Saddler acknowledged he could not require
Attorney General Richards to give his advice on the matter.
He was concerned that the withdrawal agreement would be a
sticking point such that it would prompt a decision not to
proceed with the project. He was not getting assurance from
the attorney general that it would not happen. He was
offering Attorney General Richards to persuade him
otherwise.
Attorney General Richards responded that he could not
provide a guarantee that a decision would be made by his
client. However, he asserted that everyone was working
diligently and in good faith to move the project forward
and to complete the very aggressive agreement schedule in
time to get the constitutional amendment approved. He
offered that he personally believed BP and Conoco Phillips
thought the agreements could be completed.
3:14:54 PM
Vice-Chair Saddler asked what message it would send to him
as a large player in the project if one of the producers
decided not to commit to it.
Attorney General Richards responded that it would send the
message that one or more of the producer partners was
maintaining an option not to have North Slope gas
developed.
Vice-Chair Saddler asked what would happen if two producers
decided not to commit.
Attorney General Richards thought it would send the message
that two of the state's partners maintained options not to
have North Slope gas developed.
Vice-Chair Saddler asked if there were other conditions
that the administration might place on approval of the work
plan and program going forward at the December 4th meeting.
Attorney General Richards was unaware of any statements by
AGDC, the governor's office, DNR, or any of the major
decision makers in the project that had conditions like
Vice-Chair Saddler was suggesting.
3:16:08 PM
Vice-Chair Saddler asked if Attorney General Richards was
in a position to know of any.
Attorney General Richards stated he was not aware of any.
Vice-Chair Saddler asked if anybody else in AGDC was aware
of any.
Attorney General Richards was not any which meant that no
one had told him of any. He was unaware of any other
conditions.
3:16:31 PM
Representative Edgmon remarked that it was very possible
that the state's timeline would slip due to external
factors out of the state's control. The state would have to
do it's best to go forward. He commented on getting well
informed about a very complicated issue with many moving
parts. He believed that the following session would be
historic by many proportions. The state would be addressing
large state deficits, exploring a sovereign wealth fund
concept, and potentially having a special session on a
constitutional amendment to name a few. He wondered what
the overall strategy for keeping the legislature on point
on some of the issues. The legislature would be grappling
with many different things including talking with
constituents at home about paying a consultant $840
thousand and entering into a 20-year or 25-year binding
agreements for the freezing of certain tax rates. He felt
there were some fundamental turns the legislature would be
taking in the following few months. He asked how the state
would be strategically moving forward.
Ms. Rutherford agreed that there were significant issues
that would be coming before the legislature during the
upcoming six months. Her expectation was for the
legislature to deal with more of the fiscal issues during
the regular session with a subsequent special session to
follow. She asserted that the department was working very
diligently to bring closure to the agreements as quickly as
possible. One of the things the department would do was to
provide very clear and concise analysis for each of the
agreements. Experts would also be made available to walk
through the documents to help law makers understand the
relationship between the various documents. There would be
analytics available to better understand the financial
implications of the agreements. The Department of Natural
Resources would do everything in its power to provide as
much clarity as possible, similar to the exercise done with
the Alaska Gasline Inducement Act (AGIA) where the
department provided continuing forms with the experts being
made available to legislators.
3:20:47 PM
Representative Edgmon committed to working diligently with
his constituents to understand why the state had to pay
market rates to get the top level talent. In terms of
marketing leads or whoever else was needed on the project.
He spoke of his private sector experience in recruiting. It
would be invaluable having good working relationships
between producers and the state. He opined that without
such relationships the state would not be able to move the
project forward. He emphasized having to work together for
the project to be successful.
3:21:54 PM
Representative Pruitt suggested that when the preliminary
withdrawal agreement was in front of the committee in SB
138 it was not presented as an essential agreement.
Currently, it appeared to be a necessity. He wondered what
had changed such that it was on the project timeline as a
requirement to get to a constitutional amendment.
Ms. Rutherford thought that everyone brought their own
perspective of risk when assessing a project of great
magnitude. The administration believed that a project
progressed by settling commercial agreements and fixing
fiscal certainty for a duration of 25 years. If 2 years
into the future a party decided to withdrawal from the
project and to refrain from providing gas, the economics of
the project would significantly change. Volume was a driver
in the cost of the gas. If the project lost all of one
party's gas or all of one unit the question of the
viability of the project would have to be reexamined. She
concluded that the administration felt that, in the best
interest of the state, it was important to bring a level of
certainty that gas would be available. She believed that
the two parties that had sent letters to the administration
saying that they were committed to trying to negotiate the
agreements recognized the state's risk. They had indicated
their willingness to provide some certainty around the
issue. The details of the agreement would be critically
important. She thought it was premature at the current
juncture to presume the state would do only one thing
because of being in the process of the negotiations. She
concluded that the more gas, the lower the tariff, and the
more money the state could potentially make at the
wellhead.
3:25:12 PM
Representative Pruitt suggested that if either Conoco
Phillips or BP were comfortable with withdrawing, the
project would not be in the state's best interest. It would
mean that both partners would be selling to achieve the
best value for their shareholders, in turn making it a
struggle for the state to make the project economical. He
was uncomfortable with the other parties being willing to
work on a withdrawal agreement. He wondered whether the
companies were going to try to get the most for their gas.
Attorney General Richards responded that the gas sales
agreement would be an option for the state. The state would
not be committing to purchase gas under on specific terms
with 100 percent certainty if at some point a party
withdrew. Instead, at a withdrawal event the state or other
producer parties would have the option to purchase gas
under pre-agreed terms. He did not completely agree with
enalytica's assessment about an option was being created
rather that a commitment.
Representative Pruitt asked how far along the state was in
the discussions relating to the agreements.
Attorney General Richards responded about six months.
Representative Pruitt asked if the state would make its
timeline.
Attorney General Richards responded that it was his hope
that the state could reach agreements with all three
companies. He could not guarantee that the timeline would
be met because every party negotiating had the power not to
advance every single agreement.
3:27:28 PM
Representative Pruitt stated that hope was not a method. He
believed the state was hoping things would come together.
It was a timeline that was very close on a few items with
only 8 weeks to get them completed. He wondered if there
was a contingency plan. He wanted to know if the state
would be able to continue on the road to the constitutional
amendment if certain things did not fall into place.
Ms. Rutherford responded that the attorney general could
not speak for the governor, nor could she. The timeline
recognized slippage and increased pressures on the
subsequent quarters. She commented that many of the
agreements had progressed very far. She thought that if a
couple of elements fell into place they would free up the
opportunity to close on many other agreements. Gas
balancing was one of the elements, which once in place,
many other items would begin to be clear. Not all
[agreements] were at a starting point. The majority of them
[agreements] had progressed quite far. She opined that it
was not impossible [to meet the timeline] if every party
was motivated to find a middle ground. She added that it
was also challenging.
3:29:54 PM
Representative Pruitt asked if the state was organized such
that it would not hinder the items moving forward.
Ms. Rutherford stated that the state had very qualified
team members and that the state was structured well enough
to close. The department had added another law firm to the
project. She believed with the firm's help the state would
be able to craft the documents quickly and with expertise.
She thought the state could reach closure.
3:31:05 PM
Representative Pruitt wanted to clarify if her response was
affirmative.
Ms. Rutherford replied that the State of Alaska would not
be a barrier to reaching the agreements except to the
degree that the department was protecting the state's
interest in not allowing a poor commercial agreement going
forward.
3:31:33 PM
Representative Pruitt asked if there was anyone that could
speak for the governor. He explained that he was asking
because there had been several people representing the
governor that stated that they would not speak for the
governor. He emphasized that the legislature was trying to
find some answers to better understand what the direction
would be going forward. He contended that the discussion
was not only about $157 million as reflected in the bill,
but the project moving forward. He wanted additional
clarity.
Ms. Rutherford confirmed that the administration was fully
committed to getting the appropriate agreements in place to
further the progress of the project. She commented that
many things could derail it but the state was willing to
abide by a very compressed timeline as long as the state's
interest remained protected.
3:32:53 PM
Co-Chair Neuman referred to slide 15. He commented that
when the legislature created SB 138 several different
advisory groups were consulted to help with the structure
of the bill because of its specificity. The legislature had
been told that the greatest risk for the producers was to
engage in such a project with a government rather than a
business. He opined that SB 138 was specifically designed
to set up a very specific program in a stage-gated process
which the state was in currently. Once approved, the
process in SB 138 would be the law. There was nothing in
the legislation about gas withdrawals on the December 15th
date. The timeline was set up for a specific reason. One of
the reasons was the fact that the state would not have a
certain level of information necessary to enter into
complicated and complex contracts with the producers on
withdrawal agreements.
Co-Chair Neuman continued that one of the questions he
posed in the day to the experts from enalytica was whether
they would purchase gas from Exxon. They answered that they
would not advise the state to do so because there would be
a better deal available elsewhere. In entering into a gas
sales agreement there would be things to have to be aware
of such as transportation costs, costs associated with
carbon dioxide, costs for reinjection, and costs for gas
treatment for gas liquefaction before moving forward with a
project. He asked if he was correct. He wondered when in
the process would associated contracts have to be
negotiated.
Ms. Rutherford indicated that the sales agreement would be
submitted to the legislature for approval. The attorney
general clarified that the state saw it as an option: If a
withdrawing party decided to step away from the project and
an agreement was in place defining the terms under which
the party would sell its gas, the state could consider the
option. Prior to exercising the option the specifics of the
terms would be provided. The legislature could determine
whether having the option was in the state's best interest.
She agreed that the State of Alaska needed to know the
terms for dealing with the disposal of its CO2, the gas
supply terms, the terms of the firm transportation service
agreement with AGDC, and other terms. All of the terms were
critical to understanding the risk and reward for the State
of Alaska. Part of the package will hopefully include sale
agreement offers from the companies that provided the state
an option should one of the producers opted to step away
from the project.
3:38:31 PM
Co-Chair Neuman asked if a right to purchase had the same
meaning as an obligation to buy.
Attorney General Richards responded in the negative.
Co-Chair Neuman restated his question.
Attorney General Richards stated that it was the current
understanding of the status of the negotiations from the
state's perspective.
Co-Chair Neuman asked if they had an obligation if an
entity had the right to purchase their gas and entered into
a purchase agreement.
Attorney General Richards responded that the current
expectation under the negotiations was that there would not
be an obligation to buy at present. He suggested that it
was possible in the future and if the state decided to
exercise its options it would then create binding
commitments. It would only be in the future when the option
was exercised.
Co-Chair Neuman asked about the price of gas in the
futures.
Attorney General Richards responded, "No, Ms. Rutherford.
Chairman."
Co-Chair Neuman asked if the state knew the volume of gas.
Attorney General Richards did not know the exact volume but
the administration had an idea of volume. There were
parameters of understanding. He supposed there was less
understanding about the volume in Point Thomson versus the
volume in Prudhoe Bay.
Co-Chair Neuman asked about a legal title if gas had an
option attached to it.
Attorney General Richards responded that legal title would
not transfer until such time as the state took the physical
possession of any particular molecule. The title rested
with the molecule.
3:40:29 PM
Co-Chair Neuman was trying to figure out how the state
could enter a withdrawal agreement without having the
information. There were certain things a party would have
to know in order to enter into an agreement.
Attorney General Richards suggested that it was standard in
gas sales agreements that some things were not absolutely
certain, volume being one of them. Typically, what was done
was to include a funneling mechanism over time such that
the closer to capital commitments in the field and within
the project with infrastructure the more clarity would be
apparent around the volumes. He specified that it would be
rare for the gas sales agreements were absolutely firm as
to volumes until the end of the funneling stage at the
point of construction.
3:41:28 PM
Co-Chair Neuman asked if Attorney General Richards had
personally examined any of the gas contracts on any other
gas pipelines in the world.
Attorney General Richards had not examined them for the
purposes of the exercise at hand. However, he had certainly
reviewed them in the past for other reasons.
Co-Chair Neuman explained that he was asking because
Attorney General Richards had stated it was a standard.
Attorney General Richards conveyed that he had been told by
one of the state's counsel, one of the Millbank attorneys
working on the project.
Co-Chair Neuman remarked that he had asked every one of the
producers and enalytica advisors if they had ever heard of
a withdrawal agreement such as the state of Alaska's, and
was told no. He wondered how the attorney general could see
it as standard policy.
Attorney General Richards was referring to the funneling
mechanism to get to certainty around the volumes and the
gas sales agreements.
Co-Chair Neuman wondered about a contract where the
withdrawing party, at the current point of the stage-gated
process, agreed to drop out as a partner forgoing their
investment. He asked Attorney General Richards if he had
seen similar language in any other gas pipeline proposals.
Attorney General Richards responded that he had not but
added that he had not personally been privy to the
commercial arrangements around other LNG projects.
3:43:11 PM
Co-Chair Neuman commented that he was surprised that
Attorney General Richards had not asked to see copies of
other withdrawal agreements to use as a boiler plate. He
asked if he had seen any contracts/
Attorney General Richards responded that he had not asked
because the circumstances were particular to Alaska in
terms of progressing the project and the dynamic. He
thought the withdrawal agreement would be fairly simple.
The complexity would be in the gas sales arrangements and
the option being discussed. There would certainly be
discussion among the lawyers of the commercial parties as
to the customary practices around the world.
3:44:17 PM
Co-Chair Neuman asked for Attorney General Richards's
vision of a standard withdrawal agreement.
Attorney General Richards responded that the main elements
had been identified. He suggested that if a party left the
AKLNG project or was unwilling to progress it gas sales
would be made available. The core of the agreement would
provide an option to have the gas available for a project.
3:44:49 PM
Co-Chair Neuman remarked that the point was when it
happened. He relayed that the commissioner indicated that
the gas withdrawal agreements were high on the
administration's priority list and had to be executed by
December 15, 2015. He stated that such an agreement was not
standard in the industry and it was not standard for any
gas pipelines. He was told there were no known withdrawal
agreements fashioned similar to the one the state was
considering anywhere else in the world. He was advised that
a withdrawal agreement was possible but the state would
have to know the price and volume of the gas in order to
negotiate properly. He opined that the state was a long way
from having that information to meet the December 15th
deadline. He asked if the attorney general agreed.
Attorney General Richards responded that it would be nice
to have additional information soon. He added that the gas
sales agreement as an option for the state in the future
created substantially less risk than some of the other
decisions being made, particularly whether or not the state
took gas RIK versus RIV and modified the state's leases for
the net profit interests. He opined that those were
decisions being made within a couple of months after
potentially the withdrawal agreements. The state was
committing to things that were not options. They were
things that were massive economic commitments at the front
end of the project. He suggested that everyone wanted to
hold off making decisions for as long as possible to better
understand risk. the process the state was in had it making
some key decision over the following 4 to 6 months
including whether and to what extent the state would bind
its tax framework for the following 25 years. More clarity
around things like pricing, volumes, and tariff levels
would be great to have prior to negotiating a gas purchase
option. They would also be wonderful to have before
committing to modify the state's leases or alter its
constitution to lock in taxes. The state was on the
timeline it was on.
3:47:41 PM
Co-Chair Neuman specified that although he was aware of the
AKLNG timeline he had not heard from representatives from
the AKLNG project management team about the timeline. He
wanted additional information and called into question the
timing for certain things to occur. He shifted his focus to
risk. He had been told that because of the gas withdrawal
agreements and the tight timeline risk was higher. He asked
if the attorney general agreed.
Attorney General Richards asserted that when something new
was introduced to the negotiation process it added risk in
the form of additional complexity. He thought the point of
the agreements was to reduce overall risk by crating
clarity for the state and for the other producer parties.
For instance, if any one party withdrew in the future the
project could continue. He concluded that he agreed that it
enhanced some negotiating risk, but believed it reduced
more risk than it created.
3:49:19 PM
Co-Chair Neuman expressed his concerns about increased
costs associated with addition risks. He recounted that
cost certainty was key to a successful gas pipeline. The
ability to keep costs low would better ensure the project
going forward. He explained that SB138 [Legislation passed
in 2014: Short Title: Gas Pipeline; AGDC; Oil & Gas Prod.
Tax] created the structure for negotiations for a gas
pipeline and was law. Currently, the specific structure did
not include withdrawal agreements by the end of 2015. He
opined that indiscriminately adding items into a timeline
increased risk and costs making the project less viable. He
reiterated his concern about other entities in the industry
never having seen a withdrawal agreement such as the one
the state was considering. He claimed that he had not been
provided an appropriate answer as to the advantages of the
associated risks and costs.
Attorney General Richards responded that the state's risk
profile would be substantially reduced if it knew all of
Prudhoe Bay and Pt. Tomson volumes would be available for
the project as designed in the future. It meant that if a
party withdrew three years from now the state would not
have to change the design basis, make a smaller project, or
start over on permitting. The gas sales agreements would
provide an avenue for more certainty for the project to go
forward as designed.
Co-Chair Neuman believed a gas sales agreement would
provide certainty, which was why he believed a gas sales
agreement had to be in place prior to having a withdrawal
agreement.
Attorney General Richards stated that the thought process
was that the agreements would be done simultaneously.
Co-Chair Neuman responded, "It certainly is."
3:52:21 PM
Co-Chair Thompson reminded members that the committee would
be taking public testimony on HB 3001 at 4:00pm. He
reported that the finance committee had asked the
administration about the state's vote on December 4th if
there was no withdrawal agreement between the state and
ExxonMobil prior to that date. He felt that the committee
had not been able to get an answer to his question. He was
concerned because of the importance of the vote on December
4, 2015. If any of the parties voted "no" the project would
halt completely. He opined that if the state voted "no" the
failure of the project would lie in the hands of the
administration. The legislature would have given all of the
tools they needed to move forward on a successful project.
He emphasized his concern about the current position of the
state and why the state was spending the majority of its
time planning for failure instead of being positive.
Ms. Rutherford emphasized the administration's commitment
to the success of the project. She relayed that all of the
AKLNG parties were involved in the withdrawal discussions,
committed to moving the project forward, and dedicated to
ensuring that, if a party decided not to be an asset owner,
the project could progress. The administration was doing
everything it could to abide by the timeframe laid out. She
believed the partners were trying to do the same. She
referred to letters from two of the partners indicating
their commitment to making the project work and to
providing an option for the state to exercise if something
changed in the future where a partner had to withdrawal.
She thought the following quarters would be difficult, but
hoped to bring to the legislature contracts that it could
support by spring 2016.
3:56:11 PM
Co-Chair Neuman echoed what Co-Chair Thompson said about
focusing on success. He reemphasized the structure defined
in SB 138. Currently, a different component had been
introduced, withdrawal agreements, with the requirement to
execute the documents by the end of December 2015. The
attorney general relayed to the governor that the only
available options were to either continue with the project
if the withdrawal agreements were not in place, or to
terminate the entire project. Co-Chair Neuman was greatly
concerned.
3:57:47 PM
AT EASE
5:15:22 PM
RECONVENED
Co-Chair Neuman called the meeting back to order.
5:15:49 PM
Vice-Chair Saddler asked if there were any other conditions
that the administration would insist on having in place as
a condition of advancing the work program and budget.
Ms. Rutherford was not aware of anything beyond the
discussion that had already occurred about withdrawal.
MARK MYERS, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES,
reported that the real conditions sat with AGDC assuming
the buyout happened. The work plan and budget would be
controlled by AGDC. The administration would strongly
encourage AGDC to vote "Yes" particularly since DNR would
be shipping on their capacity. The decision would
ultimately be made by the board of AGDC.
Vice-Chair Saddler wondered if it would be the
legislature's prerogative to approve or disapprove of the
commercial agreements or would it have the opportunity to
amend them.
5:17:42 PM
Ms. Rutherford, after conferring with the state's assistant
attorneys general, responded that the state would have an
up or down vote because the documents would already be
executed by the other three parties.
5:18:00 PM
Vice-Chair Saddler asked if there was any room in the
timeline for legal challenges and whether any legal
challenges were anticipated at the current stage of the
process that would inhibit making the commercial agreements
to bring back to the legislature.
Mr. Schultz anticipated that if the legislature passed a
joint resolution placing a constitutional amendment on the
ballot and the people of Alaska voted in favor of it, the
fiscal agreement would be on extremely solid footing. It
was always possible for someone to challenge anything and
file a lawsuit.
5:19:19 PM
Vice-Chair Saddler wanted to keep an eye out for any
challenges the state might encounter in advance of the
larger decision. He wanted to know whether there was an
accommodation for any time lost to litigation.
Commissioner Myers wanted the finding to be very solid and
clear when making the decision about RIK. He furthered that
the reason for discussing the structure and the modeling
effort was to demonstrate the standards defined in 138 [SB
138] and that the standards were clearly being met. The
state wanted to avoid legal challenges by doing the best
homework possible to make the decision transparent and the
analytics very convincing; one of the reasons to lock in
the agreements prior to doing the finding. The state had
built the structure to write a very compelling decision but
still needed very effective negotiation to make the
arguments in order to meet the standards in the law.
Vice-Chair Saddler commented that it was never a guarantee
against vexatious litigation. In looking at the bill in
front of the committee CSHB 3001 provided most of the
important elements of what the administration's team had
been looking for in order to buyout TransCanada, terminate,
reimburse, or fund a work plan going forward to the end of
Pre-FEED. He wondered if there was anything else the
administration wanted to have in legislation but did not
have.
Commissioner Myers responded that he was familiar with the
other body's committee substitute but was unsure of the
House's version.
Co-Chair Neuman confirmed that the versions from both the
House and the Senate were identical.
Commissioner Myers was appreciative of the committee
substitute because it provided with the funding tools
needed to be successful in negotiations.
Vice-Chair Saddler asked if the committee substitute was
lacking anything.
Commissioner Myers did not believe so.
Vice-Chair Saddler asked if the commissioner wanted to
comment on the committee substitute.
5:21:39 PM
Co-Chair Neuman asked if there were any comments from the
testifiers regarding the Committee Substitute.
Ms. Rutherford believed the Senate committee substitute
satisfied the administration's needs.
Mr. Schultz had reviewed the Senate committee substitute,
Version I, and concluded that it was a good appropriations
bill. He mentioned that funds for the legal services that
were requested would provide council to DNR, DOR, AGDC, and
any other state agencies that needed legal counsel for the
project.
5:22:37 PM
He asked if it was a sign that if the timeline did not make
sense to the other partners they were not interested.
Ms. Rutherford responded that the schedules had been
evolving for all parties. She had seen approximately seven
versions of the schedules. She furthered that since she had
joined the discussion not one schedule had been approved by
all parties. Although a schedule was important, no one was
using it to dictate how the parties approached their
discussions.
Co-Chair Neuman interrupted to clarify that the current
timeline was the once Ms. Rutherford suggested.
Ms. Rutherford responded affirmatively. It was the timeline
the administration thought was necessary to accomplish what
it hoped; to provide the legislature with executable
agreements and to get the constitutional amendment on the
general election ballot. The timeline was not something the
state had had an agreement on with the producers, it was
just the most recent version.
Co-Chair Neuman mentioned that the language for future
constitutional amendments was previously covered in
committee.
5:25:16 PM
Co-Chair Neuman directed his question to Attorney General
Richards and Ms. Rutherford. He asked if either were aware
of any of the project partners being concerned about or
interested in withdrawing or exiting the project.
Ms. Rutherford asked for Co-Chair Neuman to restate his
question.
Co-Chair Neuman asked if Ms. Rutherford had become aware of
any deep concerns or inkling that any other project was
interested in any way in withdrawing or exiting the AKLNG
project.
Ms. Rutherford answered in the negative. The partners had
always indicated they were committed to the project. There
had been differences of opinion on the schedule of the
project.
Co-Chair Neuman wondered if there had been any discussion
within the administration to have a gas line or the AKLNG
project go to Valdez.
5:26:28 PM
Ms. Rutherford responded that the partners had agreed with
the terminus being in Nikiski. The administration had asked
many questions about the project including design
construction to how the prior decisions had been made. She
furthered that it was in the process of due diligence of a
new administration coming into an unfamiliar process. She
added that she had never heard discussion about re-routing
the project from Nikiski to Valdez.
5:27:26 PM
Co-Chair Neuman asked whether AGDC was going to be a bully
government or a partner in the project.
Ms. Rutherford asked Co-Chair Neuman to restate his
question.
He wondered how aggressive the state should be in its
negotiations with the partners.
Ms. Rutherford indicated that, in her previous experience
negotiating with the major oil companies, the negotiation
process was very serious. She emphasized that there was a
tremendous level of risk and reward at stake. The state had
been engaging very aggressively for several weeks prior.
She reconfirmed that all parties were very serious about
reaching an agreement.
Co-Chair Neuman relayed that when he had spoken with Mr.
Steve Butt, he had indicated that if one of the partners
had a problem the project management team representing all
four partners worked together to resolve it. He asked if
that was the typical process that would be used.
Commissioner Myers thought it was important to distinguish
that the project, as complex as it was, had many different
parts and the partners were broken into subsets. In looking
at the members of the project team, their job was to
engineer, permit, design, and manage construction and
initial production from the project; they were the
builders. The second group consisted of the gas owners, who
wanted the builders to construct a very efficient, low-
cost, high quality system; one optimized for delivering gas
to the markets in a way that maximizes their well-head
value. Assuming the legislation passed, AGDC would be part
of the management team building the system. The team's
efforts would be in problem solving around how to build the
project. They would be looking at the best technology,
approach, and contractors to use. They would also be
working on the federal environmental impact study (EIS)
process, doing engineering design studies that looked at
how to cross Cook Inlet, working with all of the federal
agencies to mitigate issues, and working with and educating
communities on the project. The project team would also be
handling local hire, employment, and the logistics of the
project. The team would also be working with the Department
of Transportation and Public Facilities (DOT) to look at
roads and crossings and the related effects on them. He
suggested that project work included problem solving which
was fairly easy.
He reasoned that when looking to maximize the wellhead
value, all of the companies and the state had different
equities in the fields and they were all negotiating for a
common goal of maximizing value of their resource. He
continued that because each party's equity was different it
created tension. He explained that DNR, DOL, and DOR were
working together to protect the state's interest. The state
was unique in that it did not have wells or the ability to
produce. Whereas, in the field the unit operators for the
producers could drill additional wells, for example. The
state could claim that 25 percent would come from new
wells, but it had to ensure its supply. The state was
commercially different in that it did not own any of
Prudhoe Bay infrastructure. If the Prudhoe Bay
infrastructure charged a fee to their downstream company,
it stayed within the corporation. The state pays the fee to
the corporation; Therefore the state's value decreased and
the corporation's increased. The challenge was minimizing
the cost leakages to the state in a way that was still fair
to the producers. The state was going work through the
differences through a series of negotiations. The state had
an integrated team to work with each one of the categories
listed on the organizational chart. The negotiations needed
to occur at the front end to resolve any issues in order to
fund and build the project. The Department of Natural
Resources' job was front-end-loaded for the following 6
months until the commercial agreements were executed. Once
the agreements were reached the state's teams could
disassemble. The state would subsequently move into a
monitoring phase. The construction build team would last
through the entire project until gas began to flow. He
reemphasized that there was commercial tension with
reasonable framework provided by SB 138 to negotiate.
5:33:16 PM
Representative Wilson relayed that she had been told of
confidentiality forms that parties might be asked to sign.
She wondered if there would ever be a reason a person would
be denied the opportunity to sign one.
Attorney General Richards did not believe that there were
confidentiality agreements relating to any particular
meeting that he was aware of. There were confidentiality
agreements between the parties with vendors, for example.
He assured the committee that the administration was
committed to an open and translucent process to allow as
much sunshine in as was practical. He recognized the need
to keep proprietary information confidential; to have
negotiations that protect people's ability to negotiate
behind closed doors in order to reach agreements. He
suggested that within the process there was room for more
sunshine. The governor had made it part of his objective to
bring the legislative body into knowing as much as
possible, hence letting the people of the state of Alaska
know as much as possible. He agreed that there was give and
take on different confidentiality agreements and what the
terms should be. He believed that the state was making
progress and opening up the process over time which the
partners were beginning to see the importance of
transparency. He added that from his perspective things
were progressing and working fairly well. He thought more
openness was better, and the state was working that as an
objective.
5:35:12 PM
Representative Wilson stated she was in favor of
transparency and understood that the state was playing in a
different arena. Mr. Fauske had told her that at a meeting
he had been asked to leave the room because he had not
signed a confidentiality agreement and that it had slowed
the process down. She was looking for assurance that the
state would be in the room to hear the full discussions in
order to make its decision.
Attorney General Richards compared it to a chicken and the
egg problem. In other word, a specific issue could not be
addressed because it was all confidential. He told of one
small contract in which there was a hiccup. The state was
currently working on the issue and had great confidence
that the state would find a way to resolve it.
5:36:58 PM
Co-Chair Neuman indicated he had requested that Mr. Fauske
be available to address the Finance Committee.
Representative Wilson stated the committee had heard that
the governor was in charge of AGDC but was not in charge of
the railroad. She opined that Mr. Fauske had been providing
accurate information about what was going on. She asked if
there was any situation that would cause the state's
representative sitting at the meeting on December 4th not
be able to sit through the entire meeting to make a
decision.
Ms. Rutherford responded that she believed that the AGDC
work plan and budget decision, to be voted on no later than
December 4th, would be made by the board with input from
the AGDC staff. She thought the governor would be making
decisions about progressing the project on a commercial
front based on how well the discussions about withdrawal
were going and how the entire project negotiations were
progressing. She believed they were two different things.
5:38:52 PM
Representative Wilson specified that she was not talking
about withdrawals. She was concerned that Mr. Dubler would
be sitting in the December 4th and asked to leave the room.
She asked the attorney general if he could think of any
reason why he would be asked to leave the room. W there was
anything that would cause Mr. Dubler to have to leave the
room. She wondered if the state could do anything to cause
that to happen.
Attorney General Richards stated that the board members had
the right, as did every company, to approve the work plan
and budget. The decision they make would be their decision
at the time. He expected that they would approve the work
plan and budget. However, he could not guarantee that it
would be approved.
Representative Wilson clarified that she was no talking
about who approved it, she was taking about other
discussions that might occur in the December 4th meeting.
She wondered if he could think of any reason why he would
be asked to leave during the meeting. In other words could
Mr. Dubler be privy to all of the discussion at the
meeting.
Attorney General Richards was unaware of any reason he
would have to leave the meeting.
5:41:11 PM
Representative Wilson asked if Attorney General Richards
knew of any other meetings where he had been asked to
leave.
Attorney General Richards was unaware until someone
summarized testimony from the previous day that it might
have happened in one meeting regarding one small matter. He
reiterated that the administration was attempting to work
through such issues and to bring greater transparency into
the process bringing more knowledge to Alaskans. He
admitted that at times there were bumps in the road but he
thought the state was on the right path to bringing more
sunshine while respecting proprietary information.
5:41:50 PM
Representative Wilson stated that we all want sunshine. She
had 17,500 people that she had to answer to. She wanted the
public to know that she wanted transparency and that in
certain circumstances in the arena which the state was
entering there would be things that might not come out. She
suggested that changes might be necessary in the following
session.
5:42:50 PM
Representative Munoz asked Attorney General Richards if he
had seen the public hearing testimony on the regulations.
Attorney General Richards responded in the negative.
Representative Munoz wanted to place on record brief
excerpts from statements made by the other AKLNG partners.
She wanted to be clear that the partners did not support
the proposed regulations as they were written. She read
comments from October 15, 20155 having to do with the AGDC
proposed regulations on confidentiality:
David Van Tuyl, BP:
"Confidentiality agreements are an essential part
of doing business in a technically and
commercially competitive world."
Patrick Flood, Conoco Phillips:
"For AGDC to participate as the representative of the
State as a fully effective participant in AKLNG, AGDC
will need to continue to be able to enter into
confidentiality agreements."
Bill MacMahon, ExxonMobil:
"If enacted, we believe these regulations would prohibit
continued AGDC participation in AKLNG."
Representative Munoz emphasized that legislators wanted the
project to continue uninterrupted. The legislature wanted
to give the project the best chance of success and avoid
inserting impediments in to the process which might slow it
down and add cost.
Co-Chair Neuman furthered that he had had discussions
concerning proprietary information, particularly with the
state's contractors and the ability for them to work in
Alaska. Many of them he hoped were Alaskan contractors that
had experience in the Arctic.
5:45:04 PM
Representative Guttenberg thought it was a unique
experience for ExxonMobil, BP, or Conoco Phillips to be
able to lobby in the state capital but the state could not
reciprocate in their board rooms. He emphasized that the
majors were currently in the committee room negotiating
with the state. He was concerned with AGDC signing a
blanket confidentiality agreement which could never be
discussed with the legislature. He provided a hypothetical
scenario where unfair labor practices were taking placed
and AGDC could not come to the legislature to report it as
a disadvantage to the state. He wondered if it was a
concern for the administration.
Attorney General Richards stated that it was a concern. It
was clearly in the best interest of the State of Alaska to
have more sunshine and transparency in the process. He
thought it was true from the governor's perspective and was
how the administration had been working. He opined that it
was not in the producers' interest to have more
transparency and sunshine in the process. The more
information that they controlled and limited providing to
the people of Alaska the more they would have control of
the process. He parroted Representative Guttenberg's
concern. He suggested to keep in mind whenever dealing with
the three individuals Representative Munoz quoted, that
they were world-class negotiators which he dealt with
frequently. They were negotiating to convince the
legislature to keep the process as secret as possible. The
administration was attempting to bring in a little
sunshine. He suggested it would better inform the Alaska
people and increase the state's negotiating leverage. He
admitted he was surprised at the level of secrecy the three
companies wanted. He did not believe it was in the state's
best interest to have everything secret, but realized that
certain things were proprietary. The state had to find a
balance. He opined that the scale was tipped too far on the
confidentiality side and that the governor would like to
see that change towards more openness. The administration
was working towards that end. He genuinely believed that
the state could continue in the process with the producer
partners and that they recognized that the stance of the
administration would mean more information would be
publically available and would not hurt the project.
Co-Chair Neuman remarked that everybody had an opinion.
5:47:53 PM
Representative Guttenberg had asked Mr. Butt a question had
appeared before the committee in the prior few days and
could not answer a question that he had stated that he had
asked Mr. Butt a question about the confidentiality
agreement. He did not understand why an unopposed pipeline
would need to be confidential.
Attorney General Richards agreed that there was a
significant amount about the process that was confidential
that he felt did not need to be. The administration had
inherited confidentiality systems that had been in place
governing the project that were very difficult to change.
The state was trying to introduce more sunlight and make
the process more open over time. He furthered that until
the state could affect change, which was happening slowly,
the process was designed to be secret. He agreed with
Representative Guttenberg that some of the things that were
secret likely did not need to be and some of them were. He
provided some examples of classic proprietary information;
engineering data, upstream resource assessments, a
company's financial information, and cost estimates. He
claimed that in his career the entities he had been
associated with on the public side had not operated using
the current model.
Co-Chair Neuman suggested that it had been a concern of the
legislature when SB 138 was being discussed. He thought
that a requirement was in place to do reports at the
legislature on the work as it proceeded. He had asked AGDC
to provide quarterly updates of which AGDC was amenable.
Attorney General Richards stated that he wanted to be clear
that confidentiality requirements were not a result of SB
138. The bill authorized confidentiality agreements as
necessary and appropriate. It allowed the commissioner to
enter into them. It was the terms of the particular
confidentiality agreements that the administration
inherited that were setting the confidentiality stage. At
the direction of the governor the administration was trying
to open up information that was not genuinely and
legitimately confidential could be shared with the people
of Alaska.
Co-Chair Neuman offered that the legislature decided what
it wanted to see for confidentiality. The confidentiality
details were outlined in SB 138. He mentioned having
received some change proposals that had originated from
Attorney General Richards' office.
5:52:13 PM
Representative Gara referenced a response to Representative
Edgmon's question concerning the proposed constitutional
amendment if the administration decided one was needed
regarding locking in a gas tax. The response was that the
issue might be part of the agenda for a special session. He
suggested that there was no need to wait to discuss it in a
special session if it was ready to be discussed during the
regular session. It would save costs.
5:53:56 PM
Co-Chair Neuman agreed with Representative Gara.
Representative Gara was sending the message and hoped the
administration would be open to discussing the issue during
the regular session if it was ready.
Ms. Rutherford admitted she had been the one that had
mentioned a special session. She clarified that DNR would
bring the package of materials to the legislature as
quickly as possible and acknowledged his preference for a
regular session.
Co-Chair Neuman asked Ms. Rutherford to provide any
information she had for members as soon as possible so the
discussion could begin.
5:55:07 PM
Vice-Chair Saddler spoke about the issue of transparency.
He was concerned with setting up a process through draft
regulations for AGDC's confidentiality that commercial
partners wishing to protect their commercial trade secrets
were being asked to prove why they should be kept
confidential as opposed to being open and transparent. He
expressed concerns about having to stop, like going down a
highway and having to stop every two miles at a check
point, to prove permission to proceed which caused delays.
He believed delay was the enemy of the state's progress. He
asked how long the attorney general had known about the
regulations.
Attorney General Richards responded that he had known about
them since the previous March.
Vice-Chair Saddler thought he had a heard Attorney General
Richards on the previous day he had not seen them. He
wondered if he had played any role in their development.
Attorney General Richards stated that he had testified
before the Senate Finance Committee that the role in the
advice he gave was confidential. He indicated he had played
a role in the early stages of providing advice through the
governor's office to AGDC and their council in discussing
them.
Vice-Chair Saddler commented that it was a matter of asking
the right question.
5:56:56 PM
Vice-Chair Saddler asked Attorney General Richards to
provide his understanding of the mechanism necessary in the
standard of proof necessary to demonstrate why something a
commercial partner brought forward should be kept
confidential. He wondered about the level of proof and the
mechanism for proving it.
Attorney General Richards did not know. He had not read the
draft regulations nor had he looked at them in the previous
6 months. He did not recall the specifics and had not seen
what the board adopted versus the first early stage draft.
Vice-Chair Saddler asked who would be able to answer his
question.
Attorney General Richards answered that Assistant Attorney
General Jerry Juday had worked with the board and the
executive team at AGDC.
Vice-Chair Saddler asked if Mr. Juday would be barred from
answering the question regarding the mechanism.
Attorney General Richards responded in the negative.
5:57:58 PM
Co-Chair Neuman wonder how much time would be needed to
resolve any issues regarding proprietary information. He
expressed his concerns around delays and asked about a
possible list of items subject to confidentiality.
Attorney General Richards responded that there were was a
standard way in which the state dealt with confidential
information. He used the example of DNR's statutory
framework which basically listed the type of information
that was confidential. The Department of Natural Resources
had applied for many decades.
5:59:16 PM
Co-Chair Neuman noted that the state was dealing with
private parties on a business deal which differed from the
states' standard regulations. The departments worked
through a basic public process that was spelled out in
statute. The state was currently in a private partnership
with private industry on a construction project, which he
thought was significantly different.
Attorney General Richards responded that there was a
difference which he understood. However, it was the same
process state agencies used when dealing with private
construction projects with private entities. It was the
same system used by Alaska Industrial Development and
Export Authority (AIDEA).
Co-Chair Neuman asked the attorney general to provide the
committee with some examples of what he was talking about.
6:00:13 PM
Representative Gattis asked about AIDEA. She wondered if
AIDEA had experienced as much push back as the legislature
had talked about in the prior few days regarding the
confidentiality agreements.
Attorney General Richards could not speak to the actual
factual circumstances of AIDEA's interaction with companies
it was investing with. He was aware that AIDEA's system had
been in place for a long time and was statutory, created by
the legislature. Alaska Industrial Development and Export
Authority had functions presumably well under the system
for a number of years.
Representative Gattis mentioned the "push me, pull me"
dynamic in the state's negotiations with the producer
partners. She suggested the dynamic could be because of the
vendors working for the producers rather than the producers
themselves. She supposed that if she were negotiating or
having a contract with a vendor and the sunshine concept
entered into the picture she might feel some resistance
from a vendor about confidentiality. She wondered if the
attorney general understood the dynamic and whether he
agreed with her.
Attorney General Richards understood that there was always
the possibility the entities dealing with the government
might want to keep things confidential. He also recognized
that it was a dynamic. At one end of the spectrum might be
complete secrecy and the other end of the spectrum being no
secrecy. Somewhere in the middle would be where the state
would land in the type of situation being discussed. For
instance, no one was suggesting that proprietary
information should be public whether dealing with producers
or vendors. He thought it was important for vendors and
producers to recognize the legitimacy of confidentiality
and the need to attract outside vendors to do work. Using
the other extreme where the mere existence of a contract
the state had signed with a vendor, he wondered if the
contract should be confidential. He noted that the state
was at a balancing level.
Representative Gattis commented that if in regards to the
state acting like a business she thought it should be
confidential exactly like what the businesses did in the
state. She thought that what Attorney General Richards was
trying to say was that contracts should not be confidential
when acting as government and putting out contracts as
government versus a gas line project where the state was
acting as a business.
6:04:11 PM
Representative Edgmon suggested having Mr. Fauske come
before the committee to provide specific examples of
standard, non-proprietary, business and decisions where the
board might want to go into executive session to discuss
things that should not be exposed for public consumption.
He appreciated the Walker administration wanting to bring
some additional transparency to the project process. He
mentioned hearing repeatedly answers to questions that
confirmed there was a fine line that needed to be observed.
He thought some real world of examples would be helpful in
moving the discussion along.
6:05:32 PM
Representative Pruitt asked to whom the state would most
likely be selling its gas.
Attorney General Richards asked to be excused, as he had
another meeting to attend.
Ms. Rutherford responded that the state would most likely
sell to Asia; Korea, Japan and China.
Representative Pruitt asked if the state was the only
entity competing in the Asian market.
She responded in the negative. She added that British
Columbia would definitely be competing for it and perhaps
some of the Gulf Coast.
Representative Pruitt asked if there was competition for
the state.
Ms. Rutherford responded positively.
Representative Pruitt suggested that there were
opportunities where the state could lose its edge due to
too much transparency. He asked if it was possible.
6:06:52 PM
Ms. Rutherford stated that the only issue where she thought
it might be possible was in the area of gas sales
agreements. It was possible that some of the purchasers
might want to keep sales arrangements with the State of
Alaska private while the State of Alaska might want a
public review.
6:07:29 PM
Representative Pruitt asked Attorney General Richards
whether state legislators would be able to talk to board
members once they signed confidentiality agreements. He
also asked if legislator could sign confidentiality
agreements which would give them an opportunity to talk to
board members or members of AGDC who also have signed
agreements.
Attorney General Richards stated that a legislative CA was
required to talk to a board member about confidential
information. He furthered that there was a process that
anyone in the administration had to go through, and that
process was confidential.
Representative Pruitt mentioned hearing about attorney-
client privilege related to the attorney general, members
of the DOL, the governor, or other members of the
administration. He wondered asked who a person would have
to talk to prove that it fell underneath attorney-client
privilege.
Attorney General Richards stated that the boundaries of the
attorney-client privilege were well understood by most
lawyers and the rules were fairly clear. Exceptional
circumstances could be created where they were a little
less clear. By and large any communication an attorney had
with their client that involved any kind of legal advice
was privileged.
6:09:30 PM
Representative Pruitt asked if it had to be proved to
anyone.
Attorney General Richards relayed that if someone
challenged the privilege it would have to be proved. A
judge would review in camera the nature of the
communications and make a determination whether the
communication was privileged.
Representative Pruitt stated that it came afterwards. In
order to claim that a person had attorney-client privilege
a person did not have to go to someone first, obtain their
approval, and subsequently claim the privilege. He asked if
he was accurate.
Attorney General Richards responded affirmatively. The
privilege existed automatically.
Representative Pruitt wondered why the state would not hold
itself to the same standard or requirement that it expected
from its partners in terms of confidential information.
Attorney General Richards suggested differentiating between
a privilege that existed automatically and confidentiality
which was an agreement between the parties. In his
experience, it was the way it worked within the State of
Alaska and with most governments. The law would always lay
out the rules of privilege and whether they apply, the
standard way in which the state operated. He furthered that
the way in which the state was doing it currently, under
the confidentiality agreements in place in the AKLNG
project, deviated from the norm.
6:11:30 PM
Representative Pruitt asked for an example of something the
partners would want to keep secret from the State of Alaska
and away from sunshine.
Attorney General Richards provided the example of the
partners' position on fiscal certainty on oil. He would be
very curious what their public statements were about
whether they expected the process to lead to fiscal
certainty in oil.
Representative Pruitt commented that when there was too
much sun people get burned causing pain like no other.
6:12:23 PM
Vice-Chair Saddler asked about a couple of agreements that
were yet to be negotiated under the equity. He referred to
the chart containing the agreements yet to be negotiated.
He pointed to the equity option agreement under the equity
category. He wondered if it contained a 40 percent buy
back.
Ms. Rutherford responded affirmative.
Vice-Chair Saddler asked for a brief sentence or two about
the last three equity agreements listed, the member
agreement, the contract operator services agreement, and
the member administrator services agreement.
Ms. Rutherford explained that the members' agreement would
be an AGDC arrangement between the other equity holders of
the project itself; the GDP, the pipeline, and the
liquefaction plant. It would not be made available for
legislative approval.
6:13:46 PM
Vice-Chair Saddler asked her to further define the members'
agreement, as her explanation was fairly broad.
Mr. Schultz pointed, first, to the Joint Venture Agreement
(JVA) which was a cost-sharing agreement between the
participants in the project. The members' agreement was the
limited liability company agreement that would set out the
governance terms for the AKLNG project parties and
establish their rights and obligations as members of the
project company. The agreement would define capital
contributions, voting rights, distribution rights, and
other things relating to governance of the company. The
contract operators service agreement (COSA). It would be an
agreement between the AKLNG Limited Liability Company and
ExxonMobil as the contract operator for the project. It
would set the parameters by which ExxonMobil could spend
funds and act on behalf of the AKLNG project. It would be
entered into between the AKLNG Company and ExxonMobil. It
would continue through the FEED phase and perhaps into the
construction and execution phase of the project.
Mr. Schultz continued to explain the Member Administrator
Services Agreement, referred to as (MASA). It established
Conoco Phillips as the member administrator for the AKLNG
project running functions such as accounting for the
company during the FEED phase. The agreement would be
between the AKLNG Limited Liability Company of which AGDC
was a member and Conoco Phillips as the member
administrator providing those services.
Vice-Chair Saddler asked if the LLC was referred to as the
Alaska LNG Project Company.
Mr. Schultz responded affirmatively that it was the limited
liability company.
HB 3001 was HEARD and HELD in committee for further
consideration.
Co-Chair Neuman reviewed the agenda for the following day.
ADJOURNMENT
6:17:24 PM
The meeting was adjourned at 6:17 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 3001 SB138 work to date sectional FINAL - HANDOUT for 10-30-2015.pdf |
HFIN 11/2/2015 1:30:00 PM |
HB3001 SB 138 |
| HB 3001 SB 138 Overview PPT 10.29 (2).pdf |
HFIN 11/2/2015 1:30:00 PM |
HB3001 SB 138 |
| HB 3001 Agreements to be Negotiated 11.2.15.pdf |
HFIN 11/2/2015 1:30:00 PM |
HB3001 |
| HB 3001 Use and Availability of 48 (1).pdf |
HFIN 11/2/2015 1:30:00 PM |
HB3001 |
| HB 3001 Pipe size briefing 10-28-2015 v4 (2).pdf |
HFIN 11/2/2015 1:30:00 PM |
HB3001 |
| Agreements SB 136 4-3-14 HB 3001.pdf |
HFIN 11/2/2015 1:30:00 PM |
HB3001 |
| HB 3001 Enalytica additional slides.pdf |
HFIN 11/2/2015 1:30:00 PM |
HB3001 |
| Confidentiality Regs.pdf |
HFIN 11/2/2015 1:30:00 PM |
HB3001 |
| Memo to Speaker on Confidentiality Regs.pdf |
HFIN 11/2/2015 1:30:00 PM |
HB3001 |