Legislature(2013 - 2014)BARNES 124

02/26/2014 03:15 PM LABOR & COMMERCE

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03:23:27 PM Start
03:23:52 PM Presentation: "gasline Issues/options" by Janak Mayer & Nikos Tsafos, Consultants, Enalytica
04:54:47 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: "Gasline Issues/Options" by Janak TELECONFERENCED
Mayer & Nikos Tsafos, Consultants, Enalytica
-- Testimony <Invitation Only> --
                    ALASKA STATE LEGISLATURE                                                                                  
          HOUSE LABOR AND COMMERCE STANDING COMMITTEE                                                                         
                       February 26, 2014                                                                                        
                           3:23 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Kurt Olson, Chair                                                                                                
Representative Lora Reinbold, Vice Chair                                                                                        
Representative Mike Chenault                                                                                                    
Representative Bob Herron                                                                                                       
Representative Andy Josephson                                                                                                   
MEMBERS ABSENT                                                                                                                
Representative Charisse Millett                                                                                                 
Representative Dan Saddler                                                                                                      
Representative Craig Johnson                                                                                                    
COMMITTEE CALENDAR                                                                                                            
PRESENTATION: "GASLINE ISSUES/OPTIONS" BY JANAK MAYER & NIKOS                                                                   
TSAFOS~ CONSULTANTS~ ENALYTICA                                                                                                  
     - HEARD                                                                                                                    
PREVIOUS COMMITTEE ACTION                                                                                                     
No previous action to record                                                                                                    
WITNESS REGISTER                                                                                                              
JANAK MAYER, Partner                                                                                                            
Legislative Consultant on Gas Commercialization                                                                                 
Washington, D.C.                                                                                                                
POSITION STATEMENT:  As consultant to the Alaska State                                                                        
Legislature, provided a PowerPoint presentation regarding                                                                       
gasline issues and options.                                                                                                     
NIKOS TSAFOS, Partner                                                                                                           
Legislative Consultant on Gas Commercialization                                                                                 
Washington, D.C.                                                                                                                
POSITION STATEMENT:  As consultant to the Alaska State                                                                        
Legislature, provided a PowerPoint presentation regarding                                                                       
gasline issues and options.                                                                                                     
ACTION NARRATIVE                                                                                                              
3:23:27 PM                                                                                                                    
CHAIR KURT  OLSON called  the House  Labor and  Commerce Standing                                                             
Committee  meeting  to  order  at   3:23  p.m.    Representatives                                                               
Josephson, Reinbold,  Chenault, Herron and Olson  were present at                                                               
the call to order.                                                                                                              
^ Presentation:  "Gasline Issues/Options" by Janak  Mayer & Nikos                                                               
Tsafos, Consultants, Enalytica                                                                                                  
 Presentation: "Gasline Issues/Options" by Janak Mayer & Nikos                                                              
                 Tsafos, Consultants, Enalytica                                                                             
3:23:52 PM                                                                                                                    
CHAIR OLSON announced that the only  order of business would be a                                                               
Presentation:  "Gasline Issues/Options"  by Janak  Mayer &  Nikos                                                               
Tsafos, Consultants, Enalytica.                                                                                                 
3:24:28 PM                                                                                                                    
JANAK MAYER,  Partner, Enalytica,  Legislative Consultant  on Gas                                                               
Commercialization, stated  that he has  spent the last  six years                                                               
in Washington  D.C. working  for PFC Energy.   He  has co-founded                                                               
his own firm  with Nikos Tsafos, who will be  presenting with him                                                               
today.  He briefly discussed  his background, noting he initially                                                               
worked on  and led the  analytic team at PFC  Energy, essentially                                                               
conducting economic  and international modeling for  upstream oil                                                               
and gas.   This included  building models of  assets, portfolios,                                                               
international companies, independent  drilling firms, and private                                                               
equity  firms.     Additionally,   he  spent   considerable  time                                                               
analyzing  oil  and gas  fiscal  terms  on project  economics  so                                                               
government can understand the impacts  of rule changes on private                                                               
sector behavior.                                                                                                                
3:25:52 PM                                                                                                                    
NIKOS TSAFOS,  Partner, Enalytica, Legislative Consultant  on Gas                                                               
Commercialization, said  he has worked  for the past seven  and a                                                               
half  years as  a consultant  for PFC  Energy.   One of  his last                                                               
responsibilities  at  PFC  Energy  was  to  run  the  global  gas                                                               
consulting practice  for the firm.   Thus he has worked  with oil                                                               
and  gas   companies,  governments  and   financial  institutions                                                               
worldwide  on all  manner of  questions related  to natural  gas.                                                               
Principally his  experience as  a consultant  has been  to assist                                                               
companies in selling  gas, buying gas, and  understanding how gas                                                               
markets  are changing  and  how those  changes  may impact  their                                                               
strategies and plans.                                                                                                           
3:26:38 PM                                                                                                                    
MR. TSAFOS  said he  would focus his  discussion on  four things.                                                               
First,  he'd like  to discuss  competitiveness  and where  Alaska                                                               
fits into  the world of  global gas.   Second, he'll  discuss the                                                               
project pathway in  terms of the state's  current position, where                                                               
Alaska is headed,  items that will be settled in  the next couple                                                               
of months,  and what issues  will be  settled after that.   Next,                                                               
he'll  focus  on  two  of  the  biggest  themes  legislators  are                                                               
grappling  with  currently:  alignment   and  the  Memorandum  of                                                               
Understanding  (MOU).   In  terms  of  alignment, he  offered  to                                                               
define it,  explain how Enalytica  thinks about it,  and identify                                                               
why it is  important to the state.  Finally,  he will discuss the                                                               
state's midstream  options, in particular,  how to  structure the                                                               
midstream  options,  and the  vision  of  the  MOU and  the  role                                                               
TransCanada Alaska Development Inc.  (TransCanada) will have with                                                               
respect to MOU.                                                                                                                 
MR. TSAFOS highlighted  competitiveness and pointed out  a map of                                                               
the  world [slide  4].   First, if  a person  was in  Beijing and                                                               
wanted to "keep the lights on"  in Tokyo, this map represents the                                                               
choices for  obtaining natural gas.   Although Alaska  appears to                                                               
be  one of  many  choices,  by considering  the  options in  more                                                               
detail it  becomes clear that  many challenges exist for  each of                                                               
the  other options.    For example,  in  Western Canada,  British                                                               
Columbia (BC)  has had  difficulty in setting  a tax  system that                                                               
works for  government and oil companies.   Even though BC  was at                                                               
the forefront three  or four years ago, many of  the LNG projects                                                               
have  slowed   considerably  and   partners  have  left   due  to                                                               
disappointments.     He  discovered  this  morning   that  Apache                                                               
Corporation  would like  to sell  its  stake in  the Kitimat  LNG                                                               
project.   Again,  BC looked  good initially  but things  did not                                                               
play out.                                                                                                                       
MR.  TSAFOS  emphasized that  the  map  is useful  to  understand                                                               
Alaska's place in  the world, but it also  illustrates the places                                                               
that people are  most excited about.  The current  sources of gas                                                               
over the  next ten  years include Western  Canada, the  Lower 48,                                                               
and East  Africa.  It's easy  to become dismayed since  Alaska is                                                               
one of  many and the  proposed Alaska  LNG is a  fairly expensive                                                               
project so it  raises questions as to whether  Alaska can compete                                                               
or if Alaska will even "have a shot."                                                                                           
3:30:33 PM                                                                                                                    
MR. TSAFOS  said the  best way  to respond is  show what  the map                                                               
looked like seven or eight years  ago [slide 5].  Again, Alaska's                                                               
project is  fairly expensive,  but he pointed  out that  it isn't                                                               
the cheapest supply that always gets  built.  For example, in the                                                               
late  2000s,  Venezuela,  Trinidad, Nigeria,  EQ  Guinea,  Qatar,                                                               
North Africa,  Algeria, Libya,  and Egypt  were far  cheaper than                                                               
the Australian project  that actually got built.   It's important                                                               
to also  consider other factors,  such as government  climate and                                                               
ability  to get  gas  to  market.   Ultimately,  what matters  is                                                               
whether  the  gas  can  be developed  and  the  negotiated  price                                                               
satisfies  the  buyer and  the  owner.   One  additional  benefit                                                               
Alaska has is its project completion  window in the early to mid-                                                               
2020s  that no  one else  is targeting.   Most  of the  deals are                                                               
looking to supply gas in 2017-19.   Thus, most of the competition                                                               
currently happening  is in a window  that is too soon  for Alaska                                                               
to  access.   Therefore, even  though lots  of options  exist, it                                                               
doesn't mean that Alaska doesn't have a place at the table.                                                                     
3:32:40 PM                                                                                                                    
MR. TSAFOS  discussed project  pathway [slide  6].   He described                                                               
how  LNG projects  typically evolve  in response  to the  general                                                               
concern  about   the  specific  decisions  the   legislature  and                                                               
administration  must  make.   The  legislature  has  concerns  on                                                               
whether  these decisions  will be  irreversible for  the next  30                                                               
years.     In  other  words,  this   discussion  identifies  what                                                               
decisions need to be made now,  what gets "bolted down," and what                                                               
can change later.                                                                                                               
3:33:22 PM                                                                                                                    
MR.  TSAFOS turned  to discuss  the case  study of  an Australian                                                               
project,  Queensland  Curtis  LNG  (QCLNG) and  how  the  project                                                               
evolved  over a  period of  time  [slide 6].   Specifically,  the                                                               
slide  shows  five  variables:  the  size  of  the  project,  the                                                               
upstream,  the  liquefaction, the  off-take  or  buyers, and  the                                                               
external financing for  the LNG project at three  points in time.                                                               
The three  time periods include  July 2008, during the  Front End                                                               
Engineering  Design (FEED)  study,  during  the final  investment                                                               
decision (FID) phase, and in January 2014.                                                                                      
MR. TSAFOS  explained that first, the  QC LNG project is  not yet                                                               
on line.   Second, Alaska would  fall to the left  of this slide.                                                               
Subject to enabling legislation,  Alaska's partners would like to                                                               
go to  pre-FEED, and potentially  sanction FEED in  12-18 months,                                                               
which would put Alaska in the first column.                                                                                     
MR.  TSAFOS,  turning to  the  QC  LNG,  focused  on the  QC  LNG                                                               
project.  When the FEED  started the partners thought the project                                                               
might encompass  one 3-4  million metric  tons per  annum (mmtpa)                                                               
train.   The upstream  was owned  by British  Gas Group  (BG) and                                                               
Queensland  Gas  Company  (QGC),  which   BG  part  owned.    The                                                               
liquefaction   project  was   a   70/30  percent-owned   project,                                                               
respectively, with all the gas sold  by BG.  When the project was                                                               
sanctioned in October 2010, the  project had more than doubled in                                                               
size.  BG  became the sole supplier, with the  exception of China                                                               
National  Offshore Oil  Corporation (CNOOC)  and Tokyo  Gas which                                                               
took  some share  of the  upstream.   The liquefaction  ownership                                                               
changed with  one train 90/10 -  BG/Tokyo - and the  second train                                                               
was built  by BG and Tokyo  gas.  The offtake  changed with CNOOC                                                               
and Tokyo  Gas buying gas,  with the balance  going to BG.   Fast                                                               
forward  to today.    While the  project size  is  the same,  the                                                               
upstream  has changed  with CNOOC  having  a bigger  share.   The                                                               
ownership  of the  liquefaction has  changed, with  CNOOC's share                                                               
increasing from  10 to  50 percent; plus  CNOOC bought  an option                                                               
for a  potential third train,  if one  is built.   Currently, the                                                               
offtake is more  than the capacity of the project  since BG plans                                                               
to  sell its  gas from  other parts  of the  world.   The project                                                               
obtained external financing from  the Japan Bank of International                                                               
Cooperative (JBIC) and the U.S. Export and Import Bank.                                                                         
MR. TSAFOS summarized that  the aforementioned slide demonstrates                                                               
that  it   is  fairly   natural  for   LNG  projects   to  evolve                                                               
considerably   in  terms   of  size,   resources,  ownership   of                                                               
liquefaction,  target  markets,  and   financing.    He  reminded                                                               
members that thee  QC LNG project has not yet  begun.  Thus, this                                                               
project  provides Alaska  with a  useful perspective  to keep  in                                                               
mind  since  many decisions  for  the  Alaska LNG  project  could                                                               
evolve.    In fact,  he  ventured  he  would  be shocked  if  the                                                               
ownership structure is the same  when the first cargo leaves 8-10                                                               
years from  now.  He said,  "It doesn't usually happen  that way.                                                               
Things change."                                                                                                                 
3:37:58 PM                                                                                                                    
MR. TSAFOS,  in response  to a  question, suggested  that without                                                               
commenting on the intention of  the "big three," some new players                                                               
would likely buy some equity in  the Alaska LNG project, and that                                                               
some buyers will  be quite interested in  acquiring some portions                                                               
of the liquefaction  facility.  Further, the  state may initially                                                               
start  with  a  25  percent  share,  but  as  the  project  gains                                                               
momentum,  its  share  may  later  drop  to  20  or  15  percent.                                                               
Additionally, the  state may  decide on  different shares  of the                                                               
value chain,  which typically happens  when new players  come in.                                                               
For example, someone may buy a  5 percent share of the project or                                                               
a party may  buy proportionately from the ownership.   He avoided                                                               
speculating on  the three producers involved,  but he anticipated                                                               
that some  buyers will want  to buy  some of the  state's equity.                                                               
He  recalled presenting  before  the Legislative  Budget &  Audit                                                               
Committee  information   which  showed  that  typically   in  LNG                                                               
projects, half  of the LNG  buyers own  a share of  the facility.                                                               
For example, when  CNOOC came into the QC LNG  project, it bought                                                               
a 10 percent share in the project  at the time for 3.6 mmtpa.  At                                                               
the time the project increased from  3.6 to 8.6 mmtpa, CNOOC also                                                               
increased its  share from 10  to 50 percent.   Tokyo Gas  did the                                                               
same  thing when  it obtained  1.2 mmtpa  and also  obtained some                                                               
upstream  and  midstream, too.    He  speculated that  this  will                                                               
likely happen in Alaska.                                                                                                        
3:40:10 PM                                                                                                                    
REPRESENTATIVE   JOSEPHSON   recalled  discussions   on   revenue                                                               
projections  in  a  previous hearing  [House  Resources  Standing                                                               
Committee] that  if the state  held to  the MOU, the  state could                                                               
receive $3.4 billion  in revenue if the state held  a full equity                                                               
share.   He acknowledged that  the QC  LNG changes make  him feel                                                               
uneasy, although  it speaks  volumes about  the dynamics  and how                                                               
things can change  on a short time table; however,  he would like                                                               
to know how  the state can remain vigilant  and retain sufficient                                                               
earnings,  especially since  the  state's  decisions also  impact                                                               
local communities and  their budgets.  For  instance, the project                                                               
seems much less interesting if the  state's share is a billion in                                                               
revenue.    Again, he  asked  whether  the consultant  can  teach                                                               
Alaska what it takes to be  a vigilant partner.  He recalled some                                                               
legislators  have expressed  concern  that if  the state  doesn't                                                               
obtain enough  revenue early on  that it might  ultimately result                                                               
in a need to change the state's taxes and royalty share.                                                                        
MR. TSAFOS agreed  it makes sense that if the  state ends up with                                                               
a lower equity share that the  share of the revenue would change.                                                               
The  question   arises  as  to   whether  the  state   will  feel                                                               
comfortable with the necessary capital  outlay in 2017-23 for the                                                               
proposed Alaska LNG project before the  revenue will come in.  Of                                                               
course,  everyone likes  the projected  $3.4 billion  in revenue,                                                               
noting  that Enalytica  has its  own  figures, which  are in  the                                                               
ballpark.    Again,   the  question  is  whether   the  state  is                                                               
comfortable with the  upfront spending as part owner  in order to                                                               
generate  the revenue  later on.    Certainly, a  number of  ways                                                               
exist to balance  this.  For example, the state  could adjust its                                                               
equity share and obtain upfront  cash payment.  Another way would                                                               
be to  leverage the project and  use debt at the  state level and                                                               
at the project  level.  Furthermore, the question  is whether the                                                               
legislature and  the administration will be  comfortable with the                                                               
amount  of upfront  investment necessary  to achieve  the state's                                                               
goal to maximize its annual revenue.                                                                                            
3:44:22 PM                                                                                                                    
MR.  MAYER  stated  that  during  this  legislative  session  and                                                               
through  subsequent negotiations  of contractual  agreements with                                                               
the  producers,  the state's  share  will  be determined  and  is                                                               
estimated between 20-25 percent.   Once that share is determined,                                                               
the point of slide  6 is that once "you have  that share you have                                                               
that share."  As the state  gets closer and identifies the amount                                                               
of the  capital commitment, the  state's capacity to  carry debt,                                                               
and how much project financing is  possible, that is the point at                                                               
which the state  can determine whether it is  capable of carrying                                                               
a 25 percent share  or if its share should be  reduced.  He noted                                                               
if  other buyers  express an  interest  in "buying  in" that  the                                                               
state doesn't  have any obligation  to provide them  that access.                                                               
He  predicted  that if  the  state  is  clear  that it  wants  to                                                               
maintain a particular share it will be capable of doing so.                                                                     
3:45:57 PM                                                                                                                    
MR.  TSAFOS focused  next on  the Alaska  LNG project  [slide 7].                                                               
Currently, the  state is at  the Pre-FEED stage,  which basically                                                               
consists of a study to  determine whether the project makes sense                                                               
and if so, it  will move on to the FEED phase.   On the marketing                                                               
side,  some   anxiety  exists  in  terms   of  whether  long-term                                                               
commitments and contracts, the  Memorandum of Understanding (MOU)                                                               
and  Heads of  Agreement (HOA)  will be  signed.   The state  may                                                               
approach buyers and  sign some preliminary agreements,  but it is                                                               
unlikely  the  state will  finalize  anything  over the  next  18                                                               
months.  If the state has  20-25 percent equity it is more likely                                                               
the state  will focus on  marketing options and terms.   Further,                                                               
in  terms of  financing, the  state  will be  focused on  initial                                                               
talks, which  have already begun  with the state  considering its                                                               
debt capacity.   In  terms of project  ownership, the  state will                                                               
focus on defining the initial  structure.  The administration has                                                               
put out  the Pre-FEED  figures of  about $400-$500  million, with                                                               
the state's share  ranging from 20-25 percent,  depending on what                                                               
happens with  TransCanada Alaska Development  Inc. (TransCanada).                                                               
The  marketing will  be zeroed  in on  during FEED,  some of  the                                                               
deals will  be finalized, and  the sales and  purchase agreements                                                               
will provide  definitive contracts.  During  the financing phase,                                                               
the state  may sign loans  and the  state may refine  its initial                                                               
ownership  structure, and  at that  point the  investment becomes                                                               
more serious and reaches $1.5 to $2 billion.                                                                                    
MR. TSAFOS  said that even at  that point when the  state reaches                                                               
its final  investment decision,  the state  has still  only spent                                                               
$2-2.5 billion, which certainly  is significant, but represents a                                                               
fraction  of the  "big number"  [$45-$65  billion].   One of  the                                                               
questions has  been whether this  [Alaska LNG project] is  a good                                                               
deal for  Alaska.   He answered,  "Well, we don't  know yet.   In                                                               
fact, you  don't have to make  a decision about whether  you want                                                               
to commit the  big money until you get to  that 2017-2018 stage."                                                               
He  said, "Right  now you  just have  too many  unknowns and  the                                                               
whole goal of the  next two or three years is  to narrow down the                                                               
unknowns and  come up  with a  plan that is  actually a  lot more                                                               
tangible."   Currently,  the state  doesn't  have ownership,  but                                                               
just  has some  general ideas  about how  the project  might play                                                               
out.  During the construction phase,  the state can still do more                                                               
marketing,  obtain  additional  financing,   and  bring  in  more                                                               
partners.    That  represents  the point  at  which  the  capital                                                               
outlays become more  serious, the project is on-line  and most of                                                               
the obligations  are met from the  cash flow of the  project.  At                                                               
that point the project would be  earning money and it can pay its                                                               
operational  and maintenance  expenses, plus  any debt  the state                                                               
may have acquired in the process.                                                                                               
3:49:51 PM                                                                                                                    
MR. TSAFOS said the effect of slide  7 is to show that the Alaska                                                               
LNG project  is at  the starting point,  that probably  less than                                                               
one  percent of  the paperwork  has been  signed; therefore,  the                                                               
project is at a very preliminary stage.                                                                                         
MR. TSAFOS discussed the state's  options for the project pathway                                                               
[slide 8].   This  slide outlined  four options:   First,  is the                                                               
status quo  option; and  second, under the  HOA using  royalty in                                                               
kind (RIK) with 25 percent equity  in the gas treatment plant and                                                               
pipeline  ("GTP &  Pipe"),  and  25 percent  equity  in the  LNG.                                                               
Beginning with  the RIV and the  status quo, there would  be some                                                               
tax  implications   but  no   capital  obligations   without  any                                                               
ownership in the  upstream, the "GTP & Pipe" or  LNG.  Certainly,                                                               
tariffs matter  purely from an  evaluation perspective  since the                                                               
state must find  a way to tax  gas at the North  Slope.  However,                                                               
the  HOA does  several things.   First,  it potentially  switches                                                               
from  royalty  in  value  (RIV)  to royalty  in  kind,  with  the                                                               
upstream  remaining at  zero and  the  state receiving  up to  25                                                               
percent from the "GTP & Pipe",  and the LNG.  Under this scenario                                                               
the state would  be responsible for some  capital commitments for                                                               
its share  of "GTP  & Pipe",  and the LNG,  plus the  state might                                                               
take  on some  debt.   The  state would  be  responsible for  the                                                               
principal  and  interest  on  the  debt.    However,  the  tariff                                                               
suddenly becomes  only notional since  the state owns  25 percent                                                               
of the  "GTP & Pipe"  and the LNG.   In that instance,  the state                                                               
could  argue with  itself, but  the  tariff is  non-consequential                                                               
since  everything  would  happen  internally.    Thus,  what  the                                                               
producers  do and  how  they  calculate tariffs  would  be of  no                                                               
interest  to the  state.   He offered  to discuss  the third  and                                                               
fourth options under  the MOU later.  He indicated  the next four                                                               
or five slides would cover alignment.                                                                                           
3:52:48 PM                                                                                                                    
MR. TSAFOS turned  to alignment [slide 9].   He acknowledged that                                                               
gas  analysts can  use confusing  units  and consistently  switch                                                               
units so  it is difficult  to understand the language.   However,                                                               
the  easiest way  to  consider alignment  is  by discussing  oil,                                                               
since  the  legislature  and  the state  are  familiar  with  oil                                                               
issues.  On  slide 9, Enalytica copied the  DOR's revenue sources                                                               
to illustrate  LNG in oil terms.   Starting with an  oil price in                                                               
FY  15 of  $105/barrel (bbl),  removing the  midstream costs  for                                                               
transportation,  TAPS   tariff,  and  other  cost,   which  total                                                               
approximately  $10/bbl,  and   deducting  lease  expenditures  of                                                               
approximately  $46/bbl,  the  end  result is  a  $49/bbl  at  the                                                               
wellhead.   This  provides a  baseline  and the  next two  slides                                                               
consider how that will differ with gas.                                                                                         
3:54:21 PM                                                                                                                    
MR. TSAFOS  related that the table  remains the same.   Since gas                                                               
price  is  less  transparent  than  oil  and  pricing  varies  by                                                               
contract  and nation,  which  ranges from  $12-$17  for the  same                                                               
project,  the  gas price  will  likely  be  linked to  oil  since                                                               
pricing in  Asia is linked  to oil [slide  10].  The  Japan Crude                                                               
Cocktail  (JCC) or  the Japan  customs  cleared price  represents                                                               
essentially an average of the amount  Japan pays for its oil.  He                                                               
pointed out that JCC has essentially  been the same as the Alaska                                                               
North Slope (ANS) price.   Thus, he suggested members think about                                                               
LNG linked  to ANS.   Generally, gas  fetches less on  the market                                                               
than oil on a thermal  equivalency and historically, if the price                                                               
of gas goes higher than oil  customers stop using gas and turn to                                                               
oil so  oil has an  upper limit on the  price of gas  [slide 11].                                                               
The second line on the  slide relates to transportation, which is                                                               
higher since gas is more expensive  to transport than oil and gas                                                               
will  not be  regulated by  Federal Energy  Regulatory Commission                                                               
(FERC).   He related  that FERC  will regulate  the environmental                                                               
and the permitting,  but will not set the rate.   The tariff will                                                               
be highly  dependent on the  capital structure, or the  return on                                                               
equity,  or how  much debt-to-equity  is used.   Basically,  this                                                               
means  the tariff  is  highly subjective  and  therefore easy  to                                                               
argue about.                                                                                                                    
3:57:13 PM                                                                                                                    
MR.  TSAFOS turned  to slide  12, which  overlays the  LNG.   The                                                               
structure remains  the same,  but it  is no  longer about  ANS or                                                               
oil, but  represents gas.   The first line  on this slide  is $81                                                               
and represents  the idea of thermal  equivalency.  Oil may  be at                                                               
$100/bbl, but  due to the  thermal equivalency gas earns  less so                                                               
it is  discounted at  about 20  percent.   He offered  his belief                                                               
that this  wouldn't be  unreasonable in terms  of what  one might                                                               
expect  if  signing  a  contract  today.    The  next  line,  the                                                               
midstream, is  $66 per barrel of  oil equivalent (boe).   He said                                                               
$10-11 of midstream per thousand  cubic feet (mcf) means that the                                                               
gas comes out on a boe equivalent  basis.  Thus, gas is orders of                                                               
magnitude more  expensive to  transport, he  said.   The upstream                                                               
isn't necessarily high, in part,  since oil production is already                                                               
happening on the North Slope;  however, after subtracting $66 for                                                               
midstream, $6 for  upstream, one ends up with  basically a $9/boe                                                               
on the  North Slope.  Therefore,  the state can argue  whether to                                                               
tax the  $9/boe at  35 percent,  50 percent,  or 60  percent, but                                                               
multiplying  a small  number by  those  higher percentages  still                                                               
represents a  small number.   This illustrates the point  of this                                                               
slide,  which is  because the  midstream is  so important  and so                                                               
expensive,  the value  at  the wellhead  is  orders of  magnitude                                                               
smaller and lower than on the oil side of the equation.                                                                         
3:59:33 PM                                                                                                                    
MR. TSAFOS  turned to slide  13, entitled "INDICATIVE  LNG CHAIN:                                                               
$89/bbl ANS,"  noting the  only change is  dropping the  price of                                                               
ANS to $89/bbl  and the price at the North  Slope then equates to                                                               
zero  value.   Therefore, 35  percent multiplied  by zero  equals                                                               
zero, he concluded.                                                                                                             
MR. TSAFOS turned  to slide 14, entitled  "INDICATIVE: LNG CHAIN:                                                               
HIGHER  COSTS," at  12.2  percent in  costs  and/or tariffs  with                                                               
$100/bbl  oil still  wipes out  any production  tax value  so the                                                               
North Slope value is still zero, he said.                                                                                       
MR. TSAFOS turned  to slide 15, entitled  "IMPLICATIONS FOR STATE                                                               
OF ALASKA,"  to consider  the state's  position.   Certain things                                                               
become apparent.   First, it's important to obtain  a fair market                                                               
price  for  the  gas,  in  fact, as  close  as  possible  to  oil                                                               
equivalency.  So much of the  value is in the midstream, with the                                                               
upstream somewhat  secondary to the  midstream.  The  wellhead is                                                               
insufficient to drive the state's value.                                                                                        
4:01:10 PM                                                                                                                    
MR.  TSAFOS recalled  Representative Josephson  previously asking                                                               
about the $3.4 billion figure.   The bottom right figure on slide                                                               
15 lists $300 million in  revenue.  If the [legislature/state] is                                                               
considering taxing  that barrel at  the end,  it is a  much lower                                                               
value.    The  reason  for  this  is  that  similar  to  the  oil                                                               
structure,  the $66/bbl  represents the  producer's equity  - and                                                               
the state  has no equity  at midstream - in  a way, if  the state                                                               
doesn't own  a piece of  the upstream, but mostly  the midstream,                                                               
is that anything  that changes on the top line,  from $81 to $72,                                                               
the value  comes from the  state since it  went from $9  to zero.                                                               
The  idea of  alignment or  equity all  comes back  to this  core                                                               
concept:   There isn't enough  value necessarily at  the upstream                                                               
at these prices.   Obviously if oil prices were  boosted to $200,                                                               
it would represent a huge value  on the North Slope.  However, he                                                               
asked members  to think  about the  numerous arguments  the state                                                               
has  had on  the TAPS's  tariff  that in  2015 is  $6/boe and  to                                                               
consider what the argument [would  be if the tariff] was $66/boe.                                                               
He emphasized  this is where equity  comes in and instead  of the                                                               
state being at  the bottom of the table and  getting what is left                                                               
over after  costs are subtracted,  the state  gets to be  part of                                                               
these figures.   Consequently, the  state will obtain a  share of                                                               
the  $66/boe.   Therefore,  the  state  would  not be  a  passive                                                               
recipient at  the end, but  can also be a  participant throughout                                                               
the chain.   He concluded  that this  is how Enalytica  thinks of                                                               
project alignment as a means to resolve at the conceptual level.                                                                
4:04:03 PM                                                                                                                    
MR. MAYER  recapped that Mr. Tsafos  has laid out the  basic idea                                                               
of the  world as  it's envisioned  by the HOA.   He  reviewed the                                                               
midstream options  under the HOA  [slide 16].  In  this scenario,                                                               
the state would have RIK, with  25 percent interest in the "GTP &                                                               
Pipe" and LNG, and a  proportionate obligation to meet 25 percent                                                               
of the capital  expenditure (CAPEX & OPEX).  As  Mr. Tsafos says,                                                               
in that  world, the state has  an integrated project.   The state                                                               
has the  gas, owns everything the  gas goes through, sells  it at                                                               
the  other end,  and the  whole  question of  the tariff  becomes                                                               
relevant only to  instate sales of gas.  From  the perspective of                                                               
where the  state derives its  value, ultimately the state  has an                                                               
investment  in the  infrastructure  that takes  molecules of  gas                                                               
from the North Slope and sells them  as LNG into Asia.  The state                                                               
has costs  and revenues from the  LNG, but the whole  question of                                                               
the tariff  doesn't really matter  since it represents  the value                                                               
allocation across an entire project that the state owns.                                                                        
MR. MAYER  said the MOU takes  the basic vision and  considers it                                                               
differently  in  terms of  the  "GTP  &  Pipe".   It  essentially                                                               
recognizes  that  the  state  may not  have  the  full  financial                                                               
resources to  carry 25  percent equity  across the  entire chain.                                                               
The MOU  considers that  the state  would want  to enter  into an                                                               
agreement with TransCanada  Alaska Development Inc. (TransCanada)                                                               
to own all or  part of the "GTP & Pipe".   TransCanada would take                                                               
the state's full 25 percent  share, the producers would still own                                                               
75  percent, and  leave  the state  with the  full  share of  the                                                               
liquefaction  project.   The  MOU  provides  an option  to  repay                                                               
TransCanada for costs up to 40  percent.  The MOU recognizes that                                                               
this may  be an option  never exercised  in which case  the state                                                               
would not  have any  ownership of the  upstream or  pipeline, but                                                               
would still have  25 percent of the liquefaction  facility or the                                                               
state might exercise the 40 percent option.                                                                                     
4:08:28 PM                                                                                                                    
REPRESENTATIVE REINBOLD  asked for  further clarification  on the                                                               
MR.  MAYER responded  that if  the state  moves forward  with the                                                               
MOU, TransCanada would  cover the studies but the  state would be                                                               
required to repay the costs  of the Pre-FEED and FEED engineering                                                               
4:09:09 PM                                                                                                                    
REPRESENTATIVE  REINBOLD asked  whether the  state would  already                                                               
have paid "a chunk" of the costs.                                                                                               
MR. MAYER  answered that  the state would  already have  paid for                                                               
the engineering and design work on  a pipeline to the Lower 48 so                                                               
that work  remains intellectual  property.   Again, that  work is                                                               
not lost,  although some  is more relevant  to this  project than                                                               
others.  However,  he pointed out that the Alaska  LNG project is                                                               
an  enormous  $45-65  billion  project   with  several  years  of                                                               
engineering  work necessary  prior  to the  state  arriving at  a                                                               
point in which  it can seriously evaluate the  project and decide                                                               
if the  investment is a good  one or not.   This is not  like the                                                               
Alaska Gasline Inducement  Act (AGIA).  Instead,  the state would                                                               
be   a  commercial   participant  just   as  the   producers  and                                                               
TransCanada would  be, with  everyone bearing  its share  and the                                                               
risks since  the project may  ultimately not  be viable.   If the                                                               
MOU  path moves  forward then  TransCanada would  essentially pay                                                               
the  hundreds of  millions in  costs for  the "GTP  & Pipe".   It                                                               
would be holding  the state's share of  gas "GTP & Pipe".   If at                                                               
some point  the state decides to  exercise its option to  take 40                                                               
percent share, it  would reimburse TransCanada 40  percent of the                                                               
cost  plus  interest  at  an  agreed upon  rate  of  7.1  percent                                                               
4:11:59 PM                                                                                                                    
MR. MAYER said  that possibly the state will not  have any direct                                                               
equity in the GTP and the  pipeline, but it would have 25 percent                                                               
in the liquefaction.   Or perhaps the state might  end up with 10                                                               
percent  in  the  "GTP  &  Pipe".   The  state  would  hold  this                                                               
indirectly by  being shareholder of the  vehicle that TransCanada                                                               
used to own the pipeline and  the full 25 percent the state would                                                               
retain for  itself in  the liquefaction project.   He  framed the                                                               
question of whether  this is in the state's  interest by thinking                                                               
about a  few structures, although the  potential structures could                                                               
be numerous.                                                                                                                    
MR.  MAYER suggested  midstream options  [slide 17].   Thus  far,                                                               
midstream  has   referred  to  the   entire  "GTP  &   Pipe"  and                                                               
Liquefaction project, but  this slide limits the MOU  to the "GTP                                                               
&  Pipe"   and  examines  potential  structures.     The  state's                                                               
ownership could  be structured  as "GTP &  Pipe" solely  owned by                                                               
the producers,;  owned by the  producers and the  state together;                                                               
or  by the  producers, the  state,  and a  third party.   If  the                                                               
structure were  to include a  third party, it could  be leveraged                                                               
by AGIA  and TransCanada  or the state  could terminate  AGIA and                                                               
launch a bid  for a new third  party.  The path of  the MOU would                                                               
consist  of a  third party  being  involved and  the best  option                                                               
would be to  continue the relationship with TransCanada  on a new                                                               
footing,  a  more  purely  commercial  footing  rather  than  the                                                               
arrangement that existed under AGIA.                                                                                            
4:14:45 PM                                                                                                                    
REPRESENTATIVE  REINBOLD asked  for  a  timeline for  terminating                                                               
MR.  MAYER  responded  that  this  question  is  initially  being                                                               
decided this legislative session in  terms of the response to the                                                               
MOU and the  enabling legislation.  He explained that  the MOU is                                                               
fundamentally   an  agreement   that  relates   some  terms   for                                                               
commercial agreements  the state would sign  with TransCanada, in                                                               
particular, for the firm transportation  services agreement.  The                                                               
next step  would be for the  state to sit down  and negotiate the                                                               
details with  TransCanada consistent  with the  MOU.   This would                                                               
essentially happen in the next  year, such that the details would                                                               
go  from   the  guidelines  of   the  MOU  to   firm  contractual                                                               
commitments consistent with the MOU.   However, even once that is                                                               
done  it doesn't  necessarily commit  the state  to the  specific                                                               
future directions since the details in  the term sheet of the MOU                                                               
a  series   of  "off-ramps"  are  envisioned   in  which  various                                                               
termination  events are  discussed.   First, during  the Pre-FEED                                                               
process, I believe,  within 60 days, the state  can terminate the                                                               
arrangement or  a final investment  decision.  Thus, a  number of                                                               
off  ramps exist  with corresponding  costs  associated with  the                                                               
decisions,  which   consist  of  reimbursing   TransCanada,  with                                                               
interest for the  work completed thus far.  In  many ways the MOU                                                               
also provides more flexibility than  the current relationship the                                                               
state has with TransCanada through AGIA.                                                                                        
4:17:45 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON asked for  clarification on the exposure                                                               
of the  Alaska LNG's other  three participants' exposure  "if the                                                               
plug  gets  pulled," the  state  must  reimburse TransCanada  $90                                                               
million plus  7.1 percent prior to  FEED.  He wondered  what will                                                               
happen if the producers decide not to proceed.                                                                                  
MR. MAYER responded  that the important thing to bear  in mind is                                                               
that  the  fundamental framework  is  the  state's share  on  the                                                               
project as a  whole and the MOU envisions  that TransCanada would                                                               
carry the "GTP & Pipe" portion.   He said in that sense it is not                                                               
as if TransCanada will make  independent decisions on the project                                                               
as a  whole.  Instead,  TransCanada would simply be  carrying the                                                               
Pre-feed  and FEED  costs.    In terms  of  the  costs for  those                                                               
processes  it  is  up  to  all of  the  partners,  including  the                                                               
producers, to determine.   When the time comes to  make a serious                                                               
decision whether to proceed to  FEED and eventually, at the final                                                               
investment point, all of the  project partners will need to agree                                                               
to proceed.                                                                                                                     
4:19:41 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON said  that he will be asked  in April to                                                               
spend $90  million.  He  surmised it  may be the  best investment                                                               
the state has  made since 1973 when  Trans-Alaska Pipeline System                                                               
was signed; however, he wondered  what ExxonMobil Corporation, BP                                                               
Exploration (Alaska)  Inc., and ConocoPhillips Alaska,  Inc. will                                                               
be required  to pay.   He said he  has confidence that  the three                                                               
producers  would not  agree to  this unless  they were  confident                                                               
that Tokyo Electric  would be there for them,  or whichever Asian                                                               
buyer is  in place.   He said he'd like  to be certain  the three                                                               
producers are keeping up with the state's exposure.                                                                             
MR. TSAFOS answered  that the last two lines of  slide 7 show the                                                               
investment.   He said that everyone  will pay for their  share of                                                               
this  project.   The  state  would  have  20-25 percent  and  the                                                               
producers  will have  75 percent  of the  proposed project  since                                                               
they  will spend  75 percent  of the  project costs.   Throughout                                                               
this  process,  the  whole  idea  for  the  Pre-FEED,  FEED,  and                                                               
construction is  that everyone will  be paying their share.   The                                                               
state  would be  called upon  to invest  perhaps $90  million and                                                               
ExxonMobil  Corporation,   BP  Exploration  (Alaska)   Inc.,  and                                                               
ConocoPhillips   Alaska,  Inc.,   and   TransCanada  will   spend                                                               
proportionately.   He said, "By the  world of the HOA  you are on                                                               
the hook  for 25 percent  of whatever is  being spent -  that you                                                               
are a  part of - over  the next year and  a half."  The  MOU says                                                               
that TransCanada will  spend it for the state and  the state will                                                               
reimburse  TransCanada so  it's  a  slightly different  structure                                                               
than AGIA, in which the state  was giving money to TransCanada in                                                               
order to  get something  advanced.  In  this instance,  the state                                                               
will own a share of the project.                                                                                                
4:22:25 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON  asked if the oil  companies "pulled the                                                               
plug prior to  FEED" whether they would need to  explain to their                                                               
shareholders  that they  invested $100  million each  for naught.                                                               
He asked whether that would be an accurate statement.                                                                           
MR.  TSAFOS answered  yes.   He said  this happens  all the  time                                                               
since at any given time  oil companies pursue projects, engage in                                                               
exploration,  and  development on  projects  that  get stuck  and                                                               
don't  advance.   He said  that spending  $100 million  would not                                                               
likely require  much of an  explanation.  In terms  of alignment,                                                               
at the end of  the day, as Mr. Mayer said,  "Everyone has to say,                                                               
yes."   If someone gets  cold feet due  to the expense,  it means                                                               
the project has  slowed down or the companies decide  to get out.                                                               
Companies may just  buyout the share of any  company that decides                                                               
not to  invest; however,  the idea  of alignment  is that  at the                                                               
time period, the  state needs to make the big  decision and write                                                               
the  check for  billions of  dollars, which  is exactly  the same                                                               
time that  ExxonMobil Corporation, BP Exploration  (Alaska) Inc.,                                                               
and ConocoPhillips  Alaska, Inc. and perhaps  TransCanada's board                                                               
of  directors will  be giving  their authorizations.   Thus,  the                                                               
state is  spending money in  tandem with  the partners.   He said                                                               
one of the insurance policies the  state has is that the state is                                                               
spending  alongside the  oil companies,  and  while it  is not  a                                                               
guarantee that  the state  will make  a smart  decision, it  is a                                                               
guarantee  that  the  state  will make  a  decision,  similar  to                                                               
everyone else  since everyone  is in it  together.   He concluded                                                               
that that  represents the  idea of alignment,  which is  what the                                                               
ownership distribution does.                                                                                                    
4:24:59 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON understands  that there  are about  500                                                               
variables,  but from  the DOR's  presentation, one  might surmise                                                               
that with 30 years of natural  gas that the state would spend $10                                                               
billion and make $90 billion.   He concluded that is one possible                                                               
"take home"  from the DOR  commissioner's presentation.   He said                                                               
he  wondered what  he  was  missing since  it  looks  like a  "no                                                               
brainer" from that elementary level.                                                                                            
MR. MAYER indicated he'd need to  see a specific slide to respond                                                               
to  the exact  question;  however, ultimately  the  project as  a                                                               
whole is  a $45-50  billion project.   If  the state  forgets the                                                               
MOU, the state's  interest would be about 25 percent,  which is a                                                               
lot  of  money to  spend  upfront  for  a substantial  amount  of                                                               
annuity ranging from  $3-4 billion.  There  is always uncertainty                                                               
about  future revenue  streams  in  terms of  gas  prices so  the                                                               
decisions will need to be weighed  very carefully.  The impact of                                                               
TransCanada's  involvement is  to reduce  the upfront  investment                                                               
and   correspondingly  reduce   the  subsequent   revenue  stream                                                               
afterwards.  He suggested that  Representative Josephson may have                                                               
been  referring   to  earlier  slides  that   the  administration                                                               
presented  that  show  quite  a big  difference  in  the  upfront                                                               
spending and  relatively little difference  at the tail end.   He                                                               
wasn't sure what he was referring to as being a "no brainer."                                                                   
4:27:25 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON said the  slides seemed to indicate that                                                               
the state would spend $5-6  billion, leverage another few billion                                                               
dollars, but by 2023 or 2034 would  earn $3 billion a year for 30                                                               
MR.  TSAFOS indicated  that if  one abstracts  from the  specific                                                               
numbers, one  benefit of alignment is  that it gets the  state to                                                               
think like  an oil company.   That is part of  what oil companies                                                               
like about  LNG projects -  that as long  as one can  get through                                                               
the hump in  the beginning, and get the project  running, and not                                                               
subject  to people  blowing up  pipelines, it  is something  that                                                               
will pay  off over  a very  long time.   In a  way the  base case                                                               
scenario -  keep costs at this  level so the $65  billion doesn't                                                               
become $85 billion  is the attraction of the  LNG business, which                                                               
is that it  represents a huge investment upfront,  but "once it's                                                               
done it's a great long term business."                                                                                          
4:29:09 PM                                                                                                                    
MR. TSAFOS  said that is  the idea of  the long term  benefits of                                                               
the upfront investment.   The state gets more than  25 percent of                                                               
the value  in certain price  environments due to  property taxes,                                                               
which is  a slightly  disproportionate share,  but in  effect, it                                                               
sounds like a  good deal so long  as the state can  live with the                                                               
50 or 500 variables that can move  at any given time and can make                                                               
the overall project look better or worse in 10 years.                                                                           
MR. MAYER  added that the variables  are not just related  to the                                                               
upfront cost  but the $3.5  billion of revenue is  one projection                                                               
at one particular gas price and  what the revenue will be depends                                                               
on the  agreements that  are negotiated  for the  sale of  LNG as                                                               
well  as the  oil price  is at  the time.   The  figure could  be                                                               
higher or  lower and  a large  number of  variables that  mean it                                                               
could look like  a fantastic investment for the state  and end up                                                               
without the rate of return it thought it might at the onset.                                                                    
4:31:05 PM                                                                                                                    
MR. MAYER  said the state  doesn't know  what the costs  will be,                                                               
but  the Pre-FEED  work will  cost $400-$500  million and  if the                                                               
state has  a 25 percent share  of that the state's  portion would                                                               
be $80-$100 million, in particular if  it is a full 20-25 percent                                                               
investor throughout  the project [slide  16].  If the  state goes                                                               
with the MOU,  and the "GTP & Pipe" will  be done by TransCanada,                                                               
the state is  really saying it will bear $40-$50  million for the                                                               
LNG  [liquefaction]  and  TransCanada will  bear  another  $40-50                                                               
million for  the GTP  and the  pipeline.  In  2015, if  the state                                                               
would like  to exercise its  option and  call back 40  percent of                                                               
TransCanada's cost, the state would  repay TransCanada 40 percent                                                               
of the $40-50 million in expenses plus 7.1 percent interest.                                                                    
4:33:03 PM                                                                                                                    
MR.  MAYER said  that  gives a  more concrete  sense  of how  the                                                               
stage-gated process  works and  who is spending  what money.   He                                                               
said the  overall decision  to spend  money is  one in  which the                                                               
project as  a whole will make  based on what's been  done to date                                                               
and  deciding whether  it's worth  continuing  with the  process.                                                               
How might  one think through  whether the proposed MOU  meets the                                                               
state's criteria  might mean thinking  about the  critical things                                                               
the state  needs that  determine the state's  interest.   He said                                                               
Enalytica has talked about alignment,  the tariffs of elements in                                                               
the  midstream,  if the  state  is  building an  upstream  taxing                                                               
entity and  how quickly disputes  could arise and wipe  out value                                                               
to  the state.   Thus,  clearly minimizing  those disputes  about                                                               
where  value  is allocated,  and  being  indifferent about  where                                                               
value  is  allocated  or  having   the  same  interests  will  be                                                               
important to the  state.  The state has a  somewhat different set                                                               
of  interests  than  the  producers  when  considering  that  the                                                               
resource base is bigger than Prudhoe  Bay and Point Thomson.  The                                                               
large resources are estimated to be  35 trillion feet of gas, but                                                               
an  estimated 200  plus trillion  feet of  gas is  waiting to  be                                                               
found.   Thus,  from the  state's  perspective, it  is not  about                                                               
monetizing  existing  proven  North   Slope  gas,  but  is  about                                                               
building     infrastructure    that     will    enable     future                                                               
commercialization of  all of  the rest  of the  enormous resource                                                               
base.  Therefore, it is important  to ensure from the outset that                                                               
the  structure is  oriented toward  future  expansion.   Clearly,                                                               
this  is of  vital interest  to the  state.   Obviously, ensuring                                                               
that  in-state customers  can receive  gas from  the project  and                                                               
that the tariff on the pipeline and  GTP is as low as possible to                                                               
deliver   gas  at   the  lowest   price  is   clearly  important.                                                               
Additionally, it is  vital to have parties  involved with serious                                                               
execution  ability.    Finally,  if possible  it's  important  to                                                               
maintain  some degree  of momentum.   He  said that  in terms  of                                                               
previous work,  and in talking  to colleagues in  Washington D.C.                                                               
and elsewhere,  that it's important  that people not  think about                                                               
an  Alaska  gas  project  as something  that  never  happens  and                                                               
instead to  have worldwide  interest that  something is  about to                                                               
happen  in Alaska.   Thus  it seems  important to  understand the                                                               
cost  and benefit  in terms  of  continuity and  momentum and  in                                                               
terms of  time value  of money the  perception of  the investment                                                               
community  that  this  process  is one  that  continues  to  move                                                               
forward.  It's  also important to think about how  to weight cost                                                               
and benefit if the project is delayed.                                                                                          
4:37:21 PM                                                                                                                    
MR. MAYER  suggested keeping in  mind that framework  to consider                                                               
possible options [slide 18].  He  asked what that would look like                                                               
if it was a producer only pipeline  and how it would meet some of                                                               
these interests.   He answered that a producer only  "GTP & Pipe"                                                               
seems  to have  a  number  of weaknesses.    First,  in terms  of                                                               
alignment,  it comes  back  to the  potential  for disputes  over                                                               
allocation  of value  since  the  state would  need  to know  the                                                               
tariff.  This  means a significant potential  for disputes exists                                                               
in terms of  value allocated, the tariff rate, how  it is set and                                                               
the  optimal level.   It  isn't  clear, in  terms of  third-party                                                               
expansion, a 100  percent producer "GTP & Pipe"  since clearly it                                                               
would  represent  a big  investment  to  monetize that  resource.                                                               
These are not companies that  make money by moving other people's                                                               
gas  through their  infrastructure, but  are companies  that make                                                               
money  by selling  their  resource and  it is  not  clear that  a                                                               
producer-only  pipeline  would  have  a  compelling  interest  in                                                               
pursuing  expansion.   There may  be times  when expansion  is in                                                               
their interests, but  it's not necessarily guaranteed.   In terms                                                               
of  in-state  deliveries,  the  question  of  alignment  and  the                                                               
uncertainty  over  tariff becomes  an  uncertainty  for in  state                                                               
deliveries of gas.  The three  producers all have a strong proven                                                               
ability to  execute enormous  projects like this.   On  the other                                                               
hand,  midstream,  not  in  terms of  the  unregulated  world  of                                                               
liquefaction terminals, but the  sort of regulatory monopoly view                                                               
of  pipeline and  pipeline infrastructure  is  becoming less  and                                                               
less a core focus of the majors.                                                                                                
MR.  MAYER said  that in  terms  of continuity  and momentum  the                                                               
questions that must  be weighed are Alaska's ways  of exiting the                                                               
state's   commitments  under   AGIA   and  the   cost  of   those                                                               
commitments, in terms of arbitration  and litigation, or the cost                                                               
to end that  relationship without finding an  additional means to                                                               
continue with TransCanada.                                                                                                      
4:40:13 PM                                                                                                                    
MR. MAYER turned  to the heads of agreement [slide  19].  He said                                                               
the HOA fixes  a lot of problems  for the producer of  the "GTP &                                                               
Pipe" since it  creates a strong alignment  between the producers                                                               
and the State of Alaska.   And the question of the tariff becomes                                                               
irrelevant  except  for  in-state  deliveries of  gas  to  Alaska                                                               
residents, but in terms of the bulk  of the gas being sold, it is                                                               
one big integrated  investment that is about taking  gas from the                                                               
North Slope and  selling it to Asia and where  value is allocated                                                               
across that  chain ceases to  be important.   In terms  of third-                                                               
party expansion, as a shareholder  and key partner, the state has                                                               
a  clear  interest  in  future   expansion  with  the  producers.                                                               
However,  if other  parties aren't  interested  in expansion,  it                                                               
means  the state  will go  it alone  in a  future expansion.   He                                                               
asked  what the  arrangements  will be,  noting  the state  could                                                               
agree  on the  basic principles,  as stated  in the  HOA, but  in                                                               
terms of finding  new companies who want to take  up capacity and                                                               
having the  ability to execute  on building the new  capacity the                                                               
state is  left going alone.   He said  there is a  key difference                                                               
between  "GTP &  Pipe" and  the  liquefaction.   While there  are                                                               
certainly  issues involved  in expanding  liquefaction facilities                                                               
and who gets  the benefits, in general, a  series of liquefaction                                                               
trains exist  and if one wants  to expand the overall  project, a                                                               
new liquefaction train is built  and each train can have separate                                                               
ownership.   Thus,  expansion, in  that sense  can be  relatively                                                               
modular.    The  owners  of  the  new  train  can  be  completely                                                               
different than owners  of the previous train and that  can all be                                                               
worked  out.   However,  ultimately,  in  the foreseeable  future                                                               
there will only  be one pipe and everyone must  agree how the gas                                                               
will flow through  the pipeline.  Therefore, the  question of the                                                               
existing  ownership and  how that  works becomes  very important.                                                               
The fundamental question becomes whether  the state wants to be a                                                               
pipeline company or  are there benefits to  having a professional                                                               
pipeline involved, in particular, when  it comes to expansion, to                                                               
be  an anchor  partner carrying  the future  expansion.   He said                                                               
that  execution is  fine for  existing projects  since the  three                                                               
producers have very strong capabilities  in that regard, but in a                                                               
future expansion it could be the  State of Alaska alone or with a                                                               
new partner, and  the state may not want to  be in that position.                                                               
The questions around the continuity  and momentum are the same in                                                               
terms of what's involved in terminating the AGIA relationship.                                                                  
4:44:04 PM                                                                                                                    
MR. MAYER  turned to considering  third party  involvement [slide                                                               
20].   He said if  one takes the  path of  the MOU, and  it makes                                                               
sense to leverage  the work that has been done  under AGIA and to                                                               
transition it to  a more commercial relationship.   He asked what                                                               
that  would  look   like.    He  answered  that   it  would  mean                                                               
maintaining the  strong alignment  between the producers  and the                                                               
state.   It  that instance,  the state  wouldn't worry  about the                                                               
tariffs on the liquefaction project  or moving value to different                                                               
places.  The  one important part becomes when a  third party owns                                                               
the GTP  and the pipeline,  is that if  a tariff is  involved the                                                               
question  becomes,  "How reasonable  is  the  tariff?"   It  then                                                               
becomes a fixed  component with essentially a  guaranteed rate of                                                               
return that could  essentially increase some of the  risk for the                                                               
state.    In particular  it  becomes  important to  evaluate  how                                                               
competitive the tariff  is and who else could do  this and if the                                                               
state could get  a better deal.   In terms of the  details of the                                                               
term sheet  in the  MOU, the  12 percent return  on equity  and 5                                                               
percent return on debt - although  those figures could move - but                                                               
most importantly  the agreement means  a 75/25 split at  lease in                                                               
the second year  of the initial capacity of the  pipeline.  Thus,                                                               
it means getting  to a level of around 7  percent of the weighted                                                               
cost of  capital used in  determining the tariff.   Then suddenly                                                               
considering the North American regulated  pipelines and U.S. FERC                                                               
regulated  pipelines,  it  appears  to be  competitive  and  well                                                               
within the  norm.   The 75/25 split  in debt-to-equity  implies a                                                               
high  level of  leverage  and  overall the  tariff  is much  more                                                               
sensitive  to  that than  to  things  like  the overall  cost  of                                                               
equity.   Thus, it  becomes clear  that this  is well  within the                                                               
norm and  is quite  competitive and the  question becomes  if the                                                               
state  had  a  new  bidding process,  whether  it  could  produce                                                               
something better or lower and  the answered is that ultimately we                                                               
don't know.                                                                                                                     
4:46:53 PM                                                                                                                    
REPRESENTATIVE HERRON asked whether  TransCanada is the strongest                                                               
partner  Alaska   can  find  since  TransCanada   would  want  to                                                               
encourage expansion.  He asked  him to score TransCanada in terms                                                               
of the producers' expansion bias.                                                                                               
MR. MAYER responded by asking members  to look at slide 21, other                                                               
potential parties.   It isn't about who the partner  is but about                                                               
the  timeframe.   He  said  a number  of  pipeline companies  are                                                               
capable  companies,   perhaps  five,   but  all   have  execution                                                               
capability  and  an  interest  in  expansion.    The  fundamental                                                               
difference, ensuring the project as  a whole, going with the MOU,                                                               
is more  a question of how  long the process takes  and what else                                                               
happens in  the meantime since  there will  be a series  of other                                                               
agreements being signed.  One  question is whether there is value                                                               
in having an  experienced pipeline player with  a strong interest                                                               
in  expansion  at  the  table  since all  of  the  other  project                                                               
agreements are being signed and  going through a bidding process.                                                               
He said it  could affect how long that bidding  process lasts and                                                               
whether it affects  the timelines for the rest of  the project if                                                               
core   commercial  agreements   are  being   signed  without   an                                                               
experienced pipeline player coming in  until later.  He said that                                                               
could be a cost in terms  of negotiation terms by not having that                                                               
interest represented as solidly as it could be.                                                                                 
4:49:52 PM                                                                                                                    
MR. MAYER,  with respect  to in-state  deliveries, said  that the                                                               
state  can  use its  equity-entitled  capacity  to carry  gas  to                                                               
market  at lower  cost.   The only  question becomes  whether the                                                               
tariff is  the lowest achievable  and if  the state could  have a                                                               
lower one through the competitive  process.  Ultimately the state                                                               
may  not know,  or  if  the state  goes  through the  competitive                                                               
process, the state may find it doesn't  have as good a deal as it                                                               
has on  the table now  since many "unknowables" exist.   Clearly,                                                               
execution  capability exists  to  undertake  this large,  complex                                                               
project.   The  arrangement  of interests  provides an  appealing                                                               
orientation  since  the  pipeline   company  brings  strong  pro-                                                               
expansion  interests  to the  project,  but  the three  producers                                                               
bring strong cost-controls because they  do not make money from a                                                               
guaranteed tariff,  they make their  money by selling  their gas.                                                               
Thus the producers  will be very concerned with  the overall cost                                                               
of pipeline project.  In  terms of continuity and momentum [slide                                                               
21], the  state would maintain  and accelerate all the  work that                                                               
has been done  to date and the interests that  have arisen around                                                               
it [slide 21].                                                                                                                  
4:51:40 PM                                                                                                                    
MR. MAYER  compared this to  launching a bid and  the fundamental                                                               
question becomes the tariff rate,  which could be higher or could                                                               
be lower.  Additionally, the  cost terms of investor interest and                                                               
time value  of the  money could occur  and low  investor interest                                                               
could  slow down  the  project.   In  the  event  the project  is                                                               
delayed a year  or more it will affect the  project cost in terms                                                               
of  present  value  of  the   future  investment  to  the  state.                                                               
Further,  uncertainty about  the  possibility  of litigation  and                                                               
loss  of  work  done  to  date can  occur.    Fundamentally,  the                                                               
legislature will  need to weigh  the cost of these  things versus                                                               
the probability  that one could  get a  better deal, with  all of                                                               
the "unknowables" involved in that process.                                                                                     
MR. MAYER  summarized key questions  the state needs  to consider                                                               
carefully  [slide  23].    First, the  state  needs  to  consider                                                               
compensation  the state  might have  to pay  to terminate  Alaska                                                               
Gasline Inducement Act through other  means and what intellectual                                                               
property  the Alaska  LNG will  retain.   Second, the  state also                                                               
needs to  consider if the  HOA process  will slow down  the state                                                               
and the  producers if uncertainty, arbitration,  or litigation in                                                               
terms of the "GTP & Pipe" occurs.                                                                                               
4:53:06 PM                                                                                                                    
MR. MAYER said  the state must also consider the  odds that a new                                                               
selection process will deliver better  terms than those available                                                               
today.   That, in  turn, somewhat  depends on  how representative                                                               
the  AGIA process  is of  the industry's  interest in  an Alaskan                                                               
pipeline  and  how  many  bidders  the  state  could  potentially                                                               
achieve with an  open process.  Finally, the  state must consider                                                               
whether a new tariff offsets  absence from the negotiating table,                                                               
reduced momentum,  and the cost  to dissolve AGIA.   He concluded                                                               
that these  are the  things Enalytica  believes the  state should                                                               
consider when viewing the Memorandum of Understanding.                                                                          
4:54:47 PM                                                                                                                    
There being no  further business before the  committee, the House                                                               
Labor and  Commerce Standing Committee  meeting was  adjourned at                                                               
4:54 p.m.                                                                                                                       

Document Name Date/Time Subjects
enalytica Presentation to HL&C 02-26-2014.pdf HL&C 2/26/2014 3:15:00 PM
Presentation to HL&C 2-26-14