Legislature(2007 - 2008)BARNES 124
04/12/2007 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB177 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 177 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 12, 2007
1:02 p.m.
MEMBERS PRESENT
Representative Carl Gatto, Co-Chair
Representative Craig Johnson, Co-Chair
Representative Vic Kohring
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Bryce Edgmon
Representative David Guttenberg
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Anna Fairclough
COMMITTEE CALENDAR
HOUSE BILL NO. 177
"An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline Inducement
Act coordinator; making conforming amendments; and providing for
an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 177
SHORT TITLE: NATURAL GAS PIPELINE PROJECT
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
03/05/07 (H) READ THE FIRST TIME - REFERRALS
03/05/07 (H) O&G, RES, FIN
03/06/07 (H) O&G AT 3:00 PM BARNES 124
03/06/07 (H) -- MEETING CANCELED --
03/08/07 (H) O&G AT 3:00 PM BARNES 124
03/08/07 (H) -- MEETING CANCELED --
03/13/07 (H) O&G AT 3:30 PM HOUSE FINANCE 519
03/13/07 (H) Heard & Held
03/13/07 (H) MINUTE(O&G)
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03/15/07 (H) Heard & Held
03/15/07 (H) MINUTE(O&G)
03/19/07 (H) O&G AT 8:30 AM CAPITOL 106
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03/20/07 (H) Heard & Held
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03/21/07 (H) O&G AT 5:30 PM SENATE FINANCE 532
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03/24/07 (H) O&G AT 1:00 PM SENATE FINANCE 532
03/24/07 (H) -- Public Testimony --
03/26/07 (H) O&G AT 8:30 AM CAPITOL 106
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03/28/07 (H) O&G AT 7:30 AM CAPITOL 106
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03/28/07 (H) O&G AT 8:30 AM CAPITOL 106
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03/31/07 (H) -- MEETING CANCELED --
04/02/07 (H) O&G AT 8:30 AM CAPITOL 106
04/02/07 (H) Heard & Held
04/02/07 (H) MINUTE(O&G)
04/03/07 (H) O&G AT 3:00 PM BARNES 124
04/03/07 (H) Moved CSHB 177(O&G) Out of Committee
04/03/07 (H) MINUTE(O&G)
04/04/07 (H) O&G RPT CS(O&G) NT 3DP 2NR 2AM
04/04/07 (H) DP: RAMRAS, DOOGAN, OLSON
04/04/07 (H) NR: SAMUELS, KAWASAKI
04/04/07 (H) AM: DAHLSTROM, KOHRING
04/04/07 (H) O&G AT 8:30 AM CAPITOL 106
04/04/07 (H) -- MEETING CANCELED --
04/05/07 (H) O&G AT 3:00 PM BARNES 124
04/05/07 (H) -- MEETING CANCELED --
04/10/07 (H) RES AT 1:00 PM BARNES 124
04/10/07 (H) Heard & Held
04/10/07 (H) MINUTE(RES)
04/11/07 (H) RES AT 1:00 PM BARNES 124
04/11/07 (H) Heard & Held
04/11/07 (H) MINUTE(RES)
04/12/07 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
MARTY MASSEY, U.S. Joint Interest Manager
Exxon Mobil Corporation ("ExxonMobil")
Houston, Texas
POSITION STATEMENT: Presented testimony and answered questions
regarding CSHB 177(O&G).
ACTION NARRATIVE
CO-CHAIR CARL GATTO called the House Resources Standing
Committee meeting to order at 1:02:58 PM. Representatives
Gatto, Edgmon, Kohring, Wilson, Seaton, and Roses were present
at the call to order. Representatives Johnson, Guttenberg, and
Kawasaki arrived as the meeting was in progress. Representative
Fairclough was also in attendance.
HB 177-NATURAL GAS PIPELINE PROJECT
1:03:12 PM
CO-CHAIR GATTO announced that the only order of business would
be HOUSE BILL NO. 177, "An Act relating to the Alaska Gasline
Inducement Act; establishing the Alaska Gasline Inducement Act
matching contribution fund; providing for an Alaska Gasline
Inducement Act coordinator; making conforming amendments; and
providing for an effective date." [Before the committee was
CSHB 177(O&G).]
1:04:03 PM
CO-CHAIR GATTO stated for the record that Mr. Massey is able to
personally sign an agreement should one be reached between Exxon
Mobil Corporation and the state.
MARTY MASSEY, U.S. Joint Interest Manager, Exxon Mobil
Corporation ("ExxonMobil"), said that this is correct.
1:04:52 PM
MR. MASSEY stated that he has held his position as U.S. Joint
Interest Manager for ExxonMobil since November 2001 and that he
is responsible for the commercialization of ExxonMobil's gas
resources in Alaska. He presented his testimony from a written
statement [original punctuation provided]:
ExxonMobil has been in Alaska for over 50 years and
has been a key player in Alaska's oil industry
development. We hold the largest working interest at
Prudhoe Bay (36.4%) and our current net production in
Alaska is approximately 150,000 barrels per day.
We have benefited from our involvement in the State of
Alaska, and we believe that Alaska has benefited from
this long-term relationship as well.
1:05:39 PM
Commercializing Alaska's North Slope gas will allow us
to continue this mutually beneficial relationship for
another 50 years or more. Let me emphasize that
ExxonMobil wants a successful gas pipeline project and
we want to move it forward.
The Alaska Gas Pipeline project is important to
Alaska, to our nation, and to ExxonMobil. The Project
has the potential to generate billions of dollars in
revenues for the State of Alaska, the U.S. federal
government, and Canada, and could provide a stable and
secure source of clean energy for Alaska and North
America for decades to come. For ExxonMobil, the
project has the potential to add over 1 billion cubic
feet per day (EM share) of gas sales, which would be
more than a 10% increase to our current worldwide
daily gas production. Given the significant impact
this project could have on our business, we strongly
support efforts to advance a pipeline project and we
are ready to work with Governor Palin and her cabinet
and with the Legislature to move the project forward.
1:06:52 PM
As an illustration of our commitment, EM has spent
more than $180 million studying ways to commercialize
Alaska gas. Since the 1970's we have evaluated LNG,
gas to liquids and gas pipeline alternatives. Based
on these studies we have determined that a Producer
gas pipeline project will result in the best value for
the State, the Producers and the nation. It is
important for me to say ExxonMobil is aligned with the
Governor, the legislature and the people of Alaska
regarding the overall objective-we are committed to
moving the Alaska Gas pipeline project forward.
1:07:36 PM
ExxonMobil embraces the concept of competition all
over the world and is ready to participate in a fair
market based competition. We understand the
overarching goal of [the Alaska Gasline Inducement Act
(AGIA)] is to create open competition but due to the
prescribed conditions included in AGIA it will not
achieve this goal. A prescriptive bidding process will
not allow the flexibility needed for individual
applicants to weigh the risks associated with this
basin opening mega-project and propose what is
necessary to manage these risks.
It is important that AGIA allow applicants to define
how they could achieve the State's objectives rather
than prescribing specific requirements that must be
met. To ensure the best result, AGIA should establish
broad key objectives and allow applicants flexibility
in meeting those objectives and in defining the
requirements that are necessary to make the project
commercially viable. If you were to amend AGIA to
make it objective driven, it would result in an open
competition, maximizing the number of applicants and
allowing those applicants to propose innovative
solutions.
As such, we suggest AGIA be modified to establish an
objective driven process - define the state's broad
objectives, request proposals as to how applicants
intend to meet or not meet those objectives, evaluate
the proposals and then select the one that best serves
Alaska's needs. If none meet the State's overall
objectives then you can always reject them or opt to
negotiate with the party that most closely meets your
needs.
1:09:34 PM
CO-CHAIR GATTO asked what is the issue that ExxonMobil has with
the 20 objectives that are included in AGIA.
MR. MASSEY advised that the broad, key objectives described by
AGIA should relate to: making sure that the project delivers
the most value for the state; making sure that gas is provided
for Alaskans; making sure that people can access the pipe so
that explorers can get their gas down the pipeline; and making
sure that Alaskans will have the opportunity for the jobs that
the pipeline creates. Then, he continued, the state should
allow the applicants to lay out how they intend to meet those
objectives.
1:10:47 PM
CO-CHAIR GATTO surmised that ExxonMobil would like to see the
remaining 15 objectives deleted and that then it would submit a
proposal.
MR. MASSEY said yes.
1:11:01 PM
REPRESENTATIVE SEATON stated his understanding that there is
nothing that prevents ExxonMobil from coming forward right now
with a proposal to build a pipeline under those conditions. He
asked why this has not happened.
MR. MASSEY responded that ExxonMobil has been asked to
participate in an open, competitive process which has been laid
out in AGIA and that ExxonMobil has not been asked to provide a
proposal that meets its needs. He said that ExxonMobil did do
that once before in what is referred to as the old fiscal
contract. The process that the administration has laid out is
an open, transparent, competitive process which ExxonMobil is
ready to participate in as long as it is allowed to participate
in such a way that the company can describe what is necessary to
make the project commercially viable, and to meet the state's
objectives. Mr. Massey stated that it would not be in
ExxonMobil's best interest to participate outside of the open
competitive process when that is the direction that the state is
trying to go.
1:14:14 PM
CO-CHAIR GATTO commented that the AGIA bill was introduced on
April 4, 2007, and that prior to that date anyone could have
come forth with a plan for moving gas. He inquired whether the
introduction of new gas is somehow detrimental to ExxonMobil's
ability to sell existing gas in the open market at a higher
price. Is it an advantage or disadvantage for ExxonMobil to
move forward at this time, he queried.
MR. MASSEY responded that it is an advantage for ExxonMobil to
move the project forward when it is commercially viable.
1:15:39 PM
CO-CHAIR GATTO asked at what point would ExxonMobil determine
whether it is commercially viable.
MR. MASSEY stated that commercial viability is determined by
looking at a combination of different factors: the ability to
execute the project, the ability to mitigate the risk associated
with the execution, and the range of project costs versus the
anticipated range of future gas prices. If the project is
judged to be viable, then the company would move forward.
1:17:20 PM
CO-CHAIR GATTO inquired as to who gathers the information and
makes the decision on whether or not to move forward - the
corporation's board of directors, a group of other people, or
one person.
MR. MASSEY responded that a set of people within the company
would make the decision together after weighing and discussing
the information provided by all of the experts in each of the
different aforementioned categories.
1:18:27 PM
CO-CHAIR GATTO acknowledged the difficulty in making such a
decision.
1:18:46 PM
MR. MASSEY continued with his presentation:
To understand why it is important to use broad
objectives as opposed to prescribing specific
requirements it is helpful to review project risks and
issues surrounding its development that will have to
be addressed by an applicant.
Because there is a perception this is "simply" a gas
treating / gas pipeline project, the tendency exists
for many to underestimate the size, magnitude, and
risks associated with this undertaking. The Alaska
Gas Pipeline Project is a world-scale undertaking with
significant risks. In fact, the Project would be the
largest private investment in North America -
significantly larger than most "model" worldwide oil
and gas "mega" projects. There is not really another
project that compares.
Because of this size, many factors impact commercial
viability.
1:19:40 PM
First there is cost: Our previous estimate of $20
billion [in 2001 dollars] is now substantially higher.
Since 2001, steel prices have nearly doubled.
Industry and construction labor costs are experiencing
hyperinflation. In addition, world-wide mega-projects
are placing pressure on pricing and availability of
global materials, and skilled manpower.
Next there is gas price: Despite recent increases,
natural gas prices remain highly volatile. The price
of natural gas before 2000 was less than currently
estimated gas treating and transportation costs.
1:20:17 PM
Finally, there are many other risks: These include
cost overruns, schedule delays, construction
conditions, and regulatory and State fiscal
uncertainties. It is also important to note that
project investments would have to be made over a
period of 10 or more years before gas flows down the
pipeline and is sold at the marketplace.
With size comes complexity, and an even greater
premium on getting the design concept, contracting and
marketing plans right…and then executing these plans
efficiently and effectively. Most importantly, size
also amplifies the consequences of poor execution. If
a mistake is made on this project it would cost us all
dearly.
The State of Alaska cannot anticipate how individual
applicants will view these risks or how they may
address them. Establishing a set of rigid prescribed
terms will not allow the flexibility needed for
individual applicants to weigh and manage those risks.
1:21:16 PM
It is also important to understand how pipelines are
financed which is a key reason why AGIA should allow
flexibility in proposing upstream terms.
Commercially-sound oil, gas, and pipeline projects
traditionally have been able to obtain financing if
they have strong sponsors with proven track records
and the financial strength to both provide sponsor
equity and to backstop key project commitments. For
the Alaska gas pipeline project, key project
commitments take the form of firm, long-term gas
transportation commitments. Firm transportation
commitments are binding obligations made by companies
to pay for the cost of reserving a quantity of gas
capacity as shippers on a pipeline over a specified
period of time, typically many years. These
commitments are made during an "open season", which,
according to FERC Order 2005 for the Alaska gas
pipeline, is a period of at least 90 days during which
any and all prospective gas shippers can make binding
commitments for a specific volume of transportation
capacity.
Financial institutions generally require substantial,
long-term, firm transportation commitments to provide
funding for a gas pipeline project. These commitments
must be provided by creditworthy shippers. In this
case, the shippers will be the Producers, and,
directly or indirectly, the State or the State's
shipper. These firm transportation commitments are
substantial, in the tens of billions of dollars and
must be paid whether the shipper making those
commitments actually transports gas through its
reserved capacity. The shipper is also required to pay
this commitment regardless of the price of gas in the
market place.
1:22:59 PM
Pipeline investors use these firm transportation
commitments from shippers to show creditors they have
capacity confirmed over a sufficient duration to
secure financing and must rely on the financial
strength of the companies backing the transportation
commitments to secure project financing. Thus, the
development costs and the associated over-run risk are
ultimately borne by the shipper via this commitment.
In other words, shippers must make long-term ship or
pay transportation commitments and agree to pay
transportation and treating rates that are based on
the ultimate cost of the pipeline and treating
facilities. The only information known in advance of
making these commitments will be a projection based on
each project entity's initial estimate of costs.
1:24:11 PM
For that reason, the parties taking the risks need to
be able to manage those risks. The Producers, as
shippers, cannot make firm transportation commitments
during an open season unless they are confident the
gas pipeline project can be built cost effectively and
operated on a long-term, commercially viable basis,
including being competitive with other sources of gas
supply. This is especially true for a project of this
magnitude.
The existing prescriptive terms will preclude
leaseholders from being able to make a conforming
proposal which would deny the state the opportunity to
even consider terms from the parties who hold the
largest stake in the project's successful development.
1:24:52 PM
Let me now talk about the importance of alignment
between the State and the Producers and the benefits
of a Producer project.
Maximizing the value to the State of Alaska and the
resource holders means selecting the right design
concept for this mega-project and then executing the
project to deliver the lowest possible cost.
On a mega-project of this size and magnitude, project
construction and operating experience should be a
significant consideration. Only a limited number of
companies have demonstrated the capabilities and
financial strength to effectively participate in and
manage world-scale mega-projects.
1:25:29 PM
CO-CHAIR GATTO inquired whether Mr. Massey believed that
ExxonMobil is the only one in Alaska that can do this.
MR. MASSEY noted that ExxonMobil is a large resource owner and
also holds the largest discovered gas resource. He said that he
thinks the State of Alaska is very fortunate because it is
ExxonMobil that will put up the necessary firm transportation
commitment (FT) along with the other large stakeholders, "BP and
ConocoPhillips". He said that ExxonMobil cannot do the project
by itself, that it will take all three companies.
1:26:21 PM
CO-CHAIR GATTO asked whether ExxonMobil would or could do the
project independently.
MR. MASSEY stated that it will take ExxonMobil, BP,
ConocoPhillips, and the State of Alaska. "Until we are all
aligned on the project it just is not going to happen," he said.
1:26:56 PM
MR. MASSEY continued with his presentation:
The Producers have mega-project experience on numerous
projects world-wide and have demonstrated success in
meeting project objectives. For example, ExxonMobil
operates in nearly 200 countries and territories and
on every continent except Antarctica. We are the
world's largest non-government producer of both oil
and natural gas. ExxonMobil's global project
development company is unique within industry. This
global development company leads the industry in
project cost and schedule performance. Nearly 90% of
ExxonMobil projects with costs greater than $1 billion
are delivered within 15% of estimated costs at the
time of project funding and nearly 80% of those were
delivered within 15% of the funding schedule.
ExxonMobil's superior performance was independently
validated in a report (dated September 21, 2005)
published by Sanford C. Bernstein and Co. On the
topic of project delays, the report stated "ExxonMobil
came out on top of this analysis, with the lowest
slippage rates, despite undertaking some of the
largest projects. We believe this to be a direct
result of its highly competent internal development
company, which assumes full responsibility for
monitoring a new project from idea to profit."
Combining our capability with BP and ConocoPhillips
will provide the best chance of delivering a
successful project.
1:28:16 PM
The Producers also have Arctic experience in Alaska
and throughout the world. ExxonMobil's arctic
experience is extensive - over 40 years - with
developments in multiple types of arctic environments.
Our Arctic offshore activity started in 1966 with the
installation of the ice resistant Granite Point
platform in Alaska's Cook Inlet, which is still
producing oil. In the 1970's we provided a
significant amount of research and engineering for the
Prudhoe Bay project, where our completion designs for
permafrost were of key importance to the project. We
also developed the combined hydraulic flow model and
thermal simulator on which the design of TAPS was
based. In 1984, we installed the Concrete Island
Drilling System (CIDS) to drill exploration wells in
the Alaska Beaufort Sea. This was the first mobile
drilling platform to operate in the ice covered waters
of the Beaufort. In addition to our Arctic experience
in Alaska, ExxonMobil also has extensive Arctic
experience in Canada, developing the Norman Wells
Field in the Mackenzie River area near the Arctic
Circle. Offshore Newfoundland, we completed the
Hibernia platform, the first and only iceberg
resistant offshore structure in the world. In Russia,
we recently started up the Sakhalin 1 development
which involved an offshore drilling platform where
CIDS was reused and renamed Orlan, an onshore drill
site where we have set new industry limits for
extended reach drilling, an onshore oil, and gas plant
with a capacity of 250,000 barrels per day, and
purpose built tankers which are used year-round. All
of this work is being done in an arctic and
seismically-active area. At Sakhalin we are currently
producing 250,000 barrels of oil per day. I hope you
see from these examples that large projects with
significant complexity are what we do and we are
extremely qualified to take on this work.
These successful efforts were the result of a long-
term commitment to technology development which has
played an important role in the advancement of oil and
gas development in Alaska. ExxonMobil believes
innovation is the key to meeting the world's energy
challenges. Technology is the lifeblood of our
industry, and it always has been. We are the leader
in our industry in technology development. In 2006,
we spent $730 million on technology development and we
have spent more than $3 billion since 2002.
1:30:38 PM
In addition, ExxonMobil has demonstrated world-class
leadership in safety, health, and environmental
performance. ExxonMobil is a leader in operating
efficiency and a pacesetter in operating safety. Our
total recordable incident rates for employees and
contractors are substantially below the average of US
Petroleum Industry benchmark of participating American
Petroleum Institute companies. We believe a company's
commitment to the highest standards of safety, health
and environmental care manifests itself in superior
performance in all aspects of its operations.
1:31:09 PM
In addition to our operational excellence, ExxonMobil
has the financial strength to make this mega-project a
reality. ExxonMobil has consistently maintained one
of the strongest financial positions of any company in
the world. We are one of just a few public companies
to maintain the highest credit rating from Standard
and Poor's (AAA) and Moody's (Aaa), and we have done
so for each of the last 88 years. Our unparalleled
access to financial resources gives us the flexibility
to pursue opportunities worldwide throughout the
economic cycle with the knowledge that they can be
financed. Host governments recognize this strength
and its importance as they look to develop their
resources and economies. As an example of that
strength, ExxonMobil's project financing experience
exceeds $30 billion in value for recently completed
and ongoing activities. Our efficient management of
large scale project financings is a critical piece in
the overall success of ExxonMobil's project
implementation record.
1:32:12 PM
It is important to remember that the Alaska gas
pipeline project is a basin-opening project that will
benefit the State and the oil and gas industry in
Alaska. Basin-opening projects throughout the world
have progressed and been successful when there is
alignment between the host government and the
leaseholders. The Producers and the State both want a
pipeline project to commercialize the known ANS gas
resources and open the basin to gas exploration. So,
at a very high level we are aligned.
We believe a Producer gas pipeline project will result
in maximum value to the State and the Producers. The
reason is the Producers and the State have maximum
incentive to control costs. Low capital and operating
costs, which result in lower treating and
transportation costs, and access to premium market
price, result in higher netback value on gas. It
should be noted that the State will receive the
majority of its revenue from the value of gas sales
via revenue received under its lease royalty
agreements and from production taxes, which are valued
based on the netback received from the gas.
Third-party owners do not share the same incentives in
that they actually benefit from increased capital
costs.
Based on the demand for workers that this project will
generate, Alaskans are obviously key to successful
project execution. Both the State and the Producers
want Alaskans to benefit from the many job
opportunities that will exist. When you consider
carefully the options available, a Producer pipeline
will provide maximum value to the State of Alaska.
We believe that financial strength, experience and the
ability to get the job done should be critical
components of any evaluation of proposals.
1:34:03 PM
For us to progress the project and mitigate its
inherent risks, we will need some things from the
State. Let me discuss the importance of predictable
and durable fiscal terms for the upstream
participants. Because of the nature and magnitude of
the risks associated with this project - tens of
billions of dollars of financial commitments,
unprecedented cost and scope, potential for
construction delays, as well as the inevitable risks
associated with the commodity price of gas - fiscal
terms that are predictable and durable are necessary.
This is a common thread for all of our mega-project
investments in basin opening developments. In all
such cases, we are willing to take geologic risks, we
are willing to take cost risks, and we are willing to
take commodity price risks, but we cannot take the
risk of fiscal terms changing. Let me expand on this
important concept further. The first two risks,
geologic and cost risk are risks for which we have
developed an industry leading expertise to manage.
This is what we do day after day at EM. Market risk
is inevitable in a commodity business such as oil and
gas and we manage that by attempting to ensure that we
deliver those products into the highest value market.
Fiscal risk, however, is of a completely different
nature and wholly outside of our control. We must
have agreements that will allow us to develop this
mega-project under predictable and durable terms, so
that we can make an adequate investment decision. If
fiscal terms can be changed in the future, then we are
not able to make a well founded investment decision on
behalf of our shareholders.
The Alaska Gas Pipeline Project will require massive
investments to be made over a period of many years
before any revenue is generated from those
investments. As a result, increases in taxes on oil
and gas related activities during the life of the
project could significantly impact the commercial
viability of the project and offset the benefits of
taking on a project of this magnitude. Because fiscal
terms could be modified under the proposed AGIA
legislation, it does not provide the fiscal stability
necessary to ensure a commercially viable project.
1:36:25 PM
CO-CHAIR GATTO inquired whether a legislated 10 year certainty
on tax rates is sufficient for ExxonMobil, provided that it is
ruled legally permissible.
MR. MASSEY said that his understanding of AGIA is that the
proposed 10 years is on the gas production tax. However, he
said, there are more forms of "take" within the State of Alaska
than just the gas production tax. Locking in one piece of the
take while leaving open all the other pieces of take still does
not provide any fiscal stability because it can just be changed
in another form of the take. There needs to be an agreement
between the state and the producers as to how the revenue
generated from the project will be shared over the life of the
project. Until that is known, ExxonMobil cannot make a good
investment decision. Mr. Massey said that he does not know how
to run the economics if he does not know what the terms are
going to be, and that he will have to assume that they will go
up. On a mega-project of $20-30 billion in magnitude, this is
too big of a risk to take, he said.
1:38:23 PM
CO-CHAIR GATTO requested Mr. Massey to give some examples of
other jurisdictions where the certainty that ExxonMobil is
asking for - longer than 10 years and maybe the life of the
project - already exists.
MR. MASSEY referred Co-Chair Gatto to ExxonMobil's interim
fiscal finding that was done for the previous effort. The
finding includes an analysis of approximately 50 projects across
the world where these types of arrangements have been made.
Especially on mega-projects of this magnitude, he stressed, it
is not unusual to see terms much longer than 35 years and none
of those projects really compare to this project.
1:39:27 PM
CO-CHAIR GATTO stated that he has seen the document and reviewed
the names of the places where terms of certainty were provided.
However, he noted, many of these places are politically unstable
so that any [contractual] certainty will only last until the
next military coup, in which case the project is jeopardized in
its entirety. He requested examples of long-term tax stability
agreements in Europe and places that are considered politically
stable.
MR. MASSEY responded that whether this project was in the United
Kingdom (UK) or Texas, ExxonMobil would still require this same
sort of understanding because it is a $20-$30 billion mega-
project, not one well. Additionally, he remarked, there is no
project that is even comparable in the UK.
1:40:58 PM
CO-CHAIR GATTO commented that there would seem to be a benefit
to knowing that the reserves are proven.
MR. MASSEY acknowledged that this obviously helps a lot.
However, he argued, the estimated 35 trillion cubic feet (tcf)
of discovered resource is not enough. He said that 50 tcf is
needed because of the 35-year period of the project. While this
is not of too much concern based on the estimates of North Slope
gas, finding more gas to keep the pipeline full is still an
issue.
1:42:15 PM
REPRESENTATIVE SEATON asked if the concern about the gas
production tax exemption, as written on page 21 of CSHB
177(O&G), is that the tax will be increased between the time the
license is issued and the open season. He inquired whether
ExxonMobil would be more comfortable with fixing the rate at the
time of licensing and having this rate continue until 10 years
after the open season. Is it this certainty that you want, he
asked, or is it a negotiation on rate that you are wanting.
MR. MASSEY acknowledged that the words "lock in the rate" make
some people nervous. Whether it is income tax, production tax,
or property tax, he said, the rate can change over time as long
as ExxonMobil knows what the rate will be at the start of the
project. The rate can be flat, declining, or increasing as long
as the agreed-upon rate results in a commercially viable
project. He reiterated that he cannot run the economics and
make a sound decision today because the rates on all of the
taxes can change.
1:44:56 PM
REPRESENTATIVE SEATON inquired if he is correct in understanding
that Mr. Massey's answer means that ExxonMobil's needs would be
satisfied if the tax section on page 21 were to provide the
certainty of a tax rate that will continue from the time of
licensing, the 3 years between licensing and open season, and
then for 10 years after the close of the open season.
MR. MASSEY replied that 10 years is inadequate for a project of
this magnitude, that the term must be for the life of the
project so that ExxonMobil can run the economics. He reiterated
that the production tax rate is only one form of take. If this
is the model for the system that is to be used, then the take
for income, property, and other taxes must also be defined under
this model so that he can run the economics.
1:47:13 PM
REPRESENTATIVE SEATON asked if what Mr. Massey is saying is that
ExxonMobil will not participate in building the pipeline as a
producer if locking in the tax rates for the life of the project
is ruled unconstitutional.
MR. MASSEY offered his opinion that there is little question
that the constitutionality issue will ultimately be resolved in
court. He pointed out that the Stranded Gas Development Act
(SGDA) had a 35-year term in the belief that it was
constitutional based upon legal opinions received by two
administrations. He said that ExxonMobil's view is that it will
be ruled constitutional to agree on what the revenue share is
going to be over the term of the project. However, if it is
ruled unconstitutional the court can be asked to provide advice
in its ruling as to what needs to be done to make it work and
adjustments can be made that are based upon the advice.
1:49:08 PM
REPRESENTATIVE ROSES voiced his concern about going to court
over the constitutionality issue because it will cause a
substantial time delay during which nothing moves forward. He
suggested that a way around the tax rate issue might be for the
state to receive a percentage share in the volume of product
instead of charging a tax. He asked whether this could be used
as a measurable quantity for determining the financial viability
of the project.
MR. MASSEY pointed out that in its contract [under the
previously proposed SGDA] ExxonMobil had committed to continue
the project up to a certain level of spending even if there was
a judicial challenge, although he could not recall the amount.
He stressed that ExxonMobil was ready to risk a significant sum
of money while that judicial challenge was going on because of
its belief that the tax rate would be ruled constitutional. He
said that in his view, Representative Roses is right in terms of
a way to share the risk because if the state takes its revenue
in a share of the gas, then that eliminates a lot of the other
issues.
1:52:01 PM
REPRESENTATIVE GUTTENBERG asked whether ExxonMobil would
withdraw from the contract should the 10 year production tax
exemption be found unconstitutional.
MR. MASSEY replied that if the courts decide that the tax
structure of AGIA is not constitutional, ExxonMobil would have
to re-visit the issue to determine if it would be possible to
craft a constitutional tax provision. "We would not be able to
go forward until we understand what the deal is," he said.
1:53:28 PM
REPRESENTATIVE GUTTENBERG asked if these were conditions that
ExxonMobil would like built into the contract.
MR. MASSEY answered yes.
1:53:39 PM
REPRESENTATIVE GUTTENBERG asked what would happen if the state
was unable to provide a level of fiscal certainty satisfactory
to ExxonMobil.
MR. MASSEY responded that he believes the court would provide
guidance as to how to make it constitutional. He reiterated
that he believes the tax exemption provision is constitutional
and that ExxonMobil will be ready to spend funds and go forward
during any constitutional challenge.
1:54:12 PM
CO-CHAIR GATTO read, in response to a prior comment, the names
of countries, and noted that he did not see any European
countries on the list. He opined that no countries on the list
were equivalent to a United States or Alaskan operation.
1:55:13 PM
REPRESENTATIVE ROSES requested further detail on the need for
fiscal certainty, noting that in business lenders may require
that a lease exceed the life of a loan.
MR. MASSEY responded that lenders will closely examine any deal,
but noted that in a "deal of this magnitude" lenders will
require the full backing of ExxonMobil, whether the gas flows or
not. He opined that a consideration should be whether the
company has the financial strength to provide that backing.
1:57:21 PM
REPRESENTATIVE ROSES asked whether there had been any prior
discussion of an equity split based on the volume of the gas.
MR. MASSEY replied that is "exactly what we did for the majority
of the take." The prior approach had the state take and be
responsible for its share of the royalty and tax gas. The state
would then receive the benefits from the sale of that gas, he
explained.
1:58:07 PM
CO-CHAIR GATTO asked if "you inked your name on that agreement."
MR. MASSEY answered that ExxonMobil had been ready to do so.
1:58:15 PM
CO-CHAIR GATTO put forth for consideration:
If we looked today at the value of the gas,
almost $8 and the tax at 22 and one-half percent, and
the royalty, and figured out that that equaled 25
percent of the value of the gas and said tell you what
-- Why don't we become a one-quarter, three quarter
partner. That's as simple a contract as anyone could
come up with. It would end taxes, it would end all
the uncertainty except for the price, but then we
would all suffer equally or be blessed equally.
He asked whether the aforementioned scenario was something
ExxonMobil would consider.
MR. MASSEY said "where do we sign?" He went on to say that the
actual percentage share in any partnership arrangement would
need to be considered. He opined that the aforementioned
concept is one that would allow the state and ExxonMobil to work
together to minimize the risk associated with the project.
1:59:35 PM
REPRESENTATIVE ROSES clarified that he does not support the
state owning a part of the pipeline. Instead, he suggested that
it might be possible to establish fiscal certainty downstream if
the state took its share of the gas in-kind. He did not suggest
that the state share the expense of building the pipeline.
2:00:22 PM
CO-CHAIR GATTO commented that the tariff is an extremely
important part of the value of the gas. He opined that the
state may want to own a piece of the pipeline. He offered his
belief that the tariff provides consistent income, whereas the
income from the gas varies depending on the price of gas.
2:01:15 PM
MR. MASSEY responded to a question about the $500 million state
contribution proposed in AGIA by stating that he approves of the
amendments made to allow individual applicants to propose how
they would propose to use the $500 million. He described that
change as consistent with his belief that AGIA should be made
less prescriptive so that the applicants have more leeway to
describe how they propose to address different aspects of
commercial viability. He said that the $500 million "is not a
big deal" to ExxonMobil and offered that if the state is going
to put money into the project, it should be a participant. He
advocated that joint ownership may align the partners to execute
the project.
2:04:54 PM
MR. MASSEY continued with his presentation:
Development of a predictable and durable fiscal
framework means that the terms agreed between the
Producers and the State recognize the magnitude and
risks associated with the project; balance State and
Producer needs; and provide for the calculation of
total State take in a transparent and predictable
manner.
2:05:42 PM
AGIA should allow market participants to put forward
their best proposal on what is required to make the
project viable, thereby creating a competitive process
that will allow the State the opportunity to consider
those proposals that have the best chance of actually
delivering on the promise of an Alaska gas pipeline.
I would like to now give some specific feedback on
AGIA which is based on the conclusions and principles
I've mentioned. I will also outline some additional
thoughts on how AGIA should be modified to provide the
best chance of a successful result. For example,
alignment between the State and the leaseholders is
essential to a basin opening project of this
magnitude. Therefore, establishing the right approach
going forward is the most important activity for the
project at this time. It is important that AGIA bring
together the upstream and the midstream and provide
for an integrated proposal. Let me expand on this
point. The upstream and midstream at some point in
time will have to come together. The reason is simple
- the upstream pays for the midstream. When I say
upstream I mean the revenue generated from sale of the
gas and liquids from the pipeline project. To be able
to calculate the revenue from the upstream we must
have clarity on the taxes and royalty from our oil and
gas operations and the taxes and royalties must be set
at a level that makes the project viable. In order to
ensure a viable project from the outset, we believe
this must be done at the beginning. At a minimum, any
proposal should demonstrate how a successful open
season would be achieved.
2:06:58 PM
As I discussed previously, with regard to upstream
terms, the proposed upstream inducements would require
significant modification to ensure a commercially
viable project is obtained. It would be better to
leave that issue open for now and allow an applicant
to make a proposal to address those terms.
AGIA also prescribes activities that must be completed
within a specific timeframe or date certain. Setting
arbitrary target dates is not consistent with good
project management practices. Further, milestones are
not necessary if the project is commercially viable.
The Producers' builder will progress the project at
the maximum prudent pace, consistent with the industry
proven "gate" process for project development.
2:07:39 PM
In general, AGIA lacks specifics on key fiscal terms
and other requirements. To address these gaps, AGIA
gives commissioners broad authority to adopt
additional requirements and establish regulations.
Not knowing the requirements now creates significant
uncertainty.
Finally, because of the complexity and risk associated
with this project, the parties must have an efficient
and impartial means of handling disagreements when
they arise. We believe project related agreements
should provide for binding neutral arbitration as the
mechanism for resolving disputes. Binding neutral
arbitration is widely utilized in U.S. and
international commercial agreements and is not a new
concept with the State of Alaska. Arbitration is the
method used to resolve disputes under the State's
Royalty Settlement Agreements. In addition, Alaska
courts have recognized a strong public policy in favor
of arbitration.
2:08:34 PM
CO-CHAIR GATTO said that in his experience, arbitration can be a
slow process. He asked whether binding arbitration would apply
to project labor agreements.
MR. MASSEY replied that ExxonMobil proposes that binding neutral
arbitration apply to the relationship between the producers and
the state. In response to a question, he agreed that the
arbitration proposed by ExxonMobil would follow commonly
accepted procedures whereby each side picks an arbitrator, and
the two arbitrators pick a third arbitrator.
2:09:23 PM
REPRESENTATIVE GUTTENBERG asked if the producers use binding
arbitration for disputes between themselves.
MR. MASSEY replied that the "our agreements govern how we make
decisions," such as voting. He said the producers have not had
a dispute which has required legal or other proceedings. He put
forth that the parties have agreed that they need to work
towards arbitration should there be a major disagreement among
themselves. He responded to a question by stating that in the
past 30 years, the producers have been able to work out
disputes.
2:10:28 PM
CO-CHAIR GATTO asked what type of arbitration was in existence
at the time of the Exxon Valdez tanker incident [1989].
MR. MASSEY opined the issues there were handled through the
courts.
CO-CHAIR GATTO noted that the aforementioned litigation has
"taken a lifetime," and opined that binding arbitration may be a
much quicker dispute resolution procedure.
MR. MASSEY agreed that binding arbitration is a more efficient
process for handling disputes.
2:11:23 PM
MR. MASSEY continued with his presentation:
We also note that the House Oil & Gas Committee and
the Senate Resources Committee made a number of
amendments to AGIA. While substantial work needs to
be done to make AGIA truly objective, several of the
proposed changes moved in the right direction,
including making the state's entire capital
contribution a bid variable, beefing up evaluation
criteria, recognizing the need to include terms in a
contract and requiring legislative approval of any
license award. Unfortunately, steps were also taken
that will likely limit the number of potential bidders
by eliminating any confidentiality protection for a
licensee's proprietary and trade secret data and
imposing new prescriptive terms such as requiring any
bidder to forego its legal rights to challenge an
improper award. What we have at this stage is an AGIA
bill that remains too prescriptive to solicit the
quality market based bids necessary to move the
project forward.
2:12:28 PM
In closing, I would like to reiterate that ExxonMobil
is committed to moving the gas pipeline project
forward. Our company possesses the financial strength
and project experience required to make this project a
success. We are ready to work with the Administration
and the Legislature to establish a framework that
recognizes the integrated nature of the project and
mitigates the risks I've discussed to allow the
project to progress. We would suggest AGIA be amended
to include a broad objective driven framework that
sets out what the State wants to achieve. AGIA should
allow each applicant to propose how best to meet those
objectives and to identify what is required from the
State to advance the project. This process will
secure more viable applications, create more
competition and afford the State the opportunity to
secure the most value. We are ready to participate in
a competitive, open, and transparent process under the
approach I've outlined.
Thank you for your attention and for the opportunity
to address this important topic today. I look forward
to addressing your questions.
2:13:34 PM
REPRESENTATIVE ROSES asked for more clarification of the
"objective driven" concepts referred to above, noting that many
issues discussed appeared to be objective. He asked whether
compliance with Regulatory Commission of Alaska (RCA)
requirements is an objective issue.
MR. MASSEY replied that ExxonMobil believes the project will be
regulated by FERC and RCA will not have a role.
2:14:28 PM
REPRESENTATIVE ROSES asked whether "access to market capacity"
is an issue in terms of the desire for an "objective driven
document."
MR. MASSEY suggested that the applicant should be allowed to
decide how it will assess market capacity. He suggested that
the applicant may be able to come up with an approach preferable
to a mandated biennial review of market issues.
2:15:47 PM
CO-CHAIR GATTO asked whether ExxonMobil would object to review
of market factors such as cost and demand every two years to
possibly make adjustments so that as much gas can be produced as
is reasonable under the circumstances.
MR. MASSEY responded that pipelines are expanded frequently, and
that pipeline companies work with suppliers and shippers
regarding expansion mechanics and funding. He reminded the
committee that FERC oversight applies in these situations, and
that any parties can go to FERC. He opined that the issue of
expansion should be left to the applicant to provide in its
proposal. The state could then review that aspect of the
proposal just like other terms.
2:18:48 PM
REPRESENTATIVE SEATON said he is trying to ascertain the answer
-- Is ExxonMobil willing to have an assessment every two years
of whether there are other parties who want to ship gas down the
pipeline?
MR. MASSEY asked that his comment not be misinterpreted. His
suggestion is that the applicant be allowed to make its proposal
in this area. He noted that an applicant may propose that
market factors are reviewed far more frequently than every two
years.
REPRESENTATIVE SEATON noted that currently AGIA proposes a
review "at least" every two years" [AS 43.90.130(5)].
2:20:14 PM
REPRESENTATIVE ROSES reiterated his desire to determine which
application factors are objective driven and which are not. He
offered his belief that a requirement for review every two years
is objective driven, regardless of whether two years is the
appropriate number or not.
MR. MASSEY replied that the objective for the state is to ensure
that the pipeline could be expanded. It should be left to the
applicants to describe the process they propose to ensure
expansion, he suggested.
2:21:37 PM
REPRESENTATIVE ROSES noted that requirement number six [AS
43.90.130(6)] requires the applicant to commit to expand the
proposed project in reasonable engineering increments with
commercially reasonable terms. He asked whether it is in the
best interests of the pipeline owner to always build in an
expansion capability, therefore that term does not need to be
legislated.
MR. MASSEY stated he believes that the aforementioned
characterization is correct.
2:22:29 PM
REPRESENTATIVE ROSES asked whether the witness considered the
terms [regarding pipeline expansion] to be objective driven.
MR. MASSEY replied no.
2:22:3 PM
REPRESENTATIVE ROSES asked about AS 43.90.130(7) which requires
an applicant to commit to "propose and support recovery of
mainline capacity expansion costs," which he characterized as
limiting the roll-in costs to not exceed 15 percent "above the
initial maximum recourse rates from the North Slope to the
project's downstream terminus ..." He asked whether the witness
considered this "an objective driven statement."
MR. MASSEY replied that he does not.
2:23:04 PM
REPRESENTATIVE ROSES asked whether this requirement could be re-
structured to be "objective driven."
MR. MASSEY responded that obviously it is very important for the
state to understand how each applicant would propose to deal
with pipeline expansion. However, he stated his confidence that
the business community "knows how to do these things." He said
that given the state's interest in this area, every applicant
should be required to describe in detail how it proposes to
treat issues related to future expansion.
2:24:34 PM
REPRESENTATIVE GUTTENBERG asked whether it is a reasonable
choice for the state to require applicants to describe their
plans for future expansion and exploration.
MR. MASSEY said he did not intend to imply that the state's
interest in this area was unreasonable. However he reiterated
his preference that the applicant be allowed to describe its
approach to future expansion and exploration. He went on to
opine that under the Alaska Natural Gas Pipeline Act ("ANGPA"),
the United States Congress struck what it determined was the
proper balance between encouraging initial investment and
encouraging exploration and future expansion. He emphasized
that basin opening projects require alignment between the state
and the producers. He opined it most likely that the producers
will build the project because that approach will provide
maximum benefit to the state. He said that Congress gave FERC
unprecedented abilities to mandate a FERC-mandated expansion to
benefit explorers. Therefore, to some extent this issue has
been dealt with and delegated to the right agency, he opined.
2:2707 PM
CO-CHAIR GATTO noted that exploration for gas may allow for the
discovery of additional oil resources, which would benefit the
state. He sought clarification as to whether FERC mandates
future expansion, or whether it is simply the decision maker in
this area.
MR. MASSEY replied that "you will not have any trouble"
attracting additional explorers once the gas pipeline is in
operation, and indicated ExxonMobil would "be a part of that
effort." He emphasized that under federal law, FERC has the
unprecedented right to "mandate an expansion to benefit
explorers."
2:28:34 PM
REPRESENTATIVE GUTTENBERG asked whether ExxonMobil was currently
in litigation with FERC regarding provisions which would mandate
design changes to meet open seasons.
MR. MASSEY reminded the committee that ANGPA was effective in
2004. The issue of FERC's ability to mandate a design change
after the pipeline builder has planned and invested substantial
sums is currently in litigation, he explained. He said
ExxonMobil has no problem with FERC mandated expansion, but
would like some clarity on the design change issue.
2:30:58 PM
REPRESENTATIVE WILSON asked for clarification as to why
ExxonMobil objects to the inclusion of items in the application
that the witness has indicated will be covered by the
applicants, such as the commitment to expand the pipeline.
MR. MASSEY suggested that applicants be allowed to propose how
they intend to deal with expansion rather than describing it in
legislation. He indicated that some items should be in
legislation, but others should be left to the applicant to
propose. He suggested that the state simply describe its
requirement that explorers need access to the pipeline, and let
the applicants propose how they would meet that requirement.
REPRESENTATIVE WILSON expressed some uncertainty regarding the
aforementioned answer.
2:33:22 PM
REPRESENTATIVE ROSES sought to clarify matters by summarizing
the witness' point as stating it would be in the state's best
interest if AGIA was not as prescriptive regarding issues of
expansion, but rather allowed the applicants more flexibility to
describe their plans for pipeline expansion.
MR. MASSEY agreed with the aforementioned summarization.
2:35:06 PM
REPRESENTATIVE WILSON noted her question concerned the
requirements in proposed AS 43.90.130(5) and (6).
2:35:18 PM
REPRESENTATIVE ROSES referred to AS 43.90.130(7) and asked
whether requirements regarding the limitation of expansion costs
to no more than 15 percent above the initial maximum recourse
rates is an encumbrance to applicants.
MR. MASSEY replied yes. The issue of how potential future
shippers may access initial capacity and future expansion
capacity should be administered by FERC for all elements of the
project in the United States. He offered his belief that
shippers, being the producers, should not be required to
subsidize other expansion gas-holders at 115 percent of initial
maximum rates. He described this as potentially costing the
initial shippers an additional $500 to $800 million a year. He
characterized this as a subsidy to the expansion shipper, and
claimed that ExxonMobil "is not in the business of subsidizing
our creditors." He suggested that the applicants be allowed to
suggest what is necessary to achieve an acceptable expansion.
2:37:16 PM
CO-CHAIR GATTO referenced the possibility that ExxonMobil could
be the primary beneficiary of a rolled-in rate in some
situations. Additionally, rolled-in rates initially "drop
everybody's rates," he said. He asked whether it was to
ExxonMobil's advantage to incorporate "these rules that say
rolled-in rates are really good things."
MR. MASSEY replied that ExxonMobil proposes removing any sort of
mandates regarding expansion costs and suggested that the
businesses resolve these issues at the time. He characterized
incremental rates as rolled-in rates. He cautioned that
mandates could harm the future economic benefits to the parties.
He emphasized that the parties should be allowed to come to a
business arrangement, and that one party not have more leverage
than another. He offered that FERC would be able to resolve
disputes should the parties not come to an agreement.
The committee took an at ease from 2:40:55 PM to 2:49:48 PM.
2:50:25 PM
REPRESENTATIVE SEATON questioned how the state's setting forth
minimum requirements regarding certain aspects of the pipeline
constrains applicants from putting forth a better offer to be
evaluated by the state under the six different criteria in AGIA.
MR. MASSEY responded that what ExxonMobil is proposing that AGIA
be amended to remove prescriptive provisions, and to instead
describe the state's broad objectives. The applicants will then
propose how they will meet the broad objectives.
REPRESENTATIVE SEATON noted that the state may have certain
minimum requirements, and suggested it is important to set forth
minimum requirements so applicants have some notice and clarity
regarding what must be addressed.
2:54:30 PM
MR. MASSEY said that the "must-haves" set forth in AGIA give
potential applicants an indication of what the state would like
addressed. He opined that it is difficult to discuss these
requirements in isolation, but offered that a preferable
approach would allow more flexibility as applicants may want to
propose terms more beneficial in one area, but will be penalized
or rejected if they do not meet the requirements in another
area. An overly prescriptive approach may foreclose the state
from considering options that actually have more value to the
state, he opined. He offered that AGIA has provided helpful
information to potential applicants regarding the state's
objectives, but that a more flexible approach will allow the
state to receive maximum benefits.
2:56:18 PM
REPRESENTATIVE SEATON noted that applicants could propose more
generous terms. He asked whether the state should make clear
that there may be certain minimum requirements, such as a review
of market capacity and queried as to whether the applicants
would like knowledge of those minimums.
MR. MASSEY noted that it can be difficult to assess hypothetical
situations, but agreed that they offer some guidance for purpose
of discussion. He offered that they can be used to describe the
difficulties of a prescriptive approach.
2:57:42 PM
CO-CHAIR GATTO reminded members that AGIA is currently just a
proposal, and the stakeholders may have the ability to influence
its final provisions.
MR. MASSEY responded that if the administration was willing to
seriously consider and discuss what is necessary to go forward,
ExxonMobil would be willing to do so. He stated that as of now
the administration has set forth a particular process that
requires amendments before ExxonMobil could make a conforming
bid. He said that as currently written AGIA does not result in
a commercially viable project, therefore ExxonMobil could not
make a conforming bid.
2:59:10 PM
CO-CHAIR GATTO opined that committee members are interested in
determining possible necessary amendments. He suggested that
ExxonMobil has the ability to put forth suggestions to the
administration.
MR. MASSEY replied that if the administration was willing to
consider a proposal, ExxonMobil would provide one. However, he
said that it "is not the approach they have taken."
3:00:45 PM
REPRESENTATIVE ROSES asked about whether AS 43.90.130(8)
regarding a North Slope gas treatment plant (GTP) sets forth an
objective driven criteria.
MR. MASSEY replied that a gas treatment plant has to be dealt
with and should be part of an applicant's proposal. He
suggested that provisions regarding valuation of existing
facilities should be left to the applicant to describe. He
responded to further inquiry by indicating that although the GTP
could be considered an integral part of the project, he has
concerns about the provisions establishing the rate and net book
value of the GTP.
3:02:39 PM
REPRESENTATIVE ROSES asked about possible changes to this part
of AGIA.
MR. MASSEY replied the applicant should be allowed to describe
how it intends to roll-in assets to determine net book value of
the GTP.
3:03:30 PM
REPRESENTATIVE ROSES asked whether AS 43.90.130(9) regarding the
percentage and dollar amount that will define the level of the
state's contribution is an objective driven criteria.
MR. MASSEY responded that the state contribution provision
should be left entirely up to the applicant to propose, noting
that the applicant may not even want a contribution, or may like
to see some state ownership.
CO-CHAIR GATTO asked if amending the language to read "the
applicant shall determine the extent to which the state may
contribute a percentage of the project cost" would be
preferable.
MR. MASSEY responded that such a change would be reasonable.
3:05:06 PM
REPRESENTATIVE ROSES asked whether AS 43.90.130(10) regarding
rates for the project and the GTP is an objective driven
criteria.
MR. MASSEY replied that the applicant should propose how it
proposes to structure the tariff, but he expressed disagreement
with AGIA's mandate of not less than 70 percent debt. He said
that the applicant should be able to determine how it wants to
propose the rate structure. He indicated he understands that as
proposed the capital structure must be "not less than 70 percent
debt," but suggested that although an applicant could "not do it
unless it is 60, but they give you something else that you
value, therefore you ... would want to hear that."
3:06:12 PM
CO-CHAIR GATTO suggested that the administration put that
provision in to help control the cost of the pipeline and to
keep the tariff at a rate where everyone is "making good money."
He suggested that the 70 to 30 ratio is designed to meet that
goal, and that the administration may be unwilling to alter this
proportion. He asked whether the witness would characterize
this requirement as a "deal killer."
MR. MASSEY responded that in its last proposal, ExxonMobil hoped
to achieve an 80 percent debt ratio. He reiterated that
applicants should have flexibility to determine how they propose
to meet the state's objectives. He suggested that by picking 70
percent, the state may miss an opportunity to "get something
that works better for you."
3:07:38 PM
CO-CHAIR GATTO referred to a chart and offered that the three
North Slope producers have a higher rate of return in activities
that do not involve pipeline construction. Based on this
history, he asked why the producers would want to hold more than
30 percent of a pipeline as it may reduce their rate of return.
MR. MASSEY responded that ExxonMobil would like to own the
percent of the project that matches its percent of the through-
put so that "the amount of gas we have going through equals the
amount of pipe." He went on to say that in a basin opening
project, the resource owner and the lease holders must be
aligned before the project goes forward. He said that
worldwide, the lease holders take the lead in basin opening
projects because the leaseholder is the main beneficiary.
3:10:20 PM
REPRESENTATIVE ROSES asked whether AS 43.90.130(11) regarding
the management of cost overruns is an objective driven criteria.
MR. MASSEY responded yes.
3:10:38 PM
REPRESENTATIVE ROSES asked whether AS 43.90.130(12) requiring a
minimum of five delivery points is an objective driven criteria.
MR. MASSEY suggested the applicant be allowed to propose how it
plans to propose access to the pipeline for in-state deliveries.
CO-CHAIR GATTO suggested that this requirement is a political
problem, not a monetary problem, as state residents desire
natural gas for in-state delivery.
MR. MASSEY reiterated that this requirement should be left to
the applicant to describe how it intends to handle in-state gas
access.
3:12:24 PM
REPRESENTATIVE ROSES suggested it is important for the state to
specify some minimums to avoid costly change orders.
MR. MASSEY said that off-take points do not cost a lot of money,
but if the state absolutely has to have five, it should so
state.
3:14:17 PM
REPRESENTATIVE ROSES asked for the witness' opinion as to AS
43.90.130(13) regarding in-state transportation services.
MR. MASSEY opined that how to manage in-state transportation
services should be part of the applicant's proposal.
3:14:42 PM
REPRESENTATIVE ROSES asked about AS 43.90.130(14) regarding
local headquarters.
MR. MASSEY replied that the applicant should be allowed to
explain how it will manage the project, and opined that
obviously there will be Alaska offices to manage the project.
3:15:16 PM
REPRESENTATIVE ROSES asked whether AS 43.90.130(15) regarding
local hire would be considered an objective driven criteria.
MR. MASSEY suggested that the state should propose a broad
objective to allow an applicant to explain how it intends to use
Alaskans on the pipeline project. He suggested that state would
like to see more than a commitment to local hire, and would
benefit from a fuller explanation of employment issues.
3:16:26 PM
REPRESENTATIVE ROSES asked whether there was concern over the
possibility that AS 43.90.130(15) could limit the applicant's
ability to hire workers if it could not find in-state workers at
a reasonable cost.
MR. MASSEY replied that obviously the project is going to have
to be cost competitive. Furthermore, employees must be
qualified to meet the needs of the project. He noted that this
project will provide excellent opportunities for Alaskans, and
that the language should be broadened so that the applicant
provides more details as to how it intends to hire Alaskans.
REPRESENTATIVE ROSES summarized that the witness is suggesting
the applicants be required to provide a general statement
regarding local hire qualifications and implementation.
MR. MASSEY agreed with the aforementioned summarization.
3:19:42 PM
REPRESENTATIVE ROSES asked about AS 43.90.130(16) regarding the
waiver of the right to appeal.
3:19:55 PM
MR. MASSEY said that section 16 removes an applicant's ability
to challenge whether the award was done correctly. He opined
that would limit the number of applicants rather than open the
process up to great competition.
CO-CHAIR GATTO asked whether the limitation on the ability to
appeal would keep ExxonMobil from submitting an application.
3:20:53 PM
MR. MASSEY replied that ExxonMobil will consider the total AGIA
bill once it is "all put together" to determine how to proceed.
For this particular item, he indicated he would prefer it not be
in the bill. He went on to say that ExxonMobil will likely be
able to put a competitive bid forward, and is supportive of the
competitive process. He offered his opinion that AGIA in its
current form "does not deliver a commercially viable project, so
I can't play today the way it is written."
3:21:34 PM
REPRESENTATIVE ROSES stated that if the open season was held
first, the state would know how much gas the producers would be
wiling to commit to the project so that the pipeline could be
sized to the project. He expressed concern that if the appeal
process was closed out, the state would lose the ability to go
back and review applications should the pipeline have to be re-
designed depending on the result of open season. He also noted
that there is a benefit to the winner to not have its bid
challenged.
3:24:43 PM
MR. MASSEY responded to a question by explaining that as he
understands the appeal provision, there is no administrative
appeal available to an aggrieved applicant since the
commissioners are making the decision. As a result, an
applicant would have to appeal to the court system, he opined.
He went on to explain that one appeals a decision to the person
above the decision maker so that person can review the decision
and review new information.
REPRESENTATIVE SEATON referenced the delay of litigation and
asked whether there was any benefit to constraining the ability
of an applicant to go to court to protest the bid award.
MR. MASSEY replied that he "would make that available," noting
that an applicant could continue with the project during
litigation and could describe how it intends to proceed in such
a situation.
3:28:56 PM
REPRESENTATIVE SEATON noted that under AGIA a single license
will be issued and asked whether the licensee would proceed
despite a possible restraining order limiting the ability to
proceed with the project.
MR. MASSEY reminded the committee that "we're talking
hypotheticals," and that a restraining order would be a problem.
3:30:23 PM
REPRESENTATIVE ROSES asked about AS 43.90.130 (17) requiring an
applicant to commit to a project labor agreement.
MR. MASSEY said the applicant should be required to describe how
it intends to require labor for the pipeline and described a
requirement for a project labor agreement as too specific and
premature.
CO-CHAIR GATTO referenced the costly nature of a strike. He
asked about the significance of the labor costs for a project
like this.
MR. MASSEY responded that labor will be a big part, but he
cannot recall the actual amount of predicted labor costs. He
suggested that the labor environment could be flexible and
include union and non-union labor.
CO-CHAIR GATTO opined that project labor agreements are valuable
to avoid delays due to labor issues.
3:33:56 PM
REPRESENTATIVE ROSES asked whether AS 43.90.130(18) requiring
exclusion of the state's contribution from an applicant's rate
base is an objective driven criteria.
MR. MASSEY replied that in his opinion it is not, and expanded
by stating that the applicant should be allowed to describe how
it would characterize any state contribution amounts.
3:34:40 PM
REPRESENTATIVE SEATON relayed that a major goal is to keep the
tariff low, and that section 18 provides that any state
contribution amount will not be considered in raising the
tariff. He characterized the witness's position as potentially
allowing the state's contribution amount to be considered in the
tariff calculation, therefore potentially raising the tariffs,
and violating one of the state's main objectives - low tariff
rates.
MR. MASSEY replied that an applicant may actually propose that
the state's $500 million contribution be rolled into the rate
base. Another applicant may propose a lower tariff without
having taken any state contribution amount, or suggest some
other arrangement that would still result in a lower tariff
rate. He suggested that if the objective is to get the lowest
tariff, the state should allow the applicant to propose how it
intends to structure the tariff.
3:36:43 PM
REPRESENTATIVE SEATON noted that the aforementioned possibility
is in the evaluation criteria, and asked whether consideration
of this issue is objectionable as part of the evaluation.
MR. MASSEY indicated that it is not objectionable.
REPRESENTATIVE ROSES characterized AS 43.90.130(19) regarding
applicant information as requesting fairly specific criteria.
MR. MASSEY agreed with the above characterization.
3:37:30 PM
REPRESENTATIVE ROSES characterized AS 43.90.130(20) regarding
the applicant's readiness and ability as requesting fairly
specific criteria.
MR. MASSEY agreed section 20 was objective.
3:38:01 PM
REPRESENTATIVE SEATON referred to page 6 of HB 177 and asked
whether the original pipe size should be included in the
application.
3:39:24 PM
MR. MASSEY reiterated that ExxonMobil position is that the
requirements set forth in AGIA would be set forth in the
applicant's proposal. He did note that Representative Seaton's
query put the interpretation of AS 43.90.130(6)(B) somewhat at
issue, as it could be interpreted to mean one would have to
build a "whole new pipe."
REPRESENTATIVE SEATON indicated agreement with the
aforementioned interpretation.
CO-CHAIR GATTO noted that section (6)(B) uses the word "or",
allowing for compression or new construction to accommodate
additional capacity.
3:40:30 PM
REPRESENTATIVE SEATON asked whether the 15 percent cap on
rolled-in rates was really a substantial issue since it applies
to initial maximum recourse rates not adjusted for inflation.
He noted that initial expansion would likely be through
compression, and that it would only be later that expansion
would be through looping. Based on those assumptions, he
queried as to the significance of the 15 percent limitation.
3:41:18 PM
MR. MASSEY responded that 15 percent is huge and is too big of a
risk to take at any time.
REPRESENTATIVE SEATON sought confirmation that the witness also
meant 15 percent of the original rate structure.
MR. MASSEY replied "at any time."
3:41:37 PM
REPRESENTATIVE SEATON asked whether there is a rate increase
limitation figure which his company would not object to.
MR. MASSEY answered that ExxonMobil would prefer that the
applicant be allowed to propose how it would deal with
expansion, rolled-in rates, and incremental rates. He said he
understands what the state has suggested, and opined that if
ExxonMobil wants to win the bid it will need to deal with the
issue in a very positive way for the state.
3:42:31 PM
CO-CHAIR GATTO asked whether it would be fair to establish a
tariff whereby ExxonMobil would not receive the benefits of
lowered rates, yet would also not bear the cost of increased
rates.
MR. MASSEY said he has not really considered this and is not
able to answer that question at this time. He did say that the
items reviewed with Representative Roses were the "pipeline
side" which he characterized as the easy part of this project.
However, it is the upstream side which will determine whether
the project is commercially viable. He emphasized that the
applicants should be allowed to propose the upstream terms
required to make the project viable.
3:44:11 PM
REPRESENTATIVE GUTTENBERG asked whether ExxonMobil has the
ability to put forward to FERC a pipeline project plan
regardless of AGIA.
MR. MASSEY responded that if ExxonMobil thought the project was
commercially viable under the current terms, it could go to FERC
and apply for a certificate. However, he opined that with
respect to the upstream portions, the project at present is not
commercially viable. He stated that uncertainty over future
terms does not allow ExxonMobil to determine whether the project
is viable over the long-term. In response to further
questioning, he relayed that a determination of commercial
viability regarding a project of this size is not so much a
matter of trust as of "understanding what the deal is." This
requires a determination of the terms between the state and the
pipeline developer, he explained. He agreed that the state and
the producers have a long history, but reiterated that for this
"mega-project" the terms and conditions must be fully
understood. He opined that worldwide, projects that go forward
are those where the resource owner and the developer have come
to an arrangement regarding how the revenue will be shared. The
project will not progress until that point is reached, he
concluded.
REPRESENTATIVE GUTTENBERG noted that Alaska provides a stable
political environment and it is looking for an open competitive
process. He implied that the state's position may not be in
alignment with that of ExxonMobil's.
3:49:34 PM
REPRESENTATIVE SEATON characterized AGIA as a "mid-stream"
proposal, while the witness was referring to upstream issues
which are of interest only to the producers. He suggested that
the witness was referring to a closed process with the producers
receiving upstream concessions to make the project viable. He
opined that "we tried that route and it didn't work." However,
the approach of AGIA is to focus on a competitive process to
develop a pipeline. He asked whether the producers would sell
their gas regardless of ownership in the pipeline.
3:51:19 PM
MR. MASSEY again emphasized that the upstream pays for the "cost
of the pipe" he said. He expressed his opinion that in a basin
opening project, the gas will pay for the infrastructure.
Therefore, there will not be a project until the upstream terms
are dealt with to the satisfaction of the producers. He
suggested that the upstream applicants be allowed to propose
their needs for the project to proceed. He once again
emphasized that in his opinion AGIA as proposed does not make a
commercially viable project, therefore his company cannot make a
conforming bid. He reminded the committee the state can accept
ExxonMobil's terms, reject them, or enter negotiations. He
opined it is difficult to do this through legislation.
3:53:22 PM
CO-CHAIR JOHNSON asked whether ExxonMobil would bid on the
project if AGIA were to pass today.
MR. MASSEY answered that the way AGIA is written today, the
project is not viable, so ExxonMobil cannot make a bid.
CO-CHAIR JOHNSON asked about the process of examining AGIA to
develop a bid.
MR. MASSEY said ExxonMobil is going to try to win the bid, and
the items set forth in AGIA give a good indication of what the
state wants in the project. He explained that ExxonMobil would
look at the state's objectives, and could come up with something
more favorable to the state than is proposed in AGIA.
3:55:23 PM
CO-CHAIR GATTO indicated that the above comment is why the state
has proposed that applicants not be allowed to appeal the award.
MR. MASSEY responded that appeal concerns are a reason to not
put so many prescriptive criteria in AGIA, but to instead put
forth broad objectives. He suggested this broad approach would
make it less likely for an unsuccessful applicant to appeal.
CO-CHAIR GATTO opined there will likely be an appeal.
MR. MASSEY agreed, and pointed out that he believes that AGIA as
written does not set forth a competitive process. He said that
ExxonMobil, despite being a major player on the North Slope,
"can't play." He suggested that the legislature should consider
whether it wants ExxonMobil to participate. He clarified that
the state owns the resource, but ExxonMobil is a lease holder.
3:57:18 PM
REPRESENTATIVE ROSES asked whether ExxonMobil has participated
in competitive requests for proposals (RFPs).
MR. MASSEY explained that normally RFPs are done when one is
trying to access land or a resource. He noted that here Alaska
already has much of the gas leased, which makes RFP in this
situation more complicated. He opined that once the land is
leased, the resource owner needs to work with the lessee to make
the project go forward.
3:59:18 PM
REPRESENTATIVE ROSES summarized that typically RFPs include
lease negotiations. However, since in this instance the leases
have already been issued, the applicants have nothing to trade
off except the value of the product and would therefore prefer a
more flexible process.
MR. MASSEY characterized the aforementioned summary as fair.
4:00:22 PM
REPRESENTATIVE SEATON asked about the effect on the tariff
should ExxonMobil be required to purchase carbon dioxide
emissions credits.
MR. MASSEY said that issue has not yet been considered.
REPRESENTATIVE SEATON asked about the possible effect of federal
law regarding carbon dioxide emissions and the possible effect
on tariffs should a portion of the carbon dioxide be able to be
monetized by the pipeline operator.
MR. MASSEY replied that the policy should be that the pipeline
owner receives a fair return on its investment. If they are
able to lower their expenses, it should carry through to the
tariff, he said.
REPRESENTATIVE SEATON opined that this is a significant issue as
there may be federal legislation to pre-allow certain carbon
dioxide emissions and that this may be a significant factor.
MR. MASSEY answered he has not looked at this issue yet.
4:03:59 PM
MR. MASSEY responded to a question regarding possible
negotiations with the administration by explaining that he would
like total flexibility in that regard and is not wedded to any
prior agreement. He suggested that the parties could first
agree on common objectives, then could consider how to assign
responsibility to accomplish those objectives.
4:05:28 PM
CO-CHAIR JOHNSON asked about how more fiscal certainty regarding
taxation would affect the likelihood that ExxonMobil would
participate in the process.
MR. MASSEY stated that "we're going to have to deal with
predictable and durable fiscal terms" for all aspects of the
project. He said he "does not know how we can deal with that in
a piece of legislation," noting that prior negotiations resulted
in a 400 page document. Due to the difficulty of establishing
fiscal certainty, he suggested that the better approach is to
allow the applicants to describe what they need. The state can
then determine whether it wants to accept the proposals.
4:07:24 PM
REPRESENTATIVE ROSES observed that "you've made it ...
abundantly clear that as this bill currently exists" ExxonMobil
may not bid on this project. He asked whether this was true of
other producers as well.
MR. MASSEY said he could not speak for the other producers.
4:08:49 PM
MR. MASSEY responded to a question as to how he would present
the status of this project to his company by stating that he
would indicate "we gotta keep working at it." He reminded the
committee that his company is committed to finding a way to make
this important project go forward. He indicated that if the
state and the producers can agree on how to structure the
upstream, this project will go forward.
4:10:26 PM
CO-CHAIR GATTO suggested that the long-term forecast supports
development of this project. He asked about communication with
the administration.
MR. MASSEY said the governor has made herself available for
conversation with ExxonMobil management. He offered his belief
that the commissioners have decided on their approach and "they
don't want to negotiate with us."
4:12:56 PM
REPRESENTATIVE ROSES asked whether the open season should be
held before or after the issuance of the license.
MR. MASSEY replied that he has not pondered that question,
although he understands the point. He restated that his concern
is "what the deal is" prior to proceeding with the project.
CO-CHAIR GATTO reminded the committee that previous pipeline
negotiations had very little public discussion.
4:15:59 PM
REPRESENTATIVE GUTTENBERG read from a letter by a consultant who
worked on prior pipeline negotiations which concluded that the
state has never developed fiscal terms that are unreasonable
compared to international practices. The letter put forth that
the state has "been a reliable business partner," and there is
no need to "treat Alaska as banana republic in order to secure
the gas line."
[HB 177 was held in committee.]
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 4:17 p.m.
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