Legislature(2013 - 2014)BARNES 124
02/12/2014 01:00 PM House RESOURCES
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| Overview(s): Alaska Lng Project - Memorandum of Understanding | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
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ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
February 12, 2014
1:06 p.m.
MEMBERS PRESENT
Representative Eric Feige, Co-Chair
Representative Dan Saddler, Co-Chair
Representative Peggy Wilson, Vice Chair
Representative Mike Hawker
Representative Kurt Olson
Representative Paul Seaton
Representative Scott Kawasaki
Representative Geran Tarr
MEMBERS ABSENT
Representative Craig Johnson
OTHER LEGISLATORS PRESENT
Representative Andrew Josephson
COMMITTEE CALENDAR
OVERVIEW(S): ALASKA LNG PROJECT - MEMORANDUM OF UNDERSTANDING
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
MICHAEL PAWLOWSKI, Deputy Commissioner
Office of the Commissioner
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: On behalf of the administration, provided a
presentation regarding the Memorandum of Understanding (MOU)
between the State of Alaska and TransCanada for the Alaska LNG
Project.
JOE BALASH, Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Answered questions and provided information
on the Memorandum of Understanding between the State of Alaska
and TransCanada.
TONY PALMER, President
TransCanada Alaska, LLC;
Vice President
Alaska Development
TransCanada
Calgary, Alberta, Canada
POSITION STATEMENT: Answered questions regarding the Memorandum
of Understanding between the State of Alaska and TransCanada.
ACTION NARRATIVE
1:06:21 PM
CO-CHAIR ERIC FEIGE called the House Resources Standing
Committee meeting to order at 1:06 p.m. Representatives Seaton,
P. Wilson, Tarr, Kawasaki, Hawker, Saddler, and Feige were
present at the call to order. Representative Olson arrived as
the meeting was in progress. Representative Josephson was also
present.
^OVERVIEW(S): Alaska LNG Project - Memorandum of Understanding
OVERVIEW(S): Alaska LNG Project - Memorandum of Understanding
[Contains discussion of HB 277]
1:06:40 PM
CO-CHAIR FEIGE announced that the only order of business is the
administration's overview of the Memorandum of Understanding
(MOU) between the State of Alaska and TransCanada for the Alaska
Liquefied Natural Gas (LNG) Project.
1:06:58 PM
MICHAEL PAWLOWSKI, Deputy Commissioner, Office of the
Commissioner, Department of Revenue (DOR), on behalf of the
administration, began a PowerPoint presentation by drawing
attention to slide 2, titled "Guidance Documents & HB 277." He
said his focus today will be on the Memorandum of Understanding,
but the Heads of Agreement (HOA) is the umbrella document that
provides the roadmap of how the administration and the producer
parties intend to advance the Alaska LNG Project (AKLNG) through
a phased process. The HOA describes key understandings and
consensus on certain terms. The MOU is a separate piece which
describes a specific agreement between the State of Alaska and
TransCanada to transition away from the license of the Alaska
Gasline Inducement Act (AGIA) to a more traditional commercial
relationship. The MOU also describes key commercial terms for
that relationship. Both the HOA and the MOU provide the
guidance for how the administration would use the powers enabled
in HB 277. He recognized that HB 277 is not before the
committee, but said those powers in the proposed legislation are
participation, percentage, and process. The legislature and the
public will always be in the position of deciding whether to
advance through the certain gates.
1:09:04 PM
MR. PAWLOWSKI moved to slide 3, titled "Where We Are Today?" He
said the settlement of Pt. Thomson [litigation] and the joint
work agreements, and the confidence in investment in the oil
industry in Alaska, has created the opportunity for the
commercialization of gas. Since 2011 when the governor called
for alignment, the parties have been working on concept
selection, which is deciding what the project itself looks like.
To date the parties have been operating through TransCanada, the
state's licensee under AGIA. However, the parties to the
agreements have been doing other work. ConocoPhillips and BP
have advanced a significant amount of work under the "Denali
pipeline project." Under the AGIA process the state will have
reimbursed about $330 million [to TransCanada and ExxonMobil] by
April 2014 for the Alaska Pipeline Project (APP). TransCanada
and ExxonMobil will have spent roughly $130 million in
unreimbursed funds for APP. The MOU specifies how that
information is contributed, and then not counted, as data going
forward as the Alaska LNG Project advances. Similarly in the
HOA, all of the parties are contributing their information,
which includes the work done by ConocoPhillips and BP on the
Denali project. The green star at the top of slide 3 recognizes
that HB 277 is the decision point that decides whether the state
proceeds on this path or stops. If the state decides to stop,
there is an opportunity under AGIA to buy the $100-$130 million-
worth of data generated under APP. He reminded members that
AGIA has a process through which the state can reimburse for
TransCanada's work and then has an option to purchase the data.
Should enabling legislation pass, the MOU articulates what the
commercial relationship between the State of Alaska and
TransCanada will look like beginning in the Pre-Front-End
Engineering and Design (Pre-FEED) stage.
1:11:57 PM
CO-CHAIR SADDLER inquired whether the Denali work would be
contributed without compensation.
MR. PAWLOWSKI responded that the administration's understanding
is that it would.
1:12:14 PM
REPRESENTATIVE KAWASAKI asked how proprietary information from
the prior work of AGIA and the Denali project will be handled
and whether that is outlined within the MOU.
JOE BALASH, Commissioner, Department of Natural Resources,
replied the information itself is being contributed by the
parties to the Alaska LNG Project venture. As far as the
state's relationship with TransCanada, it is not going to be
considered part of the development costs or, later on, part of
the rate base. The proprietary information is definitely not
considered to be part of the development costs; development
costs are defined as those costs incurred by TransCanada after
January 1, 2014 that are not reimbursed.
MR. PAWLOWSKI added that the definition of development costs is
found in Exhibit C of the MOU, page 8.
1:13:54 PM
REPRESENTATIVE SEATON observed slide 3 states [that the Alaska
Stand-Alone Pipeline (ASAP)] being done by [the Alaska Gasline
Development Corporation (AGDC)] is going forward at the same
time and is using shared data with the Alaska LNG Project. He
inquired what the situation will be with AGDC's use of the data
for developing the smaller diameter pipeline [ASAP] if the
Alaska LNG Project does not go forward.
MR. PAWLOWSKI answered the reference to this is in the bullet
titled "Conveyance of Transporter Alaska LNG Project Interest to
Shipper" in Exhibit C of the MOU, page 9. If the project is to
terminate, the idea is that the information and the assets
developed by TransCanada during the process come back to the
state upon the payment of TransCanada's development cost. A
financing charge for that, called Allowance for Funds Used
During Construction (AFUDC), is incurred if the state is the one
that terminates the project. If TransCanada is the one
terminating the project, the AFUDC charge does not come into
play. How it is then directed by the state to AGDC depends
ultimately on how the House and Senate bodies talk about the way
AGDC itself is structured within the partnership. The current
thought is that an AGDC subsidiary will carry that role in the
project and will have the access to the information. The MOU
specifies that the information has a direct conveyance at a
basic development cost price so [the state] gets the information
back, unlike AGIA where [the state] has a right to negotiate for
purchase.
1:16:03 PM
REPRESENTATIVE SEATON posed a scenario in which the Alaska LNG
Project analysis goes forward and then one of the parties
determines the project to not be economic. He asked where that
leaves the information that AGDC is using for going forward to
open season; for example, whether that information is still
available or is a basis for the open season.
MR. PAWLOWSKI apologized for misunderstanding the premise of
Representative Seaton's previous question. He pointed out that
shown below the schematic on slide 3 is the concept that AGDC is
advancing the Alaska Stand-Alone Pipeline on its own through
open season. If in that time period the Alaska LNG Project
ceases to go forward, the information developed under the Alaska
LNG Project would be available for the state to then contribute
to AGDC to continue work to the degree it is relevant. There
are very big differences between the projects and part of the
importance of maintaining that parallel path at this stage is
that each is investing in the information that is relevant.
There is intent, broadly, by all the parties to cooperate where
they can to share information. In a failure case the state does
have access to information, although the degree to which it is
actually relevant to AGDC in advancing ASAP he is not equipped
to say, but other parties may be able to answer that question.
1:18:00 PM
REPRESENTATIVE HAWKER pointed out that the stoplight depicted in
the schematic on slide 3 is a major decision gate. He noted
that if the state and TransCanada mutually abandon the AGIA
license, AGIA is still the law today. The hammer in AGIA has
been the treble damages clause that says the state shall not get
involved in a competing pipeline project. When looking at the
work done over the recent past, it seems it might be construed
as a competing pipeline project that the state has been actively
involved in. He asked what the state has done to give him
assurance that the committee is not violating that provision and
triggering the treble damages by the very investment of all this
time, effort, and state monies in this process.
MR. PAWLOWSKI responded it is a good foundational question that
either DOR, DNR, or the Department of Law (DOL) could answer.
At a high level, the state agencies have approved project plan
amendments under AGIA, which are included in the committee
packet. As the governor called for in 2011, the work to date
has been through the AGIA license and is therefore not a
competing project.
1:20:12 PM
CO-CHAIR SADDLER how much money is likely to be spent for
development costs between January 1, 2014 and June 30, 2014.
COMMISSIONER BALASH replied the budgets associated with the
planning activity in the first quarter will continue to be
eligible for AGIA reimbursement under "PPA-1B" and are measured
in the tens of millions of dollars -- about $30 million. Once
in the second quarter, specifically past June, things start to
ramp up. If another field season takes place from points south
of Livengood, then it will be in the dozens of millions of
dollars in calendar year 2014. He noted that slide 4 identifies
the projected costs and budget for the Pre-FEED stage.
CO-CHAIR SADDLER said he will hold his remaining questions as
they may be answered by the remainder of the presentation.
1:22:28 PM
MR. PAWLOWSKI turned to slide 4, titled "What Happens if HB 277
Passes?" He said the Pre-FEED period is the stage that the
project, the parties, and the state are looking at moving into.
Pre-FEED is expected to last 12-18 months and cost roughly $435
million. The HOA describes a state share of roughly 20-25
percent of the cost, and the MOU says how the state will fund
that 20-25 percent cost. The MOU contemplates the state
bringing TransCanada as a partner to the table to represent a
specific interest in support of the state's 20-25 percent share
for this period. The state's share, through the AGDC
subsidiary, is contemplated at roughly $35-$43 million, which is
roughly 20-25 percent of the LNG plant-related costs of that
$435 million, he explained. During that time period,
TransCanada, under the MOU, will be carrying the state's share
of the midstream, the pipeline, and the gas treatment plant.
TransCanada will be spending roughly $53-$67 million, depending
on whether the state share is 20 or 25 percent. He said that
the separation here is that the starting obligation of the state
taking 20-25 percent is the combination of the state/AGDC
subsidiary share plus the TransCanada share. That is 20-25
percent of the $435 million. This is not total cost of the
project, as will be seen in the fiscal notes for the legislation
he added. The state needs to bring on important work and
experts, both at the agency level and at AGDC, and there is an
important request for contingency because costs sometimes do not
end up where it was thought they would. So, the fiscal notes do
not reflect the exact number; rather, they reflect what is
necessary to advance the project and fund the state's share as
well as the associated agency costs. For example, DOR is asking
for roughly $500,000 for work related to the change of the gas
tax and repurposing its tax systems, plus $250,000 for
regulations. Both are one-time costs. Either directly within
DNR or within a transfer to AGDC, DNR is looking to retain
expertise related to marketing and supporting the negotiation of
marketing contracts, a cost that is above and beyond [the $35-
$43 million]. TransCanada is shouldering a portion of what
would be the state's share, he stated.
1:26:07 PM
REPRESENTATIVE HAWKER drew attention to slide 3, saying Mr.
Pawlowski's answer regarding the risk the state is exposed to
under the treble damages clause [of AGIA] seems like a
probability game, "like [the state's] people think this way ...
we've got our law people that could take a position in defining
it." He asked whether the state is gambling that it is not
afoul of something that somebody else might take another
position were this whole thing to come apart and the other party
says the state did not pass adequate or appropriate enabling
legislation.
MR. PAWLOWSKI answered that people other than himself can give a
much more definitive answer, but he does not believe the state
is gambling. He is convinced that the work the state has done
with the AGIA licensee through the project plan amendments has
protected the state through this period where the state and
TransCanada are working together under the AGIA license. In and
of itself, that keeps it from being a competing project because
the licensee is in the room. He deferred to Commissioner Balash
or others for a more detailed analysis of what happens after a
"stop decision."
REPRESENTATIVE HAWKER related that another member of the
committee has raised the question of whether TransCanada agrees
with Mr. Pawlowski, but said the question can be answered later.
MR. PAWLOWSKI noted that TransCanada is in attendance and could
come before the committee now or later.
CO-CHAIR FEIGE requested it be later when TransCanada gives its
presentation.
1:28:31 PM
MR. PAWLOWSKI resumed his discussion of slide 4 and the Pre-FEED
period, noting that AGDC's ASAP project is continuing its work
around its open season. He drew attention to the orange box on
slide 4 which states, "Savings with TransCanada include cash
commitments by TransCanada for Pre-FEED costs which reduce State
of Alaska appropriations by $53-$67 million and seamless
transition into Pre-FEED with personnel and data continuing to
be committed to the project." At the end of Pre-FEED, he said,
contracts and legislative approval will be taken up again since
this is a staged process. So, at the end of Pre-FEED there is a
stop opportunity if it is determined that the project is no
longer in the interest of the state or all of the parties. If
work stops, the state under the MOU would repay the development
costs that TransCanada has expended on behalf of the state
during that time period. If the state is the one that
terminates, it would pay TransCanada the development costs,
estimated to be $53-$67 million, plus 7.1 percent in AFUDC. If
TransCanada is the one that terminates, the state would pay
TransCanada the $53-$67 million with no AFUDC. He noted that
for purposes of slide 4, he assumed the state is the one
terminating the project.
1:30:04 PM
REPRESENTATIVE P. WILSON said she sees on slide 4 where the $53-
$67 million comes in, but asked where "the other" comes in.
MR. PAWLOWSKI responded "the other" is the $35-$43 million that
the state has put in to fund AGDC holding the share of the
liquefaction plant. The balance share of $348-$327 million
comes under the Heads of Agreement. That is where, in this
project, the other parties are handling 80-75 percent of the
cost of the project instead of the state; that is part of the
state gas share being 20-25 percent. Under AGIA the state was
reimbursing 90 percent. The policy call under the HOA is to let
each party pay for its share, so now the state is paying 20-25
percent minus what TransCanada is carrying, and the other
parties are carrying 75-80 percent of the cost.
REPRESENTATIVE P. WILSON asked what that amount is.
MR. PAWLOWSKI replied it is $348-$327 million, shown on slide 4
as the producer share of the total amount of $435 million.
REPRESENTATIVE P. WILSON understood the total amount is $435
million, producers are going to be paying $348-$327 million, and
AGDC is currently spending $35-$43 million.
MR. PAWLOWSKI corrected that AGDC is not spending until it is
given an appropriation; AGDC's work is focused on ASAP and the
$35-$43 million cannot be spent until there is legislative
authorization.
1:32:18 PM
REPRESENTATIVE SEATON understood the $35-$43 million for AGDC is
not on "the pipeline project." He inquired whether that money
is to maintain access to capacity in the LNG plant or is actual
development and planning costs.
MR. PAWLOWSKI answered the $35-$43 million is the estimated
development cost for the state's share of Pre-FEED at the LNG
plant itself, including the environmental, regulatory, and land
work associated directly with the LNG plant. "So," he
continued, "it's LNG plant down in the project and TransCanada
would be handling LNG plant up to the producing fields."
REPRESENTATIVE SEATON surmised "AGDC's current budget money that
was already allocated is proceeding with the development of the
pipeline and that is totally independent from AGDC's role in
this amount of money."
MR. PAWLOWSKI responded the HOA contemplates AGDC continuing the
work on ASAP, which is why on slide 4 it is included in the
green arrow located underneath [the schematic for the Alaska LNG
Project]. In the HOA the administration commits to seeking an
appropriation to fund the additional work asked of AGDC to step
into the LNG plant.
REPRESENTATIVE SEATON, noting AGDC has been doing a lot of
pipeline work and incurred a lot of expenses, inquired whether
that work rolls into the Alaska LNG Project or is useless
information for the Alaska LNG Project.
MR. PAWLOWSKI replied it is likely to be useful information for
the Alaska LNG Project because some things will be able to be
shared. Statutory direction was given under HB 4 for AGDC to
cooperate with a large project, so AGDC and the Alaska LNG
Project will need to enter into a cooperation agreement to
design how that information is shared. It is incumbent on the
committee to be clear about how that is going to work when the
committee takes up legislation for the Alaska LNG Project.
1:34:56 PM
REPRESENTATIVE SEATON noted he does not see where "all of that
money that is being spent on that" is represented. He can see
the numbers for the producer parties, TransCanada, and the
state's share of AGIA, but he does not see anything as a state
contribution "in that."
MR. PAWLOWSKI apologized for missing Representative Seaton's
question at the beginning and said the quantification of how
much of AGDC's work is directly relevant to the Alaska LNG
Project is work that will need to be done once the state decides
to move the Alaska LNG Project. While there is potential for
synergies, he cannot provide a number today that this work is
directly relevant. To his knowledge, the agreement has not been
developed or executed between the two projects to identify some
of that work, but he knows they are working together on that.
REPRESENTATIVE SEATON understood the idea is that there is a
balloon out there someplace for whatever portion of that state
investment is applicable to the project and goes in as a state
contribution share.
MR. PAWLOWSKI said the HOA describes the intent of that
cooperation. He confirmed it is a balloon but said it is
difficult to quantify at this stage.
1:36:42 PM
CO-CHAIR SADDLER posed a scenario where the project comes to a
stop [after passage of HB 277]. He inquired whether there would
be a use for the Pre-FEED work product that was done to that
point in time and, if so, how it would be apportioned, split,
and sold at that time.
COMMISSIONER BALASH responded the governance of that information
will be contained separately in a joint venture agreement that
will be applicable to the Pre-FEED phase of the project. That
agreement will need to be executed after enabling legislation
passes. Who retains what information and what ability the
parties have to use that publically will be a product of the
negotiations to close out that agreement. It will be [the
administration's] intent to maximize the opportunity.
1:37:59 PM
REPRESENTATIVE KAWASAKI returned to slide 3, which shows that
for AGIA the state is roughly in for $330 million, the Alaska
Pipeline Project is in for $130 million, and Denali is in for
$200 million. He inquired whether those figures are included in
slide 4 or whether slide 4 depicts new dollars for the producer,
AGDC, and TransCanada shares.
MR. PAWLOWSKI specified slide 3 does not add to slide 4; slide 4
is a fresh start. Also not included is the money appropriated
for AGDC to do ASAP work. Those are other things that are being
looked at point forward from action on HB 277.
REPRESENTATIVE KAWASAKI presumed the AGIA licensee and APP and
Denali have not yet shared information. He asked what will
happen once they do share information if, for example, the same
route studies have been done by the parties.
MR. PAWLOWSKI encouraged that this question be asked of the
other parties out doing the work, but said when people start
working together with all of the information available they find
synergies and those ultimately reduce cost. From the state
perspective of knowing about these types of projects, he said he
is hesitant to estimate that these costs are going to go down.
While there is an opportunity for that when people start working
that data and sharing that work, which they have done a lot of
since 2011, he hesitates to say it is likely to result in less
estimated cost rather than the other way where it is found that
more engineering needs to be done.
1:40:22 PM
REPRESENTATIVE P. WILSON understood HB 277 must be passed before
the Pre-FEED stage can occur.
MR. PAWLOWSKI said she is correct; the Heads of Agreement
describes that enabling legislation leads to a ramp-up of the
Pre-FEED work and the acceleration of all the parties.
REPRESENTATIVE P. WILSON further understood that if HB 277 is
passed, then a joint venture agreement would be needed first to
lay out exactly how the parties will work together.
MR. PAWLOWSKI answered in the affirmative but explained it is
important to remember there is a distance between what the state
does as a resource owner and what happens between the parties
that are actually doing the business side of the operations. As
[the administration] contemplates things in the HOA, the
business-side agreements will be done by AGDC, AGDC's
subsidiary, and TransCanada. The MOU says how that information
flows back to the resource owners to evaluate and have the
transparency that [the state] needs; the HOA also contains
principles of how that information is shared. Day-to-day
agreements like the joint venture agreement are not something
that the agencies see themselves in the middle of. The agencies
will be watching and be informed, but those are agreements that
happen between business parties. It is an important distinction
of what is actually getting worked on by whom.
1:42:28 PM
REPRESENTATIVE P. WILSON, in regard to TransCanada and AGDC
working together at this time, surmised that legislators "have
to assume that they are saying 'okay, we're doing this stand-
alone pipeline, AGDC, but we kinda need to know what you need to
know if the stand-[alone] pipeline does not go so that while
we're doing this work that work is being taken care of at the
same time, so that ... if this goes then, TransCanada would feel
comfortable about taking over that part of ... the 20-25 percent
cost of the state because they feel they've gotten ... their
money's worth from what AGDC has done alongside it.'"
MR. PAWLOWSKI responded a cleaner way to think about it is that
the progress on the Alaska LNG Project - the big project that
has the state, TransCanada, BP, ExxonMobil - is really a
separate progress than the work that goes on at AGDC for the
Alaska Stand-Alone Pipeline. Those are two horses, parallel
paths. There are very good potentials for complementary work to
go on and part of an important policy call by the state is
maintaining those parallel tracks, but they have to work
together to figure out what can be shared. At the decision
point to move into the Front-End Engineering and Design (FEED)
stage, in late 2015 or early 2016, the state will know whether
one or the other is going to advance. After that stage, the
decision of what is valuable for whom and how that gets
reconciled is seen as an opportunity that has yet to be worked
out. That is part of what gets developed during Pre-FEED while
AGDC continues on ASAP and the state moves forward on the Alaska
LNG Project. The administration and the legislative bodies have
work to do in the discussion around the legislation because the
state is asking AGDC to take on a large additional role.
Managing exactly how that is structured is a key part of the
dialogue between the state, the committees, the administration,
and AGDC while actually digging into the legislation.
1:45:33 PM
REPRESENTATIVE P. WILSON remarked that [legislators] are working
in a vacuum at the same time that they are thinking about this
because they do not know for sure what is ahead.
MR. PAWLOWSKI replied that that challenges what really is the
fundamental driver for the state decision to recognize that the
Alaska LNG process is a staged process. Long-term commitments
are not being made on the Alaska LNG Project because the project
is not ready for long-term commitments. At the same time, the
need to get gas to Alaskans and advance the ASAP project means
the state needs to maintain the parallel path on both projects
because the future outcome is unknown. Thus, Representative P.
Wilson is right. The HOA, MOU, and HB 277 are asking for the
ability to take a step forward to see what the opportunity is.
1:46:47 PM
REPRESENTATIVE HAWKER surmised the dollar amounts displayed on
slide 4 represent the money to get to the stage gate of starting
the FEED process.
MR. PAWLOWSKI answered correct.
REPRESENTATIVE HAWKER noted the equity option agreement in the
MOU must be executed within 90 days of the enabling legislation,
making the equity option agreement a necessary part of the
process forward. The equity option agreement is the ability for
the state, via whatever mechanism, to purchase up to 40 percent
of TransCanada's interest in this process. That option expires
the earlier of 12/31/15 or the date of execution of the
commercial agreements to commence FEED. Therefore, the state
needs to have that money as the very last thing on deck prior to
those expiration dates in order to cross the line from Pre-FEED
to FEED, if the state wants to exercise that option. He
inquired whether that money is included in any of the monies
[depicted on slide 4].
MR. PAWLOWSKI responded it is not at this point. He explained
that on slide 4 he put the equity option in the "Go arrow" that
is located to the right of the box for legislative approval of
the contracts. The decision of when to appropriate that money
and put it into place is a very valid consideration as [the
administration and legislature] work through these questions.
REPRESENTATIVE HAWKER surmised the red stop box on slide 4
depicts the legislature failing to appropriate that money.
MR. PAWLOWSKI replied no, the exercising of the equity option is
depicted in the "go arrow" for 40 percent of FEED; $21-$27
million is 40 percent of the $53-$67 million.
REPRESENTATIVE HAWKER apologized for mishearing what Mr.
Pawlowski had said earlier.
1:49:34 PM
REPRESENTATIVE HAWKER surmised that if money is needed on deck,
it would need to be appropriated in HB 277. He said his
understanding of the legislation and its fiscal notes is that
that money is not provided.
MR. PAWLOWSKI answered the fiscal notes include a significant
amount of contingency money, which is prudent in any project in
an appropriation for a fiscal note.
REPRESENTATIVE HAWKER asked whether the contingency money is $27
million.
MR. PAWLOWSKI responded the current fiscal note has a $75
million capitalization of the fund.
REPRESENTATIVE HAWKER inquired about the $83 million.
MR. PAWLOWSKI replied the $83 million includes the costs for
AGDC and potential transfers through. In the notes on the
fiscal note, the actual appropriation for the cost is roughly
$75 million, so there is some contingency built into that and
for good reason. That would provide an opportunity for some of
that, though the contingency is to recognize what happens during
FEED. When looking at the issue, it was recognized that the
decision to go to FEED and the exercise of that equity option
happens sometime during the 2015 year and that decision to
proceed is going to be accompanied by appropriations for the
next stage. It is a strategic question as to whether to
appropriate now or during the 2015 legislature.
1:51:49 PM
CO-CHAIR SADDLER inquired from what basis the treble damages to
TransCanada would be determined; for example would it be based
on the $130 million in expenses that are yet to be reimbursed.
MR. PAWLOWSKI answered he is unprepared to provide an estimate
or an opinion on the treble damages because he has not done work
on this. He deferred to the Department of Law or commissioner
of DNR to provide an answer.
CO-CHAIR FEIGE requested the committee be provided an answer at
some point.
MR. PAWLOWSKI agreed to do so.
1:53:02 PM
REPRESENTATIVE SEATON surmised the legislative approval of
contracts depicted on slide 4 is actually the "go decision."
Another decision the legislature could exercise, but does not
have to do for the project to still go, is exercise of the
option for up to 40 percent.
MR. PAWLOWSKI responded correct.
1:53:31 PM
REPRESENTATIVE TARR understood that if TransCanada was the one
to terminate, then TransCanada would be responsible for paying
back the $53-$67 million. She asked where in the timeline of
events would be the termination of the AGIA license.
MR. PAWLOWSKI replied the termination of the AGIA license is in
the MOU and would not happen immediately with enactment of
enabling legislation because there would be a little bit of
transition period, windup, and finalization of some of the audit
work. So, almost commensurate with enactment of enabling
legislation will be a lag and then the license would be
abandoned by both parties.
REPRESENTATIVE TARR understood, then, that if that stop point
[depicted on slide 4] was reached by moving forward and the AGIA
licensed expired, the state, even if it was the responsible
party in the stop point, would not be subject to paying treble
damages. The state would only be subject to paying the [$53-$67
million] plus the 7.1 percent AFUDC fee.
MR. PAWLOWSKI answered yes, that is his understanding.
1:55:07 PM
REPRESENTATIVE HAWKER said the enabling legislation, as he sees
it, does not address the state extracting itself from the
parameters of AGIA. He offered his belief that the MOU is the
only place this is referenced. Language in the MOU seems soft,
he argued, because it simply says the commitment is to initiate
the process of making a determination. It does not say [the
state] will make a determination or conclude a determination.
The MOU says that upon the occurrence of the trigger event and
the execution of the transition agreement, the licensee will
agree that the project licensed under AGIA is uneconomic. He
said he does not see any real formal commitment for the state to
extricate itself and move into a new post-AGIA world. He
inquired whether it is too late to add some firmness to that
commitment to both the legislature and the people of Alaska.
MR. PAWLOWSKI responded the administration is open to discussing
with the committee and other members any additional firmament
surrounding that concept. It is an open item that is worthwhile
to discuss, especially when getting to the legislation.
REPRESENTATIVE HAWKER commented that the aforementioned is just
academic business conversation, it is not any comment on the
quality or the commitment or service of any party involved. It
is just looking for what is the right and best business deal
that is possible for the state to achieve.
MR. PAWLOWSKI appreciated the comment and allowed there is room
for providing clarity.
1:57:46 PM
MR. PAWLOWSKI turned to slide 5, titled "What Happens after
FEED?" He noted there has been talk about the state exercising
the option of 40 percent, the reinvesting of up to 40 percent of
the cost of the midstream, $21-$27 million, where the state can
then stand on both sides of the transaction in the midstream.
Exercise of this option happens as the FEED stage is stepped
into. He stressed the depicted FEED costs are very rough
estimates and that they are rounded and therefore do not add up.
The costs are based on the advice of [the administration's]
technical experts [Black & Veatch] using 4 percent of $45
billion, portending that 60 percent is midstream and 40 percent
is downstream. This is an illustrative idea of what a
reasonable FEED spend would be like. The actual costs will get
refined through this next stage; for example, two years after
the Pre-FEED stage, these numbers are very likely to change, but
they provide a scale of what can be expected. Cost of the FEED
stage is estimated to be in the neighborhood of $1.8 billion.
Under the concept of the state taking between 20 and 25 percent,
the producers would carry roughly $1.44-$1.35 billion of the
cost of the FEED stage. The state's AGDC subsidiary share would
be $145-$180 million, excluding contingency and actual staff and
agency support. If the state exercises the equity option and is
carrying an additional 40 percent of the midstream, the state's
cost would increase to $230-$290 million. If the state does not
exercise its option, TransCanada would carry $215-$270 million;
if the option is exercised, TransCanada would carry $130-$160
million. When the decision point is reached, all of the parties
will look at the project and decide whether it is appropriate to
go to Final Investment Decision (FID) at which construction
commences. If the decision is to stop, under the MOU the
development costs will come into play. Mr. Pawlowski pointed
out that he has made the assumption on slide 5 that the Alaska
LNG Project is moving forward. In the arrow under the schematic
on slide 5 it can be seen that AGDC's mission is broad and AGDC
will continue working on getting gas to Alaskans through
interconnections to the Alaska LNG Project. Thus, it recognizes
that the Alaska LNG Project is not the totality of the work that
needs to be done in a success-case scenario.
2:01:26 PM
CO-CHAIR SADDLER, regarding slide 4, asked whether the blue go
arrow about the exercise option for 40 percent is for 40 percent
of FEED or for 40 percent equity purchase.
MR. PAWLOWSKI apologized, replying the go arrow should say Pre-
FEED because it is truing up the Pre-FEED costs and then [the
state] assumes 40 percent of the midstream FEED costs going
forward.
CO-CHAIR SADDLER understood, then, that it is 40 percent of the
midstream FEED cost.
MR. PAWLOWSKI answered it should be 40 percent of Pre-FEED.
CO-CHAIR SADDLER inquired whether it is 40 percent of all the
Pre-FEED costs.
MR. PAWLOWSKI responded it is actually 40 percent of
TransCanada's $53-$67 million depicted on slide 4.
CO-CHAIR SADDLER asked whether the green box on slide 4,
regarding yes or no for legislative approval of contracts, is
the same thing as go/stop.
MR. PAWLOWSKI nodded yes.
CO-CHAIR SADDLER, regarding the blue box on slide 5, inquired
whether the State/AGDC subsidiary share without equity option,
and the State/AGDC subsidiary share with equity option, are
alternative options and therefore are not additive.
MR. PAWLOWSKI replied they are intended as one or the other as
options.
CO-CHAIR SADDLER complemented the charts, saying he wants to
understand what the protocols of the colored boxes mean.
2:03:15 PM
REPRESENTATIVE HAWKER remarked that exercise or non-exercise of
the [40 percent] option is an absolutely essential and major
component of the MOU. He understood that the equity option term
sheet [in the MOU] provides that the state can take 40 percent
ownership in the one-quarter of the project carved out for the
state/AGDC. Thus, the state is not really buying into the
project itself, but rather into a TransCanada subsidiary that
has 25 percent actual ownership equity in the pipe project.
However, the state is the sovereign, a tax-exempt entity, and
the state wants to maximize its benefit. He said he does not
know what the consequences are for the state to be buying into
the subsidiary of a corporate entity, as opposed to the state
actually holding directly a component of the overall project,
and whether that is the right and best decision or whether the
state is compromising its rights and privileges as a sovereign
and its financial advantage by not owning directly a chunk of
that pipe project within the Alaska LNG Project.
MR. PAWLOWSKI noted the equity option term sheet is Exhibit B in
the MOU. Offering to get back to the committee, he said it is
structured in a way to maximize the tax advantages to the state.
Through several of its funds, either directly or indirectly
overseen by DOR, the state currently invests in these types of
partnerships and the state maintains the tax advantages on the
income; it is actually one of the benefits of the master limited
partnership or limited partnership model. He agreed with
Representative Hawker that how it is structured is a key point.
CO-CHAIR FEIGE advised the aforementioned is in Exhibit B of the
MOU, page 3, bullet 10.
2:07:07 PM
REPRESENTATIVE HAWKER said he is looking at Exhibit B of the
MOU, page 2, item 7, which outlines the conditions on the state
transferring its interest in the limited partnership. He added
this would be after the state has acquired the limited
partnership. He observed this section talks about being able to
transfer the state's interest to any government fund owned by
the state, such as the "State Department of Revenue
Constitutional Budget Reserve Fund." Because the state would be
holding a part of a corporate entity, it seems it would be
fraught with questions on which he would like to see legal
analysis. He further questioned what others in the project
think about this ability to move that around and not knowing who
might be their partner at the end of the day.
MR. PAWLOWSKI responded that Commissioner Rodell played a large
role in this as a fiduciary looking at how the state invests
through different funds and these types of structures. He said
will get information back to the committee about this.
REPRESENTATIVE HAWKER remarked that this is an area he does not
quite understand.
2:08:43 PM
CO-CHAIR FEIGE said he thinks the concern being expressed by
Representative Hawker is that as the project progresses and gets
to the point where project partners have to be voting on
particular aspects or particular directions that the project is
going to take, the question is who will be at the table
representing the State of Alaska's share in the overall project
-- Commissioner Balash, Commissioner Rodell, a representative of
AGDC, or TransCanada. This needs to be made clear so everybody
has the same understanding.
MR. PAWLOWSKI thanked Co-Chair Feige for the direction, saying
he views it as one of the key moving pieces in HB 277 that is
ripe for legislative engagement, just as how the legislature
will participate in the development of the contracts that enable
each of these stop and go decisions. Drawing attention to slide
2, he said those are the three big pieces that are up for
discussion in HB 277. Clarity is key in how the state will play
a role in this project going forward. Some of those assumptions
are articulated in the HOA. The MOU describes one specific
arrangement of the state transferring and working with
TransCanada for the midstream portion of the project.
2:10:30 PM
REPRESENTATIVE SEATON noted that one alignment issue was about
having the percentage of all the pieces. He asked what the
alignment is if AGDC is 20 or 30 percent of the LNG and 0-40
percent of the midstream pipe. He further asked whether it is a
fixed percentage of all components because it really only works
if there is an equal amount through the entire process.
MR. PAWLOWSKI brought attention to slide 2, saying the HOA at a
broad high level describes that alignment concept and that
alignment concept starts with the gas. The state's share of the
gas feed will drive what the state share of the project is. For
example, if the state's share is 20 percent of the gas, the
state will have 20 percent of the infrastructure. Looking back
to the [November 18, 2013, Alaska North Slope Royalty Study by
Black & Veatch (royalty study)], that decision is the real
alignment. The MOU is a separate step away from that. Each
party, each owner of the gas resource, will determine how it
will finance or support its particular share. The MOU says the
state is going to support its share through AGDC subsidiary
participation. That does not upset the fundamental alignment of
the gas in the infrastructure because the alignment is as much
about what is happening to the other partners. One alternative
to moving the project forward was to reduce royalty rates to
reduce the burden of investment in infrastructure to carry the
value. However, the policy call was made that reducing the
royalty was not in the best interest of the state; rather, the
state co-investing along with its share of the gas was the way
to maximize the value to the people of Alaska. How the state
finances that participation is a state question. He encouraged
committee members to ask the companies their perceptions of that
and whether it up-ends the alignment. From the state's
perspective it does not. What matters is that the state's share
of the gas matches the state share of the infrastructure. Who
the state brings in to work with, within reason, is the state's
choice, not the choice of the other parties.
REPRESENTATIVE SEATON posed a scenario of 25 percent, meaning
the alignment would be that TransCanada has one-fourth of the
amount. He surmised the option would then be whether the state
wants to purchase part of that, but TransCanada would have one-
fourth of the capacity in the pipe. One-fourth of the
liquefaction capacity would belong to AGDC, which would allow
that alignment to be set up.
MR. PAWLOWSKI replied correct.
2:14:49 PM
REPRESENTATIVE HAWKER noted that overall the operating agreement
would be very large. As currently conceived, three producers
would own about 75 percent of the project and another entity
would own about 25 percent. He understood Mr. Pawlowski to have
said that the producers would be completely indifferent to what
the state did with the state's quarter of the project. He
remarked it seems odd to him that a party putting up $45-$65
billion in an aggregate project would not want to know who its
partner was going to be. He expressed amazement that industry
would be ambivalent toward the terms of the MOU, who the state's
partners are, and what the state's intent is. He asked what the
administration did to get that concurrence from the producers
and whether the producers had a chance to review the MOU so they
knew what they were getting into before they signed the HOA.
MR. PAWLOWSKI apologized, acknowledging he stretched the
boundaries of language when he said that "within reason" the
partners the state brings in and he should have been more
careful. Of course, the partners care about the credibility and
capability of the partners that the state brings to the table;
that is a fundamental issue. The state was working with
TransCanada throughout the process of the development of the
Heads of Agreement, he reported. As called for by the governor
in 2011, all of the parties were working together. Saying [the
administration] is comfortable, he urged the committee to ask
the other parties about their relationship to TransCanada. The
other parties were not in a position, or asked, to review the
agreement between the state and TransCanada, he noted. The HOA
references the agreement between the state and TransCanada being
released concurrently. So the MOU and HOA were released at the
same time. The MOU is a separate agreement between the state
and TransCanada, but comfortable within the boundaries of the
HOA as signed by all the parties.
2:18:11 PM
REPRESENTATIVE HAWKER appreciated Mr. Pawlowski's apology.
However, he said he is hearing within Mr. Pawlowski's response
that it would be judicious for the committee to get put on the
record the comfort level that the proposed participants to this
project have with the terms of the MOU, given they were not
consulted in its construction.
MR. PAWLOWSKI answered the administration, regarding the MOU,
will continue to work with the committee to talk about the
interest that is seen as a state. What committee members ask
the companies is something for which he would not presume to
offer guidance. He will continue to talk about the policy
reasons the state is offering in advancing the MOU.
2:19:01 PM
REPRESENTATIVE P. WILSON understood that the agreement between
TransCanada and Alaska that was released at the same time [as
the HOA] was the MOU.
MR. PAWLOWSKI responded correct.
REPRESENTATIVE P. WILSON presumed that the other parties do not
really care about how Alaska does, the other parties only care
about whether the deal works for them. She asked how
legislators will be able to determine whether the State of
Alaska is getting the best deal.
COMMISSIONER BALASH replied a number of things were considered
when [the administration] examined the specific terms and
whether they were acceptable and in Alaska's interest. The
terms were benchmarked against a variety of other work, other
decisions made by this body, and a positive conclusion was
reached. [The administration] examined the Federal Energy
Regulatory Commission (FERC) approved rates of return and
capital structure for new-build projects under Section 7 of the
Natural Gas Act. While not exactly analogous here because this
is expected to be a Section 3 governed project, it is a starting
point. Also looked at was the capital structure for other LNG
projects around the world, some that include pipelines. Also
taken into account were the specific actions by the legislature
in 2008 on the AGIA license. The license contains terms that
are very similar to this, but [the administration] thinks this
package represents an improvement over that set of terms. The
royalty study included information that looked at these kinds of
metrics, such as what the typical returns are for a project like
this. [The administration] was satisfied that it was a positive
package and that it was going to allow retention of momentum
through calendar year 2014 and keep the project on a positive
trajectory. When getting down to the final sets of terms and
whether, for example, it was worth it to hold out for another
half point on the return on equity (ROE), [the administration]
looked at what that would mean to the state's net present value
and compared that to what a delay of a year might cost. It
turns out that a half point difference is worth about $100-$200
million in net present value to the state; a year's delay is
worth $800 million. That choice was weighed in regard to
whether to shop around for a better deal somewhere else, but it
was thought to not be in the state's collective interest. [The
administration] thought things were close enough with the
package of terms as they sat before the body in the MOU to meet
the state's long-term interests.
MR. PAWLOWSKI added that Representative P. Wilson's question is
a key question. He said the administration's consultants will
be available to work with committees to talk about the analytics
and look at these questions. Additionally, [the administration]
has confidence in the ability of the legislature's consultants
to look at the metrics and to do a financial analysis that is
independent of the administration.
2:24:34 PM
REPRESENTATIVE TARR, regarding how much the legislature needs to
appropriate and in what time frame, observed from slide 4 that
upwards of $43 million would be needed, plus another $27 million
to exercise the state's 40 percent option. She inquired whether
only those two costs will be what the legislature is looking at
next year. She further asked whether the costs depicted on
slide 5 also need to be looked at next year so things can move
in a seamless way.
MR. PAWLOWSKI answered he presumes the most efficient way to
advance the project is in the 2015 timeframe -- to be looking at
the totality of the appropriations necessary to move through
that stage gate, which would be FEED plus all of the other work.
That is what is meant by commensurate steps. The step
contemplated at this stage when looking at the fiscal note is
somewhere between $70 and $90 million. The next step is a much
bigger step and the step after that is in the tens of billions
of dollars by all parties to move into the construction stage.
2:26:07 PM
CO-CHAIR SADDLER, referring to the earlier statements made by
Commissioner Balash, said the extent to which the administration
can give more information to the committee about the analysis,
and the weighing and balancing done by the administration, might
forestall a number of probing questions because members must
exercise their independent judgments. The more members can be
helped in understanding the process that the administration went
through, the more comfort members will have with the
administration's calculations and conclusions.
COMMISSIONER BALASH responded he will be happy to do so.
2:26:36 PM
REPRESENTATIVE P. WILSON understood there are five fiscal notes
all from different departments. She requested the committee be
provided on one sheet of paper the amount of money needed for
2014 and the amount needed in 2015 for the project to proceed to
the next stage.
MR. PAWLOWSKI replied he would be happy to do that, but with the
caveat that he earlier put on the FEED stage, which is that at
this point there is a danger in being too precise. However,
those numbers will get better through the Pre-FEED stage.
COMMISSIONER BALASH added that those numbers will be prepared as
the governor's legislation contemplates the state take - 22.2
percent total - rather than the ranges seen on today's slides.
2:28:07 PM
REPRESENTATIVE HAWKER said the committee received some degree of
answers to the questions it submitted [after the committee's
January 29, 2014 hearing on the MOU]. He noted he is trying to
use [the 6-page response from commissioners Balash and Rodell,
dated February 11, 2014, and in the committee packet] as a
roadmap for things he wants to see discussed in committee; that
he had not planned on the answers just being written responses
that are never referred to again. He inquired as to whether the
administration pursued or considered other avenues besides this
one for extricating the state from the existing AGIA contract.
He further asked whether this was the only route considered and,
if so, why other viable options are not out there. He
maintained the [written] response to this question, question 4,
is a "nonresponsive response."
COMMISSIONER BALASH answered that the guidance taken from the
"org chart" is instructive here. In 2011 the governor called on
the parties to work within the AGIA framework, including with
the state's AGIA partner. As things have matured and picked up
speed in 2013, he would not say that alternatives were not
contemplated, but a need was not seen to break the partnership.
TransCanada has been a good partner, has worked well with state
agencies helping solve problems, and has worked hard to
understand the state's interests. As the state's participation
was considered in this project overall, the question was
considered as to what role TransCanada would play here, if any.
A spectrum of zero to fully representing the state's interest in
the midstream was considered and it can be seen where it ended
up. In the course of conversations with TransCanada it was
learned that the smaller TransCanada's interest the less likely
TransCanada was going to devote significant personnel to the
effort. What a pipe company really brings to the table is the
expertise -- the understanding that can be brought to bear here.
In the longer run, TransCanada's commercial motivations and
fiduciary interests are ones that [the administration] thinks
align fairly well with the state in the broader scheme of things
and provides a fine counterbalance overall and this ultimately
weighed in [the administration's] "decision making to end up at
the point we did in the end."
2:32:08 PM
MR. PAWLOWSKI interjected, saying an additional consideration
contemplated by the administration was that the MOU was not
drafted in isolation. While the MOU is a separate document and
agreement, at the time the MOU was being worked the
administration was also working with all of the parties on the
alignment document in the HOA. The comfort of all the parties
with TransCanada, the working relationship for years, and the
momentum was an issue in the development of the HOA. [The
administration] saw the benefits that TransCanada brought from
the state's side within the HOA in resolving key issues and also
saw the working relationship that the companies have with
TransCanada. At the same time [the administration] was working
the MOU, it was also conscious on momentum of the HOA. All
through last summer the governor was calling for a commercial
agreement. It took quite a long time to work both concurrently
to be able to get to a place where the state was comfortable
advancing them to the legislature and the public for
consideration. He stressed that [the administration] does not
view the [written] responses to the committee's questions as the
last response and looks forward to the give and take as more
questions are generated.
REPRESENTATIVE HAWKER offered his appreciation for the responses
of Commissioner Balash and Mr. Pawlowski. He said the responses
give him a great deal of personal comfort about the process that
was gone through and that it was a well-thought, deliberate
process that considered other alternatives. The route chosen is
sincerely thought by Commissioner Balash and Mr. Pawlowski to be
the best route forward and the aforementioned responses give him
much greater comfort than the written answer.
2:34:56 PM
CO-CHAIR SADDLER brought attention to question 9 in the
administration's February 11, 2014, response letter, which asks
where in the MOU or other related documents is TransCanada
required to build the pipeline. The administration's answer, he
related, says it is not required but that the state's preference
is TransCanada be selected. He asked who is saying this is the
state's preference and how was that expressed.
COMMISSIONER BALASH directed attention to the last page of the
February 11, 2014, response which shows a breakout of the
respective owner interest for each of the other three parties
when the state's equity is at 20 percent and at 25 percent. [At
20 percent state equity, ExxonMobil would be 34.6 percent, BP
22.5 percent, and Conoco Phillips 22.9 percent; at 25 percent
state equity, ExxonMobil would be 32.5 percent, BP 21.1 percent,
and Conoco Phillips 21.5 percent.] TransCanada's interest could
be the second largest among the parties by virtue of the state's
interest. That may weigh in the decision making as to who is
the actual lead to manage the construction of the project. Once
at operation, each of "the four pipes in a pipe" will be
operated relatively independently in terms of being able to
pursue additional opportunities or additional customers, which
is what the expansion policy in Appendix A of the HOA really
achieves. Whether or not a party is the actual Operator, that
party will be able to pursue additional opportunities to
transport more gas for more customers, including the state and
potentially others; that is one of the things that keeps [the
administration] attracted to TransCanada in this regard.
2:37:33 PM
MR. PAWLOWSKI interjected, bringing attention to the schematic
on page 30 of the Heads of Agreements [titled "Attachment 1,
Southcentral Alaska LNG - Integrated Team"]. He explained the
schematic shows how the parties will work together in the
concept selection agreements. TransCanada will be the lead for
pipelines, BP the lead in producing fields, and ConocoPhillips
the lead in the LNG plant. ExxonMobil will lead the integration
team and BP will lead the commercial team. Responding further,
he clarified the schematic is under Exhibit I-B of attachments
to the HOA and outlines the project team during the concept
selection period. Drawing attention to slide 3 of his
presentation, he explained that the Alaska Pipeline Project
(APP), in which TransCanada was the lead, plays a large role in
the midstream, just as BP as the operator of Prudhoe Bay is
bringing expertise as the lead in the producing fields. Each
company brings a particular expertise that complements the
differing expertise of the others. This gives confidence to the
people looking at the project that credible companies are
involved in pushing this project forward; each company has much
expertise around the different pieces of the project. [The
administration] also looked at the opportunities created by the
share that each party would own.
2:40:35 PM
CO-CHAIR SADDLER noted the answer to question 24 in the
administration's response says a flowchart will be presented
today. The flowchart is good, but it is high level, he said,
and he was hoping for a more detailed flowchart that talks about
the enabling legislation, equity agreements, and so forth. He
said he will be glad to work with the administration to identify
specifically what he would like to have. He presumed
Commissioner Balash and Mr. Pawlowski must have used some type
of schematic to find the path forward through all these things
and said he would like to have a copy of that.
MR. PAWLOWSKI responded a schematic is being working on and [the
administration] will work with the committee to continue that
work. A dilemma is translating from engineers through lawyers.
The designs get really impossible to read, so that issue is
still being worked through internally.
CO-CHAIR FEIGE quipped he is envisioning a wall full of sticky
notes that get moved around a lot.
2:41:49 PM
REPRESENTATIVE SEATON observed from the last page of the
administration's response that, regardless of the state having a
20 or 25 percent equity, BP and ConocoPhillips are basically at
equal percentages and ExxonMobil is at a slightly higher
percentage. He inquired whether those percentages are based on
the reserves of gas in the current fields.
COMMISSIONER BALASH replied yes, it is the working interest
owner percentage of each of the three parties in the combined
resources of Prudhoe Bay and Point Thomson.
REPRESENTATIVE SEATON asked whether all of the interests had by
each party have the same royalty rates on all of those fields.
COMMISSIONER BALASH answered no and said Point Thomson generally
has higher royalty rates than Prudhoe Bay.
2:42:59 PM
REPRESENTATIVE SEATON inquired how each party's combination of
royalty percentage, amount of gas, and tax rate are being looked
at to come up with the specific percentage of share equity per
party.
COMMISSIONER BALASH responded that it will require lots of work
on the gas balancing agreements referenced in the HOA. The
presumption is that there will be a 75/25 mix of Prudhoe
Bay/Point Thomson gas for the vast majority of the life of this
project. As long as that is the case, it can be counted on that
the numbers will be relatively stable. But, in the early years,
there may be a concentration of one or the other field, in which
case it must be ensured that all of the parties are kept whole
commercially; that a consistent amount and volume of gas for
each party can be provided that matches up with the presumptions
for throughput and volumes produced at the LNG plant that will
go into the Sale and Purchase Agreements (SPAs) that will be
marketed and completed.
2:44:46 PM
REPRESENTATIVE SEATON expressed his concern that as a
representative of Alaska he wants to ensure that what happened
with the administration's bill on oil taxes will not happen in
this agreement, which was that everyone pays at 12.5 percent
even though some had bids at 16 percent. For people putting
through the same amount of gas, he said he wants to ensure that
if there is a difference in royalty between different fields
there will not be varying tax rates to compensate for the
different royalty rates. This is a long-term project and now
the state is taking tax in-kind and it could become "mushy" and
expensive unless all of the aforementioned is figured out ahead
of time.
MR. PAWLOWSKI replied there are two key points in HB 277, the
first being that the bill contemplates the "opportunity" for in-
kind. All tax being paid in-kind at all times is not being
allowed. Rather, the in-kind option for tax exists for very
specific instances, which is consistent with the Heads of
Agreement when a party's royalty has been taken in-kind.
Second, HB 277 does not contemplate changes, offsets, or
differences in the tax rate for gas. The combination of these
two things drives the state's share in the project. Offsetting
incentives are not being looked at to offset different royalty
rates. A simple flat tax system of 10.5 is being proposed,
which will be discussed when the bill is before the committee.
2:47:57 PM
CO-CHAIR SADDLER drew attention to question 1 on the first page
of the administration's February 11, 2014, response, which asks
whether there is a termination contract [related to the AGIA
license]. He related that the answer states there is no
termination contract and that there are two different mechanisms
for terminating the AGIA license. One is an uncontested
abandonment under a certain section and the other is a mutual
agreement that the original project contemplated is uneconomic.
Maintaining that those two mechanisms are parallel and
duplicative, he asked the reason for having both.
COMMISSIONER BALASH answered the AGIA statute provides two
paths, with both paths starting the same way. He posed a
scenario in which the State of Alaska, through the DNR and DOR
commissioners, says the project is uneconomic. That triggers
one of two outcomes. One is that TransCanada agrees and it is
mutually agreed to abandon with no contest. The other is "not
so fast, you gotta approve ... that the project is uneconomic."
There is a skeleton of a process laid out in the statute that
would govern that contested determination involving an
arbitrator and certain economic assumptions. If at the end of
that process the arbitrator says the state is correct and it is
uneconomic, then everything wraps up. If the arbitrator goes in
TransCanada's favor, then the license stays in effect and there
potentially are rights to make up for any lost time or value.
2:50:12 PM
CO-CHAIR SADDLER asked whether he is correct in assuming there
are two different mechanisms and it will be the state's decision
to pursue both of them or just one of them.
COMMISSIONER BALASH responded the path outlined in the MOU is
the first one that he described. The process is outlined in
statute and the state would initiate and TransCanada would agree
that the "Alberta project" is uneconomic. Responding further,
he confirmed this would be called the uncontested abandonment.
CO-CHAIR SADDLER understood that is separate and distinct from
TransCanada's agreement that the AGIA project is uneconomic.
One is uncontested and the other is going through the transition
agreements. He said he does not understand why because both
seem to be the same end, but two different paths.
COMMISSIONER BALASH replied the intent if the enabling
legislation is adopted is to draft and execute the transition
agreements identified in the MOU, specifically the Precedent
Agreement and the Equity Option Agreement. That would then
trigger the process for abandonment of the license. It would be
at that point that [the state] would raise its hand, initiate
the process on the state's side, and TransCanada would then
agree that the "Alberta project" is uneconomic.
CO-CHAIR SADDLER understood that is the mutual agreement that is
uneconomic.
COMMISSIONER BALASH answered yes.
CO-CHAIR SADDLER said that is distinct from the uncontested
abandonment of the AGIA license.
COMMISSIONER BALASH responded "uncontested" and "mutual" are the
same thing.
2:52:07 PM
CO-CHAIR SADDLER said he still does not understand whether it is
one process or two.
MR. PAWLOWSKI offered his belief that part of the confusion here
is that the pathway for the uncontested abandonment stated in
sentence two of the response [for question 1] is based on the
determination that the project is uneconomic. They are not
actually separate processes; the way the word "uneconomic" is
used here implies a separate process, but actually the
abandonment process itself depends on the decision to be
uneconomic. It really is one process. How the process is
executed, whether it is uncontested or mutual, changes how that
one process is gone through.
2:53:19 PM
CO-CHAIR FEIGE said the whole arrangement with the MOU and how
it fits into the HOA is fine. The business deal that is the MOU
asks that the State of Alaska essentially cede a share of its
potential ownership in the overall project to TransCanada; a
value is assigned to that. [The administration] has
demonstrated there is value that TransCanada brings to this.
The question for the committee is whether the values offset
whether it is a good deal for the state or a slightly better
deal for TransCanada. Slide 4 depicts the numbers being talked
about for the next two years. If the state executes "the
divorce option," which is the red box on slide 3, the state pays
$130 million for the information and the state walks down the
road without bringing somebody else into the overall project.
If the state did that, the state would be on the hook for a lot
of these costs. Not having to put up cash initially has a value
to the state. The state may exercise an option to buy back 40
percent of that overall share in just the pipeline and the gas
treatment plant (GTP). He inquired what those values are and
whether the value of the equity share is offset by that. He
further inquired whether the state has to go further down the
road into the FEED process and the billions of dollars that have
to be spent to get through FEED. He asked at what point the
value works out to be an equitable arrangement for the state.
2:55:58 PM
MR. PAWLOWSKI replied that one of the two issues is the upfront
cash. Today, the equity option from a net present value
perspective does not look like a good deal to the state because
of the time that elapses when the state is putting cash on the
table. The revenues the state is receiving when the project is
in operation must be carefully looked at because the time
between today and the time of operation in the mid-2020s is a
long time to be putting cash out before there is revenue coming
back in. When looking at it from a purely net present value
basis, the state actually comes out ahead by having TransCanada
as a partner. Exercising the equity option so that the state is
paying money during that time period actually reduces some of
the net present value benefit to the state of not having to
spend that money. The carry cost must be analyzed. When looked
at broadly, the state's opportunity cost of capital is about 6
percent -- the state earns 6 percent when its money is sitting
in the Constitutional Budget Reserve Fund (CBR). Taking that
money out of the CBR, or out of another reserve account, and
putting it into this project comes at a cost. The state's debt
capacity must also be carefully looked at for that financing
period of 2018-2024. There is a certain limit to the amount of
debt that the state can prudently take and analysis of that is
ongoing. The offset of the money in the near term versus the
revenue difference in the long term shows little difference in
the revenue in the long term to compensate for the cash out in
the near term. [The administration] looks forward to the
legislature's consultants getting up to speed on those numbers
and providing an independent analysis around that. The state
has some of that information available online in the royalty
study. He cautioned members about the lens through which this
is looked at in regard to determining whether this business
deal, this offset, makes sense because it could be looked at
purely from a net present value standpoint that would under-
appreciate some of the cash benefits in the outer years that the
equity option provides.
3:00:19 PM
REPRESENTATIVE P. WILSON emphasized she wants to ensure the
legislature does not do anything that would jeopardize [the
state's] position. She said she would like to hear from
TransCanada that going ahead with ASAP, as is being done by
AGDC, will not trigger the triple damages [under AGIA].
TONY PALMER, President, TransCanada Alaska, LLC and Vice
President, Alaska Development, TransCanada, replied the process
underway today, in which TransCanada has participated with the
state administration, the three major producers, and AGDC, and
which is before the committee for its consideration, has not
been in contravention of the AGIA process during the course of
that timeframe.
3:01:54 PM
REPRESENTATIVE P. WILSON understood [HB 277] is what is before
the committee. Since no one knows what the next step is, she
presumed that Mr. Palmer cannot speak in regard to that area.
MR. PALMER responded yes, TransCanada has agreed with the other
parties, including the administration, on a structure to go
forward to transition out of AGIA into a new structure. He said
he cannot predict what will happen in the event the legislature
says no to that structure and then wishes to go forward on a
different basis. TransCanada has agreed that during the course
of this process the state is not in contravention of the treble
damages issue. In the event the legislature decides to say no
to this proposal, TransCanada will see what the situation is at
that time.
REPRESENTATIVE P. WILSON surmised the aforementioned means that
maybe TransCanada would go back to where things are at now and
change its mind.
MR. PALMER said that going forward he cannot look to respond to
a hypothetical circumstance if the state turns down the
legislation. TransCanada has agreed to a structure today that
it thinks is a smooth and amicable transition with the
administration - subject to sanction by the legislature - that
would move out of AGIA and into a new structure.
3:03:38 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:04 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HRES MOU Questions & Answers Administration 2.12.14.pdf |
HRES 2/12/2014 1:00:00 PM |
|
| HRES 2.12.14 Misalignment Risk (1).pdf |
HRES 2/12/2014 1:00:00 PM |
|
| HRES 2.12.14 Putting the MOU and HOA in Context.pdf |
HRES 2/12/2014 1:00:00 PM |