Legislature(2013 - 2014)BARNES 124

02/17/2014 01:00 PM House RESOURCES


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01:33:41 PM Start
01:34:02 PM Overview(s): Sectional Analysis - Memorandum of Understanding, State of Alaska and Transcanada
03:51:07 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
--Delayed to 1:30 p.m. Today--
+ Sectional Analysis - Memorandum of Understanding, TELECONFERENCED
State of AK & TransCanada by Don Bullock,
Attorney - Legal Services
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                       February 17, 2014                                                                                        
                           1:33 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):  SECTIONAL ANALYSIS - MEMORANDUM OF UNDERSTANDING~                                                                 
STATE OF ALASKA AND TRANSCANADA                                                                                                 
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
DONALD BULLOCK JR., Attorney                                                                                                    
Legislative Legal Counsel                                                                                                       
Legislative Legal and Research Services                                                                                         
Legislative Affairs Agency                                                                                                      
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Provided an overview and PowerPoint slides                                                               
on the Memorandum of Understanding (MOU) between the State of                                                                   
Alaska and TransCanada Alaska Company, LLC.                                                                                     
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
1:33:41 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  ERIC   FEIGE  called   the  House   Resources  Standing                                                             
Committee meeting to order at  1:33 p.m.  Representatives Seaton,                                                               
Kawasaki,  Hawker,  Olson, P.  Wilson,  Saddler,  and Feige  were                                                               
present at  the call  to order.   Representative Tarr  arrived as                                                               
the meeting was  in progress.  Representative  Josephson was also                                                               
in attendance.                                                                                                                  
                                                                                                                                
^OVERVIEW(S):  SECTIONAL ANALYSIS  - MEMORANDUM OF UNDERSTANDING,                                                               
STATE OF ALASKA AND TRANSCANADA                                                                                                 
OVERVIEW(S):  SECTIONAL ANALYSIS - MEMORANDUM OF UNDERSTANDING,                                                             
                STATE OF ALASKA AND TRANSCANADA                                                                             
                                                                                                                                
1:34:02 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  announced that  the only order  of business  is a                                                               
sectional analysis presentation  from the legislature's attorney,                                                               
Don  Bullock, regarding  the  Memorandum  of Understanding  (MOU)                                                               
that the administration and TransCanada  Alaska Company, LLC have                                                               
entered into for the Alaska Liquefied Natural Gas (LNG) Project.                                                                
                                                                                                                                
1:34:19 PM                                                                                                                    
                                                                                                                                
DONALD  BULLOCK JR.,  Attorney,  Legislative  Legal and  Research                                                               
Services, Legislative  Affairs Agency, Alaska  State Legislature,                                                               
introduced himself, noting  he began work as an  attorney for the                                                               
legislature in  2001 and  has worked on  tax and  pipeline issues                                                               
since 2006.   Prior to  2001, he spent  17 years working  for the                                                               
Department  of  Revenue,  including  work as  a  revenue  hearing                                                               
examiner where  he figured  out what the  laws meant  and applied                                                               
them to the factual situations that  came up.  During his time as                                                               
legislative legal counsel  he has been involved  in the petroleum                                                               
profits  tax (PPT),  Alaska's Clear  and Equitable  Share (ACES),                                                               
the Alaska Gasline Inducement Act (AGIA), and SB 21.                                                                            
                                                                                                                                
MR. BULLOCK  said the focus of  his presentation will be  how the                                                               
responsibility  of  the  legislature  fits  in  with  the  Alaska                                                               
Gasline Inducement Act (AGIA), which  is current law; the January                                                               
14, 2014 Heads  of Agreement (HOA) between the  producers and the                                                               
state; and  the December  12, 2013, MOU  with the  AGIA licensee.                                                               
The only  thing the legislature  will be able  to vote on  is the                                                               
enabling legislation [HB 277 and SB  138], he continued, so it is                                                               
good  to  have   an  understanding  of  the  MOU   and  the  HOA.                                                               
Legislators must figure out what  the bounds are for the enabling                                                               
legislation -  the legislature can  amend those bills and  set up                                                               
the  boundaries  within  which the  administration  can  continue                                                               
toward developing a major gas project in the state.                                                                             
                                                                                                                                
1:37:13 PM                                                                                                                    
                                                                                                                                
MR. BULLOCK  outlined the  timeline of where  the state  has been                                                               
under  AGIA:   March  5,  2007, bill  introduced;  June 8,  2007,                                                               
effective date  after bill signed  into law by governor;  July 2,                                                               
2007, request  for applications under  AGIA issued by  the state;                                                               
November 30,  2007, application from TransCanada  Alaska Company,                                                               
LLC [and co-applicant Foothills Pipe  Lines Ltd.] received by the                                                               
state;  January  4, 2008,  Commissioners  of  the Departments  of                                                               
Natural Resources  (DNR) and Revenue  (DOR) find  the application                                                               
to be the only one  received that complied with the requirements;                                                               
May 27, 2008, issuance of  "Written Findings and Determination by                                                               
the Commissioners of DNR and DOR  for Issuance of a License under                                                               
the Alaska Gasline Inducement Act  (AGIA)"; June 3, 2008, HB 3001                                                               
and SB 3001 introduced to  approve the license recommended by the                                                               
commissioners; and, August  27, 2008, HB 3001 signed  into law by                                                               
the governor.   Mr. Bullock noted  that the effective date  of HB
3001 failed to  pass the legislature, which  delayed the issuance                                                               
of  the  contract  and  which   is  of  significance  because  an                                                               
effective date could  be an issue under  the enabling legislation                                                               
given   that  there   are  references   to  when   that  enabling                                                               
legislation will  take effect.   Mr. Bullock  continued outlining                                                               
the timelines:  November 25,  2008, act approving the issuance of                                                               
the  AGIA license  took effect;  December 5,  2008, AGIA  license                                                               
issued;  between  April and  July  2010,  licensee conducted  its                                                               
first  binding   open  season;  May  3,   2012,  announcement  of                                                               
unsuccessful results of the open  season; and July 30, 2012, non-                                                               
binding  solicitation of  interest  announced for  the period  of                                                               
August 8, 2012 through September 9, 2012.                                                                                       
                                                                                                                                
1:39:55 PM                                                                                                                    
                                                                                                                                
MR. BULLOCK pointed out that AGIA is  the law and is the law that                                                               
gave  the bounds  for the  administration to  determine what  the                                                               
license,  which  is effectively  a  contract,  should look  like.                                                               
Under this contract the state  will reimburse the expenditures in                                                               
anticipation of receiving the commitments  being carried out that                                                               
are in AS  43.90.130.  He explained that  during consideration of                                                               
AGIA, these  commitments were  called the  "must haves"  and they                                                               
were controversial and  well discussed.  He  emphasized that AGIA                                                               
is not  dead yet,  it is  still in the  picture, there  are still                                                               
commitments to pay  ongoing expenses under AGIA in the  MOU up to                                                               
a certain point.  How AGIA is going  to end is one of the biggest                                                               
issues needing to be considered and addressed.                                                                                  
                                                                                                                                
MR.  BULLOCK  stressed  the  importance  for  members  to  really                                                               
understand  the MOU  - what  it says  and how  the administration                                                               
wishes to  carry it forward.   The MOU provides for  a transition                                                               
from the  relationship between  TransCanada Alaska  Company, LLC,                                                               
and Foothills  Pipe Lines Ltd.   The TransCanada  corporate group                                                               
will  continue  to participate  in  the  new Alaska  natural  gas                                                               
pipeline  project  by  including another  TransCanada  affiliate,                                                               
TransCanada  Alaska  Development Inc.  (TADI),  which  is also  a                                                               
party to  the MOU.  Under  the MOU, the state  must negotiate two                                                               
transition agreements  with TransCanada  and the affiliate.   The                                                               
first is the Alaska LNG  Project Equity Option Agreement relating                                                               
to how  the state will  acquire equity ownership in  the pipeline                                                               
if it  so chooses, and which  would be through the  interest that                                                               
is actually  held by  the TransCanada affiliate.   The  second is                                                               
the Alaska LNG Midstream Services Agreement.                                                                                    
                                                                                                                                
1:44:11 PM                                                                                                                    
                                                                                                                                
MR. BULLOCK pointed out that  the first binding open season under                                                               
AGIA was  important.  Expected  during that open season  was that                                                               
shippers would  commit to capacity  in that pipeline,  enter into                                                               
Precedent Agreements,  and later  enter into  Firm Transportation                                                               
Services  Agreements in  which  the  shippers use  or  pay for  a                                                               
certain part of the capacity.   The Alaska LNG Midstream Services                                                               
Agreement is  the state  committing to put  its gas  through that                                                               
part of  the pipeline that  TransCanada's affiliate  continues to                                                               
own.  Thus, it  is just like what would happen  in an open season                                                               
as  far as  commitment  goes.   However, he  said,  he is  unsure                                                               
whether in  this case it would  be subject to the  Federal Energy                                                               
Regulatory Commission  (FERC) or whether  it would be  subject to                                                               
the Regulatory Commission  of Alaska (RCA).  The  concept is that                                                               
neither  would apply;  it  would be  treated  like an  industrial                                                               
pipeline in  which a producer gets  the gas to the  LNG plant and                                                               
then ships it to water with outlets to the state along the way.                                                                 
                                                                                                                                
MR. BULLOCK  noted that the  governor's enabling  legislation and                                                               
the  MOU address  the state's  gas and  the issue  of taking  gas                                                               
royalty in-kind  or in-value.   The bill  also proposes  to allow                                                               
the state to accept [tax] from  the producers in the form of gas;                                                               
therefore,  the state  could have  a significant  amount of  gas.                                                               
Responding  to  Representative  Seaton and  Co-Chair  Feige,  Mr.                                                               
Bullock confirmed  that the enabling legislation  would allow the                                                               
state to take its royalty and its  tax in either dollars or gas -                                                               
royalty  in-kind or  royalty  in-value, tax  in-kind  or tax  in-                                                               
value.  That  option will be part of the  negotiation between the                                                               
lease  holders  and  DNR.    Under  AGIA,  there  was  a  similar                                                               
incentive for  somebody that would  commit during the  first open                                                               
season in  that it addressed the  issue of when the  gas would be                                                               
taken in kind or in value.                                                                                                      
                                                                                                                                
1:46:55 PM                                                                                                                    
                                                                                                                                
MR. BULLOCK reported that the  governor's legislation will change                                                               
the taxation  on gas  and oil,  such that  it would  be separate.                                                               
Under the bill,  the taxation of gas would be  on the gross value                                                               
at  the  point  of  production  at  the  rate  of  10.5  percent.                                                               
However,  the  state's  [one-eighth]   royalty  interest  is  not                                                               
subject to tax, so only seven-eighths  of the gas will be subject                                                               
to that 10.5 percent.  He  calculated that 10.5 percent of seven-                                                               
eighths is  roughly 9.2 percent.   For purposes of  discussion he                                                               
assumed a  royalty of 12.5  percent, then calculated that  if the                                                               
state got  all the royalty  in gas, assuming one-eighth,  and got                                                               
all  the tax  as gas,  9.2 percent,  that would  add together  to                                                               
about  21.7  percent  of  the production.    That  percentage  is                                                               
important because it  relates to the equity  ownership issue that                                                               
TransCanada will  have in the  pipeline.   If the state  has 21.7                                                               
percent,  it is  going to  commit to  ship 21.7  percent in  that                                                               
pipeline.   That will  be the  interest that  the state  has; the                                                               
other interest will be divided by the three major producers.                                                                    
                                                                                                                                
MR. BULLOCK  said the state  is not coming in  independently, and                                                               
he qualified that  he does not completely have  his "head around"                                                               
the option to participate in  the equity position of TransCanada.                                                               
The project is  divided into two major parts, he  explained.  The                                                               
midstream  part goes  from the  entry to  the transmission  lines                                                               
from  Prudhoe Bay  and  Point Thomson  to the  inlet  at the  LNG                                                               
plant, currently  expected to be  at Nikiski.   The LNG  plant is                                                               
the part  that will take the  gas, chill it, liquefy  it, and put                                                               
it  on ships  at the  marine terminal.   The  MOU addresses  that                                                               
midstream portion.   One  option for  the LNG  plant would  be to                                                               
have  the Alaska  Gasline Development  Corporation (AGDC)  expand                                                               
its powers and invest in  state's ownership of that LNG facility,                                                               
which may possibly be at the  same percentage as the state's gas,                                                               
although, he added, he is not  sure exactly where this part is at                                                               
this point  in time.   The  state is  going to  have gas  and the                                                               
TransCanada affiliate  will be  shipping the  gas for  the state.                                                               
Signing  of  the  Precedent  Agreement  and  Firm  Transportation                                                               
Services Agreement  will mean the state  is going to be  paying a                                                               
tariff for a  period of 20-25 years, and the  state will pay that                                                               
tariff whether  or not it ships  gas because that is  how tariffs                                                               
work.  The  initial contract term is identified in  the MOU as 25                                                               
years, but the MOU says it could  go down to 20.  This is nothing                                                               
new, this is what AGIA or  any gas pipeline is looking at because                                                               
of  the  significant costs,  particularly  in  the LNG  facility.                                                               
There  has  to  be  assurance of  these  long-term  contracts  to                                                               
support the financing  of the pipeline.  The  state committing to                                                               
ship  its share  of  the gas  in that  portion  of that  pipeline                                                               
provides  some assurance  that the  owner of  that interest  will                                                               
recover its cost and will be able to finance it.                                                                                
                                                                                                                                
1:50:59 PM                                                                                                                    
                                                                                                                                
MR. BULLOCK  turned to  the topic  of alignment,  explaining that                                                               
alignment gets everybody on the  same track and moving forward at                                                               
the same time.   The state's "part of the  train" will be between                                                               
20 and  25 percent  of the  gas.   To that  extent, the  state is                                                               
aligned with  the producers because  the state will have  gas and                                                               
will have to ship it and  market it, although the details for how                                                               
it  will  be marketed  remain  to  be  worked  out.   One  thing,                                                               
however, makes the  state out of alignment, and that  is that the                                                               
state is the caboose  on the train.  If gas  is not produced, the                                                               
state does not  get royalty and there is no  production the state                                                               
can tax under  the production tax.  So, the  state's alignment is                                                               
there as  a gas owner  except that the  state does not  start off                                                               
with having  the right to the  gas until it is  actually produced                                                               
or the tax is paid with it.                                                                                                     
                                                                                                                                
MR.  BULLOCK  advised  members that  the  aforementioned  is  the                                                               
summary of  what he considers  the most significant parts  of the                                                               
MOU.   He then  addressed the  enabling legislation,  noting that                                                               
the MOU is  in front of committee members, and  members have been                                                               
told that  if the enabling  legislation is not acceptable  to the                                                               
parties the  MOU will go  away.  If the  MOU goes away,  there is                                                               
the issue of AGIA, and AGIA is the  same now as it will be if the                                                               
MOU goes  away, and that  is where  the discussion comes  out as,                                                               
"How  does one  evolve out  of  AGIA?"   Three statutes  describe                                                               
ending  AGIA:   AS  43.90.230, AS  43.90.240,  and AS  43.90.440.                                                               
There  are no  allegations  that the  licensee  has violated  the                                                               
license  agreement, so  AS 43.90.230  is  not much  of an  issue.                                                               
TransCanada is a good party that  does well in the business it is                                                               
in and it  has stuck to the agreement.   Alaska Statute 43.90.240                                                               
addresses  what will  happen  if the  licensed  project is  found                                                               
uneconomic.  The  MOU contemplates that if  certain things listed                                                               
in the MOU are done, the  commissioners will commit to pursue the                                                               
finding that the project is  uneconomic, or they will allege that                                                               
it is  uneconomic, and TransCanada  will agree if  the conditions                                                               
are met.   However, he  counseled, there  is some question  as to                                                               
whether that was a statutory way  to get out of AGIA because AGIA                                                               
is the law that protects the state.                                                                                             
                                                                                                                                
1:54:04 PM                                                                                                                    
                                                                                                                                
MR.  BULLOCK   elaborated  regarding  an   uneconomic  situation,                                                               
explaining that  the license will  end if both  the commissioners                                                               
and the licensee agree that the  project is uneconomic.  They may                                                               
use whatever  criteria they  want, such as  the project  will not                                                               
make  money or  no  one wants  to  use the  pipeline.   Under  AS                                                               
43.90.240(e),  the  state   is  allowed  to  get   the  data  and                                                               
information gathered  by the licensee  during the  preparation of                                                               
the project by  paying the net amount of  the licensee's expenses                                                               
for that  data gathering.   Drawing  attention to  page 3  of the                                                               
handout in the  committee packet entitled, "Authority  to end the                                                               
AGIA project in AS 43.90," he read aloud AS 43.90.240(e):                                                                       
                                                                                                                                
     If the  commissioners and the  licensee agree  that the                                                                    
     project is  uneconomic or an arbitration  panel makes a                                                                    
     final  determination that  the  project is  uneconomic,                                                                    
     the licensee shall, upon  the state's request, transfer                                                                    
     to the  state or  the state's designee  all engineering                                                                    
     designs, contracts, permits, and  other data related to                                                                    
     the project  that are acquired  by the  licensee during                                                                    
     the  term  of the  license  upon  reimbursement by  the                                                                    
     state of  the net  amount of expenditures  incurred and                                                                    
     paid by  the licensee  that are  qualified expenditures                                                                    
     for the purposes of AS 43.90.110.                                                                                          
                                                                                                                                
MR.  BULLOCK, continuing,  pointed  out that  if  the project  is                                                               
uneconomic under the MOU, nothing  in the MOU addresses what will                                                               
happen with the information that  is gathered.  There is probably                                                               
a reasonable  expectation, he advised,  that if the  AGIA license                                                               
faded  away  under  the   uneconomic  finding  and  TransCanada's                                                               
affiliate continued as  part of the Alaska LNG  Project, that the                                                               
data would be incorporated, but, he qualified, he does not know.                                                                
                                                                                                                                
1:56:49 PM                                                                                                                    
                                                                                                                                
MR. BULLOCK said  an onerous way for the license  to end would be                                                               
for the state to provide certain  types of support to a competing                                                               
pipeline.   A  competing  pipeline means  a  project designed  to                                                               
accommodate throughput  of more than  500 million cubic  feet per                                                               
day of  North Slope  gas to  market.   Last year  the legislature                                                               
passed HB 4, which focused on  a smaller pipeline to bring gas to                                                               
Alaskans soon.   It was carefully written to  avoid that pipeline                                                               
becoming a  competing pipeline by containing  provisions that, so                                                               
long as  somebody is  eligible to  receive the  inducements under                                                               
AGIA, the  smaller pipeline currently  proposed by AGDC  will not                                                               
become a competing natural gas pipeline.                                                                                        
                                                                                                                                
MR. BULLOCK  noted that if  AGIA goes  away, there is  always the                                                               
option of looking at somebody  else to carry the state's interest                                                               
forward.  Under the MOU, it  would be a TransCanada affiliate and                                                               
the  equity  interest  would  be acquired  by  buying  into  that                                                               
limited  partner that  is going  to  hold the  percentage in  the                                                               
project that is equal  to the state's gas that it  is going to go                                                               
through  that project.   If  the legislature  wants to  continue,                                                               
there are other options and AGDC  is one option; AGDC was part of                                                               
the discussion in developing the Heads of Agreement.                                                                            
                                                                                                                                
MR. BULLOCK advised  members to look at the 20-25  year period of                                                               
time that  the state will be  committing to ship the  gas and the                                                               
interest that the state will have  in that pipeline.  The state's                                                               
ability to come up  with the money to pay the  tariff needs to be                                                               
looked at  because it  is a long-term  commitment under  the Firm                                                               
Transportation Services  Agreement.   There will be  hefty issues                                                               
with appropriations,  but he guessed  that program  receipts from                                                               
the sale of the gas would pay  for the tariff.  The state's long-                                                               
term financial obligation is something to really consider.                                                                      
                                                                                                                                
1:59:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  asked whether  the state agreeing  to ship                                                               
gas for 20-25  years is the same condition as  the "producer ship                                                               
or pay."   He further queried  whether the state could  divert an                                                               
amount of gas if  it were willing to pay or would  that be a firm                                                               
commitment that the state is making but [the producers] are not.                                                                
                                                                                                                                
MR. BULLOCK replied  the state is going to have  to pay something                                                               
because there are  certain costs that must be  paid regardless of                                                               
whether gas  is flowing through the  pipeline.  Exhibit C  of the                                                               
MOU   incorporates   provisions   pertaining   to   the   state's                                                               
relationship  with the  TransCanada  affiliate that  is going  to                                                               
operate the  pipeline.  Drawing  attention to Exhibit C,  page 2,                                                               
[item 6.2],  he recommended  that members  find somebody  who can                                                               
tell them about  tolls, what goes into tolls, and  what the costs                                                               
will be.   It is called a "toll" rather  than a "tariff" probably                                                               
because it  is not  subject to  regulation at  this point,  but a                                                               
toll is  what a shipper would  have to pay  to ship the gas.   He                                                               
paraphrased from item 6.2 which states:                                                                                         
                                                                                                                                
         Reservation rate, a fixed charge expressed in                                                                          
    $/mmBtu/month,    will   be    designed   to    capture                                                                     
     Depreciation Recovery,  Return on Equity  ("ROE"), Cost                                                                    
     of   Debt,   Income   Taxes,   fixed   Operations   and                                                                    
     Maintenance  Costs ("O&M"),  property  taxes and  other                                                                    
     non-income  related taxes.   Reservation  rate payments                                                                    
     will be  made by Shipper  regardless of actual  GTP and                                                                    
     Pipelines utilization by Shipper.                                                                                          
                                                                                                                                
MR.  BULLOCK continued  his answer,  pointing out  that item  6.2                                                               
includes a usage  rate in addition to the reservation  rate.  The                                                               
usage rate is a variable  charge expressed in dollars per million                                                               
British Thermal Units and it  is designed to capture the variable                                                               
operation and maintenance costs of the  gasline.  So, if there is                                                               
gas, it  will be subject to  both elements of the  toll; if there                                                               
is not  gas going through at  any particular time, there  will be                                                               
the reservation rate.                                                                                                           
                                                                                                                                
2:02:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  recalled Mr. Bullock's statement  that the                                                               
state would be committing to  ship the gas through the midstream.                                                               
Because ship-or-pay  is what was  previously being looked  at, he                                                               
said  he  would like  to  know  whether  the  state is  making  a                                                               
commitment to  ship its gas.   He posed  a scenario in  which the                                                               
state wants  one-third of its  gas to  go to Donlin  Creek rather                                                               
than all the way down and  asked whether, in this case, the state                                                               
could  just pay  the differential  toll charge.   Or,  he further                                                               
asked,  has the  state  made a  commitment to  ship  so that  the                                                               
producers would  be the  only ones that  could supply  that other                                                               
use in Alaska.                                                                                                                  
                                                                                                                                
MR.  BULLOCK  responded  he  thinks   that  will  be  subject  to                                                               
negotiation between the  producers.  The limited  capacity of the                                                               
pipeline  could be  thought  about in  terms  of Alaska  Airlines                                                               
flying  from  Seattle to  Anchorage,  with  a stop  in  Southeast                                                               
Alaska.   A seat that  is sold to  Ketchikan cannot be  sold from                                                               
Seattle to  Anchorage.  So,  to the extent  that not all  the gas                                                               
goes all the way to the  LNG facility and spares the costs, there                                                               
might be  a disproportionate  tariff to  the outlet  points along                                                               
the pipeline.   The state can sell  its gas to who  it wants, the                                                               
consideration  will be  what it  is going  to cost;  for example,                                                               
what the tariff is going to be if it comes out at Fairbanks.                                                                    
                                                                                                                                
2:04:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON clarified  he wants  to be  sure that  the                                                               
state is in exactly the same  position as the other parties, that                                                               
part of the state's gas could  go to other places, and that under                                                               
the MOU the state is not  committing its proportion of the gas to                                                               
go for 20 years through the midstream to the LNG [plant].                                                                       
                                                                                                                                
MR. BULLOCK answered  that the initial contract term  is going to                                                               
be the  term that  is required  to pay for  the facility.   There                                                               
will be  cost estimates and that  is how the toll  charge will be                                                               
figured  out.   Whatever the  tolls are  for short  shipping will                                                               
have to be  factored in and considered to pay  for the project as                                                               
a whole.   He brought attention to Exhibit C,  page 5, item 6.17,                                                               
which sets a minimum of  five in-state offtake points for non-LNG                                                               
consumption and sets three tariff  zones, one zone from the North                                                               
Slope to  Nenana, one  for deliveries  to Big  Lake, and  one for                                                               
deliveries to the  LNG plant for LNG exports.   Calculations will                                                               
be made  for what  it will  cost to ship  to those  three points.                                                               
Once the  gas is  flowing, the  state has  gas and  the producers                                                               
have gas.   Mr. Bullock  said he thinks  the state is  equal from                                                               
the standpoint that the state has a  quantity of gas to sell.  He                                                               
recalled that  both the  August 2013  gas symposium  in Anchorage                                                               
and the [November 2013] Black  & Veatch [report] talked about the                                                               
various  risks that  are involved  with the  state participation.                                                               
The state  will have  gas and  will have  to sell  the gas.   The                                                               
Heads  of Agreement  mentions that  the producers  will negotiate                                                               
with the state to  sell the gas on the state's  behalf.  There is                                                               
a risk that the state does  not have the flexibility that another                                                               
producer might  in that  the state  has to pay  some part  of the                                                               
toll  if it  does not  have gas  to  ship.   If the  state has  a                                                               
contract  for that  gas, the  state  may be  scrambling, or  even                                                               
having to buy  gas, to make its commitments.   The Black & Veatch                                                               
report cautions about that when  it talks about the various risks                                                               
that  are involved.   Thus,  the optimism  has to  be tempered  a                                                               
little bit.   In all projects,  the risks must be  identified and                                                               
then the  extent must be identified  to which these risks  can be                                                               
mitigated and get the rewards.                                                                                                  
                                                                                                                                
2:06:52 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  inquired whether  the context of  Mr. Bullock's                                                               
points  is  to provide  discussion  in  a  general sense,  or  to                                                               
highlight problem areas, or to provide a walk-through.                                                                          
                                                                                                                                
MR. BULLOCK  replied he is doing  both; for example, just  now he                                                               
was  specifically  referring  to  the  documents.    However,  he                                                               
continued, he  is mostly concentrating  on the issues  that these                                                               
agreements raise because  members do not have  the opportunity to                                                               
amend these  agreements.   Members will  have the  opportunity to                                                               
look  at  the  enabling  legislation   and  decide  whether  that                                                               
legislation is giving a framework with  it in which the state can                                                               
negotiate  for  this pipeline  to  go  forward.   For  particular                                                               
issues  that committee  members  are concerned  about after  this                                                               
overview, members need  to talk to the  administration about what                                                               
the language is, where it  is, and how the administration intends                                                               
to use it.                                                                                                                      
                                                                                                                                
2:08:01 PM                                                                                                                    
                                                                                                                                
MR.  BULLOCK,  responding  to Co-Chair  Feige,  confirmed  he  is                                                               
talking about additional boundaries  that legislators may want in                                                               
the  future to  add to  the enabling  legislation.   For example,                                                               
right  now the  MOU has  an affiliate  of TransCanada  owning the                                                               
interest that the  state will buy into.   This has not  gone to a                                                               
competitive process  and the competitive process  might be delay,                                                               
but he  advised that members  should still consider  whether this                                                               
is  the best  deal  that the  state  is  going to  get.   If  the                                                               
enabling legislation is  amended to say it is  not the affiliate,                                                               
which is what  the MOU is based on, this  would probably go away.                                                               
Members need  to consider what  effect that  is going to  have on                                                               
AGIA and  the length of delays  in trying to figure  out who else                                                               
might be  interested.   Regarding who  else might  be interested,                                                               
Mr. Bullock  noted that some things  are not known.   There was a                                                               
failed open  season.  TransCanada  has talked with  the producers                                                               
all along, but it is not  known how the producers and TransCanada                                                               
necessarily get  along and  "whether they  are, for  example, the                                                               
partner that they would choose."                                                                                                
                                                                                                                                
MR. BULLOCK  said that the producers  are going to have  at least                                                               
three-quarters interest in the pipeline,  and they have their own                                                               
pipelines   and   their   own   energy   experience.      Another                                                               
consideration is  TransCanada's interest in the  pipeline project                                                               
in British Columbia to Prince  Rupert and whether Alaska will get                                                               
TransCanada's  full attention  and how  TransCanada will  protect                                                               
itself  when it  is involved  in  a competing  project.   British                                                               
Columbia is pretty much in the  same position as Alaska as far as                                                               
the timing of each project and what  it will take to grab part of                                                               
the market.   TransCanada is following an  aggressive timeline in                                                               
development of  its Prince Rupert  gas transmission  project; the                                                               
company vice  president has  said that time  is certainly  of the                                                               
essence  because  growing demand  in  Asia,  and particularly  in                                                               
China,  means   huge  new   volumes  of   LNG  will   be  needed.                                                               
"TransCanada is a  pipeline company, this is what they  do, it is                                                               
not  a problem  here,  but  it is  something  you  might wish  to                                                               
consider,"  Mr.  Bullock  advised.   When  looking  at  competing                                                               
gasline  projects, he  continued,  Alaska has  an advantage  over                                                               
British Columbia  because Alaska's North Slope  fields are pretty                                                               
much ready to  produce gas whereas British  Columbia's gas fields                                                               
are not  developed.   A disadvantage  is that  British Columbia's                                                               
pipeline  will be  460 miles  long  while Alaska's  will be  800.                                                               
When  looking at  the competition,  the cost  of getting  the gas                                                               
from the field to the LNG tanker must be considered.                                                                            
                                                                                                                                
2:11:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI  inquired whether  amending HB 277  is at                                                               
all a possibility.                                                                                                              
                                                                                                                                
MR. BULLOCK said that the  legislature writes the laws, but there                                                               
are repercussions from  an amendment.  For  example, an amendment                                                               
to the legislation to require  similar terms in the contract that                                                               
overlapped with  the commitments in  AGIA might be  considered by                                                               
the participants to be too much  of a change.  However, that type                                                               
of amendment  is not  as harmful as  precluding a  participant in                                                               
the MOU from participating.                                                                                                     
                                                                                                                                
REPRESENTATIVE KAWASAKI said he sees the  MOU, HOA, and HB 277 as                                                               
a "take it  or leave it" scenario.  He  asked whether Mr. Bullock                                                               
also sees  it this way.   He observed that  Article 4 of  the MOU                                                               
provides  that   any  of  the   parties  can  say   the  enabling                                                               
legislation is not acceptable and void the MOU.                                                                                 
                                                                                                                                
MR. BULLOCK confirmed that any party  can say no; if the enabling                                                               
legislation is  different than introduced,  the parties  have the                                                               
option  of deciding  whether  they  can still  work  with it  and                                                               
continue.  It is important,  he advised, that members somehow get                                                               
guidance from the parties to the  agreement as to what is open to                                                               
change and what is not.  One  big thing, he counseled, is how the                                                               
state's interest is  going to be handled, who is  going to handle                                                               
it,  and  whether  the  state should  get  involved  directly  or                                                               
through somebody else as is currently in the MOU.                                                                               
                                                                                                                                
2:13:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON requested Mr.  Bullock to elaborate further                                                               
regarding the state  being the caboose on the train  and what the                                                               
state will remain committed to if there is nothing.                                                                             
                                                                                                                                
MR.  BULLOCK  replied the  agreement  has  certain cost  recovery                                                               
provisions  for  TransCanada, but  that  he  does not  completely                                                               
understand how they go.   Regarding being the caboose, he pointed                                                               
out that while  a lot is heard about it  being Alaska's gas, only                                                               
part of it  is Alaska's gas.   As the sovereign, the  state is in                                                               
an interesting position.  The state  owns the resource when it is                                                               
in the  ground.   The state  issues leases  for somebody  else to                                                               
take the  gas out of  the ground.   The state  is not in  the gas                                                               
business, just like  the farmer with mineral rights  in the Lower                                                               
48 who  does not  want to develop  the gas under  his or  her own                                                               
land.   Therefore, the state  needs somebody else to  produce the                                                               
gas  and turn  it into  money.   The producers  enter into  lease                                                               
agreements  and the  state's compensation  for entering  into the                                                               
lease agreements  is that the  state gets  its share of  the gas,                                                               
which is the  royalty gas and which  is constitutionally required                                                               
to be paid to the state.                                                                                                        
                                                                                                                                
MR. BULLOCK  said that as  sovereign, the state also  needs money                                                               
to  run government,  and production  taxes  pay for  the cost  of                                                               
government.  It is similar to  an occupation tax; if an entity is                                                               
producing oil and gas, then the  entity pays the tax on producing                                                               
oil and  gas.  However,  the state  does not get  anything unless                                                               
there  is  production.   Even  though  the  state may  have  21.7                                                               
percent interest  in the gas, the  state does not get  that until                                                               
the gas  is coming  out of  the ground.   That  is why  the three                                                               
engines of the train are the  three major producers and they have                                                               
to all agree  for this project to go forward,  he explained.  The                                                               
fourth partner is the limited  liability company; it would be the                                                               
only interest that  does not directly own gas because  it will be                                                               
shipping the  state's gas,  not TransCanada's own  gas.   In that                                                               
respect,  the state  is  separated from  the  producers; that  is                                                               
where the  state's interest diverges.   The producers  can decide                                                               
to sell  gas and their  decision determines whether the  state is                                                               
going to get gas or money for the  gas.  So, the state is aligned                                                               
in ownership percentages  once the gas is produced,  but until it                                                               
is produced the gas in the ground is like money in the bank.                                                                    
                                                                                                                                
2:16:45 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  requested an explanation  of the  structure and                                                               
how the structure would work  given that TransCanada's subsidiary                                                               
would be  the general partner  in a limited partnership  in which                                                               
the state would own all the structure and leasing.                                                                              
                                                                                                                                
MR.  BULLOCK  responded  that a  limited  liability  company  has                                                               
characteristics that  are similar  to a  corporation in  that the                                                               
limited  liability partners  are  like shareholders  and are  not                                                               
actively involved in  operation of the business.   Under the MOU,                                                               
the general partner  will be an affiliate of  TransCanada and the                                                               
affiliate will  have a  minimum interest  in the  entire project,                                                               
which is about  1 percent or less.  The  percentages of ownership                                                               
of this  limited partnership  are a critical  element of  the MOU                                                               
because there  is a  limit in  how much  of this  partnership the                                                               
state  can buy.    Under the  MOU, TransCanada  wants  to keep  a                                                               
minimum  of  14 percent  interest  in  the  project as  a  whole.                                                               
Available  to the  state, then,  is the  difference between  that                                                               
floor amount  of 14 percent  and the percentage of  the ownership                                                               
that reflects  the percentage of  state gas  that is going  to go                                                               
through this pipeline.  If it  is 21.7 percent, the maximum state                                                               
interest  under this  agreement would  be the  difference between                                                               
the state's  share and  the 14 percent,  which is  [7.7 percent].                                                               
Mr.  Bullock  qualified that  he  does  not  know whether  the  1                                                               
percent  attributed to  the general  partner  is part  of the  14                                                               
percent or whether it reduces the  margin that the state will get                                                               
above 14 or 15 percent.                                                                                                         
                                                                                                                                
2:18:51 PM                                                                                                                    
                                                                                                                                
MR. BULLOCK, responding further to  Co-Chair Saddler, said the 14                                                               
percent interest that TransCanada wants  to keep is 14 percent of                                                               
the Alaska LNG Project as a whole.                                                                                              
                                                                                                                                
CO-CHAIR  SADDLER asked  what percentage  of  the entire  project                                                               
would represent Alaska's quarter.                                                                                               
                                                                                                                                
MR. BULLOCK answered  that it could go to the  same percentage of                                                               
14 percent.  To better provide  an answer he noted that under the                                                               
Pipeline Leasing  Act the general  requirement is  that pipelines                                                               
built across state lines must be  common carriers.  In this case,                                                               
if  a shipper  is  Exxon, some  of Exxon's  gas  will go  through                                                               
Conoco's part and  some will go through BP's part  - there are no                                                               
assigned seats on  the airplane.  Last year the  possibility of a                                                               
contract   carrier  was   introduced   in   the  Alaska   Gasline                                                               
Development  Corporation  (AGDC) changes  in  HB  4, which  would                                                               
allow parties to break out of  the common carrier and by entering                                                               
into  contract  would  be  guaranteed   a  certain  part  of  the                                                               
transportation capacity  without being at risk  of getting bumped                                                               
by some new gas producers.   A disadvantage of the common carrier                                                               
is that it is open to all shippers.   This is a third approach in                                                               
that this  pipeline is just like  a pipeline from a  field to the                                                               
dock and in  this case the dock  is 800 miles away.   It is being                                                               
characterized as an industrial pipeline;  it is just part of this                                                               
whole structure for a producer to  get its own gas to market, the                                                               
producer has  a definite percentage.   The ideal situation  for a                                                               
producer  is  to have  the  same  percentage  of ownership  in  a                                                               
pipeline as it has in the  resource so that the producer has some                                                               
comfort in knowing  that if it produces its share  it is going to                                                               
have a way to ship the gas to market and turn it into money.                                                                    
                                                                                                                                
2:22:01 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  asked whether the  14 percent is 14  percent of                                                               
the entire pipe or 14 percent of the one-quarter of the pipe.                                                                   
                                                                                                                                
MR. BULLOCK  replied it  is 14  percent of  the whole  Alaska LNG                                                               
Project.  He  said that if all  the gas is produced  on the North                                                               
Slope and  the state  gets, for example,  a 12.5  percent royalty                                                               
and 9.2 percent  of the seven-eighths that the  producers have as                                                               
gas,  the  state will  have  21.7  percent.    That 21.7  is  the                                                               
interest  of  the  total  project  and the  state  can  buy  that                                                               
fraction of  the 21.7 percent  that is  above 14 percent.   Using                                                               
rounded numbers,  he explained  that if the  state's share  is 22                                                               
percent  of  total gas  production,  the  state's pipeline  share                                                               
would be  22 percent; if  TransCanada keeps 14 percent,  then the                                                               
state can  buy in at  8 percent of  the total project.   Thinking                                                               
aloud,  he recalled  that  Alaska has  seen  scenarios where  the                                                               
wellhead value  of gas was very  small or nothing.   For example,                                                               
in 1986  oil prices were  rock bottom.   While he was  working at                                                               
the Department of  Revenue, the department was  speculating as to                                                               
whether an  integrated company could  continue to produce  oil at                                                               
below  wellhead value.   In  some cases  an [integrated]  company                                                               
probably could because  that is not the company's  only source of                                                               
revenue - under the pipeline tariffs,  a company is entitled to a                                                               
certain rate  of return and  the tariff  is going to  provide for                                                               
that.  If a company is refining,  there is some profit to be made                                                               
there; the  same for  if a company  is retailing  or wholesaling.                                                               
Thus, there are  different points in which an  entity can recover                                                               
its cost.                                                                                                                       
                                                                                                                                
2:24:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER stated  he is still trying to  get his head                                                               
around whether  this is the  right thing  to do.   Observing that                                                               
TransCanada's 14  percent minimum  ownership provision and  the 1                                                               
percent  general partner  provision are  part of  the Alaska  LNG                                                               
Project Equity Option  Term Sheet [MOU, Exhibit B,  page 1, items                                                               
2 and 3],  he concluded that this means those  are right up front                                                               
in  priority.   He  pointed out  that the  14  percent is  equity                                                               
participation interest  in the midstream  component and  does not                                                               
include below the midstream.                                                                                                    
                                                                                                                                
MR. BULLOCK  agreed the  aforementioned is  correct and  said the                                                               
midstream component  is from transmission lines  from Prudhoe Bay                                                               
and Point  Thomson down  to the LNG  plant inlet.   Additionally,                                                               
there is  a possibility  that, under  a different  mechanism, the                                                               
state would  acquire ownership  interest in the  LNG plant.   The                                                               
Heads of  Agreement (HOA)  contemplates that  AGDC or  some other                                                               
party might have a representation for the state in that project.                                                                
                                                                                                                                
2:26:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER stressed that one  must be cognizant of the                                                               
necessity  of  preserving  the   occurrence  of  that  percentage                                                               
throughout the  value chain.   He asked  whether Mr.  Bullock has                                                               
identified anything magic about that 14 percent number.                                                                         
                                                                                                                                
MR. BULLOCK answered  he is unaware of any  particular reason for                                                               
14 percent.   TransCanada  is a  pipeline company,  he continued,                                                               
and that 14 percent  will be a factor if the gas  is flowing.  It                                                               
is probably  the interest that  will keep  TransCanada interested                                                               
and as long  as the pipeline is operating TransCanada  will get a                                                               
share of any money that it might generate.                                                                                      
                                                                                                                                
2:27:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER observed the language  in [Exhibit B of the                                                               
MOU,  Alaska  LNG  Project  Equity Option  Term  Sheet,  item  2]                                                               
definitively states "must not" be less  than 14 percent.  He said                                                               
he would like to identify the reason why this is so definitive.                                                                 
                                                                                                                                
MR. BULLOCK  offered his belief  that those points which  are put                                                               
forth  so strongly  in the  MOU are  red flags  for the  enabling                                                               
legislation.   For example, AGIA required  commitments in certain                                                               
things.  One  thing that would be related to  a commitment is the                                                               
state  would  be  able  to  buy  all  of  its  interest  of  this                                                               
partnership.  If the state were  to consider other people who may                                                               
participate or  represent the state  in the Alaska LNG  Project -                                                               
that  would  be  a  negotiating  factor  depending  on  what  the                                                               
interest of the  state was to acquire a  percentage of ownership,                                                               
it would be a  variable.  The way it is  presented in [Exhibit B]                                                               
is "kind of a flag" that says  do not do anything in the enabling                                                               
legislation  that  would  reduce  that  particular  point.    For                                                               
example, if  the enabling legislation  says the state  would work                                                               
toward 20 percent ownership, it would cut out the 14 percent.                                                                   
                                                                                                                                
REPRESENTATIVE HAWKER remarked it is a bit more than a flag.                                                                    
                                                                                                                                
MR. BULLOCK  quipped there are  flags and then there  are "almost                                                               
guns to the head."                                                                                                              
                                                                                                                                
2:28:51 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER surmised  the  1  percent general  partner                                                               
provision  in Exhibit  B, item  3, is  a management  provision to                                                               
allow one  partner that will  have preferential voting  rights in                                                               
the  management and  affairs of  the entity  that ends  up owning                                                               
this  piece of  the  project.   The general  partner  for that  1                                                               
percent  will  make  all  decisions  on  behalf  of  the  limited                                                               
partnership, with a  couple of caveats.  The  only thing profound                                                               
about  that is  that even  though the  state may  own 40  percent                                                               
equity  in that  portion  of  the project,  all  the control  and                                                               
decision  making is  being handed  to a  general partner  that is                                                               
owned 100 percent by TransCanada.                                                                                               
                                                                                                                                
MR. BULLOCK  confirmed the aforementioned  is correct  and stated                                                               
the general  partner will have responsibility  for actually doing                                                               
the work of the limited liability company.                                                                                      
                                                                                                                                
MR. BULLOCK then advised that there  is another red flag and that                                                               
this flag  arises partly  because of the  delay between  when the                                                               
AGIA  license was  issued and  when it  was known  that the  open                                                               
season had failed.  He read Exhibit B, page 3, item 8:                                                                          
                                                                                                                                
     The Parties acknowledge  the confidentiality provisions                                                                    
     of  the  Alaska LNG  Project  agreements  to which  the                                                                    
     Limited Partnership may become  a party may prohibit or                                                                    
     restrict  disclosure  of  Project  information  to  the                                                                    
     State.  The parties agree  to use reasonable efforts to                                                                    
     allow  for  disclosure to  the  State  (including on  a                                                                    
     restricted basis)  as required under  applicable Alaska                                                                    
     law.                                                                                                                       
                                                                                                                                
MR. BULLOCK  continued, saying  that because  the state  does not                                                               
have  a  direct  interest  in  the ownership,  as  the  state  is                                                               
effectively buying into this limited  liability company, there is                                                               
certain information that the state would  not have access to.  He                                                               
qualified  he does  not  really understand  this  option for  the                                                               
state to enter  in.  At some  point, he said, the  state will say                                                               
it wants to  have the option to buy into  the partnership, but he                                                               
is  unclear as  to when  the  state would  actually exercise  the                                                               
option.   It seems to  be a two-step  process: the first  step is                                                               
the state gets an option, and  the second step is when the option                                                               
is actually exercised  and the state actually  becomes part owner                                                               
of that partnership.                                                                                                            
                                                                                                                                
2:32:17 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER  inquired who  the  partners  would be  in  the                                                               
limited liability partnership.                                                                                                  
                                                                                                                                
MR. BULLOCK replied he is unsure.   He added he is unsure that by                                                               
buying  into  the  limited  liability  partner,  the  TransCanada                                                               
affiliate, whether the state is  just combining interest with the                                                               
affiliate or  the state is  becoming a separate  limited partner.                                                               
While it is possible  the MOU may say that, he  said he is unsure                                                               
whether there  would be "limited partner  Alaska, limited partner                                                               
TransCanada  affiliate, general  partner TransCanada  affiliate."                                                               
Responding  further,  Mr.  Bullock  clarified he  does  not  know                                                               
whether it would be two  limited partners and one general partner                                                               
or one limited  partner and one general partner,  of which Alaska                                                               
is part of the limited partner.                                                                                                 
                                                                                                                                
CO-CHAIR  SADDLER asked  whether a  general partner  normally has                                                               
the authority  to speak for the  other partners or whether  it is                                                               
just specifically this agreement language that gives this power.                                                                
                                                                                                                                
MR. BULLOCK  responded that limited partners  are like investors,                                                               
and general partners are like  the executive officer who is going                                                               
to  run the  business.    "The risks  in  that  type of  business                                                               
structure are  different," he  continued, "depending  whether you                                                               
are general or limited partner."                                                                                                
                                                                                                                                
2:34:10 PM                                                                                                                    
                                                                                                                                
MR. BULLOCK began  a PowerPoint presentation, stating  he will be                                                               
mentioning  things  for  members  to think  about  as  they  move                                                               
forward.  Drawing attention to slide  2, he noted that not in the                                                               
MOU is Exxon, the party that  was working with TransCanada as the                                                               
licensee on the  Alaska Pipeline Project, and that  Exxon may not                                                               
be there because  it is more directly involved with  the Heads of                                                               
Agreement.   The  new party  in the  MOU is  [TransCanada Alaska]                                                               
Development Inc.  (TADI) which is  participating in the  Heads of                                                               
Agreement with the  producers but was not previously  part of the                                                               
AGIA  project.   Moving to  slide  4, Mr.  Bullock addressed  the                                                               
question,  "Given the  MOU, what  changes  could be  made to  the                                                               
enabling legislation [HB 277, SB  138] without causing the MOU to                                                               
fail?"    He said  red  flags  that  members  might see  are  the                                                               
specific 14  percent interest  or the  specific partner  and that                                                               
there may be  others.  He urged members to  look at any provision                                                               
that  raises  a  red  flag  [slide 6]  and  to  consider  whether                                                               
amending  the  bill  to  change  the  criteria  under  which  the                                                               
administration negotiates  will cause  the MOU to  go away.   Mr.                                                               
Bullock emphasized  that it  is important  for the  separation of                                                               
powers to  distinguish what  the legislature  does from  what the                                                               
executive does  - the legislature legislates,  executive executes                                                               
[slide 5].                                                                                                                      
                                                                                                                                
2:36:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER,  addressing  slide  5,  stated  that  the                                                               
legislature  gets one  vote on  the  enabling legislation,  which                                                               
then "shoots  this whole  thing off  into the  administration" to                                                               
complete it, exercise  the option agreement, and go  forward.  He                                                               
queried whether  this is truly  an option agreement.   Nowhere in                                                               
the legislation or elsewhere is  money being provided to exercise                                                               
the  option agreement.   He  understood the  administration would                                                               
need to come  back to the legislature for  an appropriations vote                                                               
in  order  to successfully  exercise  that  option agreement,  of                                                               
which the provisions are the earlier  of December 31, 2015 or the                                                               
date of the commercial agreements  from commencement of Front-End                                                               
Engineering  and Design  (FEED).   From  a practical  standpoint,                                                               
that seems to throw a level  of risk, doubt, and uncertainty into                                                               
giving the administration the commitment to proceed, he opined.                                                                 
                                                                                                                                
MR. BULLOCK answered by directing  attention to the terms defined                                                               
in the MOU  on page 5.  Enabling legislation,  he pointed out, is                                                               
defined to include  the giving of authority  to the commissioners                                                               
to negotiate  and enter into  the transition agreements  that are                                                               
described in the MOU.   The transitions agreements are the option                                                               
agreement to  require equity interest  and then to  the Precedent                                                               
Agreement  and  Firm  Transportation  Services  Agreement.    The                                                               
definition of enabling legislation  also includes authorizing the                                                               
commissioners   to   negotiate    and   enter   into   commercial                                                               
arrangements with the Alaska North  Slope (ANS) producers for the                                                               
Alaska  LNG  Project.   The  third  part  of the  definition  for                                                               
enabling legislation  is the appropriation provision  referred to                                                               
by Representative  Hawker.   He said he  does not  know, however,                                                               
what the  approach will be, whether  this part is in  [HB 277 and                                                               
SB  138],  or in  a  fiscal  note to  the  bills,  or some  other                                                               
approach.   Regardless, he continued,  there must be a  bill that                                                               
will fund  the state's contingent and  direct payment obligations                                                               
of the costs under the Precedent Agreement.                                                                                     
                                                                                                                                
2:39:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER  remarked  it  seems like  a  gap  in  the                                                               
documentation  that the  committee currently  has, including  the                                                               
bill and the MOU.                                                                                                               
                                                                                                                                
MR. BULLOCK replied this relates to  another part of the MOU that                                                               
is confusing -  page 7, Article 4.1, Term  and Termination, which                                                               
states that the "MOU shall  commence on the effective date hereof                                                               
and  shall terminate  upon  the earliest  of"  the seven  actions                                                               
listed below it.  Action (a)  is execution and delivery of all of                                                               
the  transition agreements,  in which  case, he  said, everything                                                               
just goes  along.   However, he continued,  if it  terminates for                                                               
actions (b)  through (g), money  will be changing hands  from the                                                               
state to  TransCanada as  guided under  Article 4.2.   Currently,                                                               
AGIA is  still in effect,  there is  an agreement that  the state                                                               
will  continue  to pay  reimbursement  costs  after December  31,                                                               
2013.  So,  he advised, this ongoing potential  cost liability is                                                               
a red flag  to think about -  not only from the  standpoint as to                                                               
whether the MOU  is going to go because  the enabling legislation                                                               
passes  or not,  but also  from the  standpoint that  if the  MOU                                                               
fails,  what   happens  to  AGIA   because  AGIA  has   not  been                                                               
terminated.  The  Alaska  Gasline  Inducement Act  will  only  be                                                               
terminated under  the terms of  the MOU if  the MOU is  in effect                                                               
and this  liability for  development cost  reimbursement survives                                                               
the MOU specifically [Article 4.3].                                                                                             
                                                                                                                                
2:41:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  recalled that  in a  previous conversation                                                               
between  the committee  and Mr.  Pawlowski [Deputy  Commissioner,                                                               
DOR], it  was determined that  there is nothing  truly definitive                                                               
about the  state exiting AGIA,  that it  is a soft  provision the                                                               
committee  was invited  to keep  in mind  as it  goes forward  in                                                               
developing the enabling legislation.   [The MOU, page 3, recitals                                                               
11-12] state that the commissioners  will initiate the process of                                                               
making  a  determination, but  it  does  not  talk at  all  about                                                               
concluding  that process  or  in  fact making  it  happen.   This                                                               
causes him  trouble, he said, because  it seems to be  very open-                                                               
ended, there is no mandatory exit from AGIA.                                                                                    
                                                                                                                                
MR. BULLOCK  explained that  AS 43.90.240  is the  agreement that                                                               
says AGIA  will end  if the  project is  found to  be uneconomic.                                                               
That  statute  is  set  up  such  that  if  TransCanada,  as  the                                                               
licensee,  and  the  state  agree that  it  is  uneconomic,  both                                                               
parties will  walk away.  There  is no specific guidance  for the                                                               
state or  for TransCanada to  decide it is  uneconomic.  It  is a                                                               
business  decision  for  TransCanada,   and  reasons  that  would                                                               
probably  be good  enough could  include that  there is  just not                                                               
enough money, or it is not going  happen, or it is going down the                                                               
wrong path.   But, if the state and TransCanada  disagree in this                                                               
regard, it goes  to an arbitration panel.  Certain  facts must be                                                               
found for  the panel to  conclude that  it is uneconomic.   Those                                                               
are more  black and white, and  clearer, because in that  case it                                                               
is a  third party making  the call as  to whether the  project is                                                               
uneconomic.   In  the MOU,  these provisions  partly do  what the                                                               
uneconomic/abandonment  provision  does.     They  say  that  the                                                               
commissioners  make a  decision  after  the enabling  legislation                                                               
becomes  effective and  the  commercial  agreements are  executed                                                               
committing the  ANS producers to  initiate the pre-FEED  phase of                                                               
the  Alaska LNG  Project.   The commissioners  will initiate  the                                                               
process   of  making   a  determination   for   purposes  of   AS                                                               
43.90.240(a),  which  is  the  allegation  that  the  project  is                                                               
uneconomic.  There are always  different ways to write things, he                                                               
noted.   Not counting the  licensee not  living up to  its terms,                                                               
the recitals  do not refer  to the other  way of getting  out and                                                               
that  is  competing pipeline,  which  is  not mentioned  in  this                                                               
agreement.   "There is no  agreement that  if the MOU  fails that                                                               
TransCanada would not seek to  recover treble damages by alleging                                                               
that the  Alaska support  for the  LNG project  is support  for a                                                               
competing pipeline,"  Mr. Bullock said.   "That is an  issue that                                                               
will continue."   It could  be that this  is a very  amenable and                                                               
friendly  agreement  that  says  "rather than  litigate  we  will                                                               
welcome you  to a  part of  this next project,"  but he  does not                                                               
know.  While TransCanada has  worked in this state probably since                                                               
before AGIA, it  is an issue as to  why TransCanada's involvement                                                               
is characterized in the terms of these recitals.                                                                                
                                                                                                                                
2:46:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P. WILSON  understood  Mr. Bullock  to be  saying                                                               
there is  nothing in the  MOU that says  what will happen  if the                                                               
state walks away.                                                                                                               
                                                                                                                                
MR. BULLOCK posed a  scenario in which there is no  MOU and it is                                                               
the AGIA  project that is being  looked at right now.   First, he                                                               
said, it is unclear what the  AGIA project is, which is something                                                               
that  he  discussed in  his  [February  15, 2013,  memorandum  to                                                               
Representative Hawker]  during the  consideration of  HB 4.   The                                                               
project pitched  to the legislature  in the AGIA  application and                                                               
approved by the  legislature - so it is the  AGIA license project                                                               
- would  have gone to  the Alaska/British Columbia border  and on                                                               
through Canada.   Is that still a good business  option?  Without                                                               
finding that  that project  is uneconomic,  the findings  and the                                                               
project  plan amendments  have said  it does  not look  like that                                                               
project is going anywhere, but this  other project is going to be                                                               
done.    Doing  this  other  project  and  forgetting  about  the                                                               
uneconomic part  of the original one  is fine in some  ways.  But                                                               
AGIA is  a law and the  AGIA law delineates specific  ways to end                                                               
the  AGIA license.   Sometimes  a  contract can  be entered  into                                                               
where  both parties  find that  the contract  is not  working for                                                               
them and  ask if the  other party would  be open to  changing it.                                                               
In a general  contract environment those kinds of  changes can be                                                               
made.    However,   in  the  case  of  a   government  agency  in                                                               
procurement  there are  certain changes  the agency  cannot make;                                                               
for example, can a change be  made after entering into a contract                                                               
that would  have been  more favorable,  that if  at the  time the                                                               
procurement  was done  there would  have been  five other  people                                                               
that were  interested?  At  some point  the change is  too great.                                                               
Continuing, Mr.  Bullock explained that  in the concept  of AGIA,                                                               
particular  bounds  for   the  AGIA  licensee  were   set  -  the                                                               
commitments in  AS 43.90.130  - the  safety of  the state  to say                                                               
that it is  not going to continue  to fund a project  that is not                                                               
showing value.   Regardless of  the contract the  legislature can                                                               
always review the  appropriations and evaluate the  project.  The                                                               
responsibility for  defining the project as  uneconomic is placed                                                               
with  the   commissioners.     Under  AGIA,   the  duty   of  the                                                               
commissioners is to  consider the economics of  the project along                                                               
the way.   Recital 11 is consistent with AGIA  because it says to                                                               
keep  looking  at  it  and  if  at  some  point  it  is  seen  as                                                               
uneconomic, not  going to go, it  raises the issue.   Then, after                                                               
that, it is  an issue of how  it will be handled.   In this case,                                                               
it  says that  the  licensee is  committed and  that  if all  the                                                               
things that  have to happen  before the commissioners  can commit                                                               
to  allege  the   project  is  uneconomic  are   in  place,  that                                                               
TransCanada will  agree that  it is  uneconomic as  well.   It is                                                               
kind of based on the AGIA  provision, but it is silent on whether                                                               
the state  will buy  the information paid  for by  TransCanada by                                                               
paying TransCanada  its net  cost.   However, it  probably covers                                                               
most of the spirit of the abandonment provision.                                                                                
                                                                                                                                
2:50:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON  surmised the state would have  to pay a                                                               
lot of  money and it is  unknown whether the state  would get the                                                               
data.                                                                                                                           
                                                                                                                                
MR.  BULLOCK  replied, "Right  -  that  is another  whole  game."                                                               
Continuing, he  reminded members  that the  state is  only paying                                                               
for those  qualified expenditures  that were  pinned down  in the                                                               
inducement provisions  of AS 43.90.110.   Up to open  season, the                                                               
licensee  can  get  up  to  50  percent  reimbursement  of  those                                                               
qualified expenditures.   After open season,  TransCanada can get                                                               
90 percent  reimbursement of the qualified  expenditures, but now                                                               
TransCanada is going  to have other costs that  are not qualified                                                               
expenditures.  Thus,  "it is not all  the qualified expenditures;                                                               
it is just the money that TransCanada has put out."                                                                             
                                                                                                                                
CO-CHAIR  SADDLER  understood   that  TransCanada's  unreimbursed                                                               
qualified expenditures are at about $130 million.                                                                               
                                                                                                                                
MR. BULLOCK  answered he  has heard that  figure but  offered his                                                               
belief there has  not been a report on the  status of the project                                                               
since January 2013.                                                                                                             
                                                                                                                                
CO-CHAIR SADDLER requested that a  firm number be provided to the                                                               
committee.                                                                                                                      
                                                                                                                                
2:52:29 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER inquired whether  Mr. Bullock's legal opinion is                                                               
that the Alaska  LNG Project is not a proper  legal descendant of                                                               
the AGIA process and does not extinguish AGIA.                                                                                  
                                                                                                                                
MR. BULLOCK responded  he is saying that because of  the way AGIA                                                               
is  written, and  because AGIA  is  still active  since there  is                                                               
still  a  licensee  that  the  state  is  still  reimbursing  for                                                               
qualified  expenditures, the  issue is  raised of  the extent  to                                                               
which the state  is promoting this parallel pipeline.   A certain                                                               
amount of  protection is probably  there because an  affiliate of                                                               
the licensee is  part of this new project.   When everybody is in                                                               
agreement, he  continued, things go  along fine, but not  so when                                                               
something breaks.                                                                                                               
                                                                                                                                
CO-CHAIR SADDLER understood that the  MOU provides a way for both                                                               
the State  of Alaska and  TransCanada to  slide on past  AGIA and                                                               
not let go of the trapeze handle  that is AGIA until a firm grasp                                                               
is had on the next trapeze  handle that is the enabling agreement                                                               
and so forth.                                                                                                                   
                                                                                                                                
MR. BULLOCK  agreed the aforementioned  metaphor is  a reasonable                                                               
reading of  the situation.   He said TransCanada as  the licensee                                                               
continues  to have  an  interest  in the  pipeline  project.   He                                                               
reminded members  that AGIA was not  to build a pipeline,  but to                                                               
work toward a pipeline.  So,  the issue of who would actually own                                                               
part of that project would continue.   This MOU, in a way, covers                                                               
that because  it allows  TransCanada to  continue to  be involved                                                               
and  it  actually  clarifies  more  than  did  AGIA  as  to  what                                                               
ownership  interest  TransCanada  would   have  in  the  ultimate                                                               
project.                                                                                                                        
                                                                                                                                
2:54:38 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  asked whether  Mr. Bullock, as  the committee's                                                               
attorney,   is   advising   the    committee   to   clarify   the                                                               
extinguishment of AGIA,  or to proceed with the MOU  and get past                                                               
the whole AGIA  question, or to be cautious and  cognizant of all                                                               
the elements at play as the committee makes a decision.                                                                         
                                                                                                                                
MR. BULLOCK replied he is advising  to be cautious.  He urged the                                                               
committee to  remember executive power versus  legislative power.                                                               
The legislature cannot find that  the project was uneconomic, the                                                               
legislature cannot  find that the  licensed assurances  have been                                                               
violated; those  are executive branch  functions.  Recital  11 is                                                               
consistent  with   the  executive  branch  function   because  it                                                               
requires  the commissioners  to  move forward  on the  uneconomic                                                               
aspect after all these other conditions have been met.                                                                          
                                                                                                                                
CO-CHAIR  SADDLER inquired  whether,  during  Mr. Bullock's  time                                                               
with  the legislature,  a  more complicated  deal  has ever  been                                                               
presented to the legislature.                                                                                                   
                                                                                                                                
MR. BULLOCK  responded no,  usually it would  not for  the reason                                                               
that  laws   can  be  complicated,   but  within  the   laws  the                                                               
legislature  has  set  boundaries   within  which  the  executive                                                               
operates.   For example,  the state has  a procurement  code that                                                               
tells state  agencies what they must  do.  What makes  this a big                                                               
deal  is that  the legislative  branch has  overlapping functions                                                               
with  the executive  branch.   The approval  of the  AGIA license                                                               
passed without a  two-thirds vote to have  an immediate effective                                                               
date,  so  there  was  not   universal  acceptance  of  the  AGIA                                                               
approach.   The issue  came up  then as  to whether  the governor                                                               
could have  done it  anyway.   There is  a possibility  that that                                                               
could have happened  because the legislature, by  saying what all                                                               
the rules  are, and the  administration, by operating  within all                                                               
the  rules,  had carried  out  its  executive  function.   It  is                                                               
contemplated   that  the   contracts  will   come  back   to  the                                                               
legislature   for  approval,   plus   the   legislature  has   to                                                               
appropriate  money anyway  and therefore  the legislature  always                                                               
has that hook on a project.                                                                                                     
                                                                                                                                
2:57:45 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER asked  whether  Mr. Bullock  has been  involved                                                               
before with agreements that are  this complicated, cascading, and                                                               
contingent.                                                                                                                     
                                                                                                                                
MR. BULLOCK answered he has  not been involved in agreements like                                                               
this, but  he has helped  clarify some of  the laws as  they have                                                               
gone through the legislative process.                                                                                           
                                                                                                                                
CO-CHAIR  SADDLER noted  that the  flow chart  the committee  has                                                               
requested  will  show  all the  different  contingencies,  moving                                                               
pieces,  decision flows,  and  implications  of those  decisions.                                                               
The chart will  help members as well as the  public to understand                                                               
such a complicated transaction.                                                                                                 
                                                                                                                                
MR. BULLOCK pointed out that there  also needs to be "a seat belt                                                               
and  airbag analysis"  [slide  10].   Everything  may look  great                                                               
right now if the enabling legislation  passes and the MOU and the                                                               
option agreement just click along,  but [there should be analysis                                                               
of] how  the state is covered  should they not.   This uneconomic                                                               
issue under AS  43.90.240 is going to continue, so  there must be                                                               
a plan for that.                                                                                                                
                                                                                                                                
2:59:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   SEATON  expressed   his  concern   about  giving                                                               
permission to  the executive to negotiate  terms, including terms                                                               
outside  those that  were specified.   Noting  that the  enabling                                                               
legislation,  as written,  would  separate the  oil  and gas  tax                                                               
formats,  he inquired  whether the  bill  would give  legislative                                                               
approval to the executive to negotiate terms of the oil tax.                                                                    
                                                                                                                                
MR. BULLOCK replied  there are two aspects of that  issue.  There                                                               
have been  many discussions about  setting tax rates  by contract                                                               
so  that the  state cannot  change them  over a  period of  time.                                                               
However, the  law is pretty  clear that [the  legislature] cannot                                                               
do that,  not only in  the state's constitution, but  the state's                                                               
own experience  between floods  and earthquakes.   The  state has                                                               
had to have  the flexibility to impose the $10  disaster tax when                                                               
the  state  needed  the  money.    Agreements  are  going  to  be                                                               
discussions in  quiet rooms  behind locked doors.   There  may be                                                               
factors that  affect what the  tax rate is  going to be,  but the                                                               
administration  or the  executive  branch cannot  set tax  rates;                                                               
that  is   the  legislative  branch.     The  administration  has                                                               
flexibility to establish  how royalty is going  to be established                                                               
and  collected because  that is  a contract  and those  contracts                                                               
must be  within AS  38.05.180, the oil  and gas  leasing statute.                                                               
It  depends on  how the  legislature gives  the authority  to the                                                               
administration.   Under  AGIA  there were  the  must-haves in  AS                                                               
43.90.130 that required  an applicant to commit  to those things.                                                               
If   the  applicant   did  not   commit  to   those  things   the                                                               
administration did  not have the  power to say the  applicant did                                                               
most of the things so the state  would go with it.  The tax rates                                                               
are  going  to  be  just  like  they  are  under  the  governor's                                                               
legislation,  which is  proposing a  new tax  rate and  different                                                               
method of tax on gas.  Members do  not know how it got there - it                                                               
may  be that  10.5 percent  was  a compromise  between the  state                                                               
getting  that  percentage of  the  gas  production on  the  North                                                               
Slope, or  maybe at 11  percent the  project might not  have been                                                               
able to go forward, or maybe  9 percent was giving too much away.                                                               
It is hard  to say because what goes into  the governor's bill is                                                               
negotiation and  thought from [the executive's]  standpoint as to                                                               
what is in the best interest  of the state.  But, particularly in                                                               
tax, it is  the legislature that decides which  rate, what method                                                               
of taxation, and  what is taxed, that is in  the best interest of                                                               
the  state.     So,  tax  rates  are  not   negotiated,  but  the                                                               
legislature may get  a bill that proposes a change  in tax rates.                                                               
For example, in  SB 21 last year the proposed  rates and proposed                                                               
change  in  structure were  based  on  the information  that  was                                                               
presented  to   the  legislature;  that  [information]   was  the                                                               
administration's basis  for selecting that  method and  those tax                                                               
rates.                                                                                                                          
                                                                                                                                
3:03:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  clarified he  is asking for  Mr. Bullock's                                                               
legal opinion as  to whether the legislature,  under the enabling                                                               
legislation, would  be giving the  authority to the  executive to                                                               
negotiate additional  terms and would those  additional terms, by                                                               
giving that authority, be to set in contract a tax for oil.                                                                     
                                                                                                                                
MR. BULLOCK answered the contract cannot  set the tax rate or the                                                               
tax  system.   But, the  way  it can  be  done is  by calling  it                                                               
enabling legislation and  setting up that this  is agreement that                                                               
requires certain  changes to be  made.  The  enabling legislation                                                               
includes more  than just giving  the commissioners  the authority                                                               
to  negotiate  these commercial  agreements.    It addresses  re-                                                               
defining the point of production  for gas and provides for taxing                                                               
gas on  the gross value  at the  point of production  rather than                                                               
the  production  tax value.    When  considering this  bill  that                                                               
states a  tax rate,  legislators must  determine whether  that is                                                               
the appropriate  tax rate and  look at  why it is  being offered.                                                               
Last year, legislators  were shown that the tax rate  was to make                                                               
Alaska more competitive.  This  year, legislators are going to be                                                               
shown that  the MOU  and Heads of  Agreement require  a different                                                               
method of taxation and the opportunity to pay the tax with gas.                                                                 
                                                                                                                                
3:05:12 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE understood  Mr. Bullock to be saying  that, in the                                                               
enabling legislation,  legislators can either give  the authority                                                               
[to the executive] to renegotiate  oil royalties or not, and that                                                               
that authority should probably be just for gas royalties.                                                                       
                                                                                                                                
MR.  BULLOCK   said  the   proposed  enabling   legislation  only                                                               
addresses gas, but noted there is  an overlap between gas and oil                                                               
that would continue in the  governor's legislation and which will                                                               
be seen  when the legislation is  before the committee.   He said                                                               
his first thought was about  lease expenditures when he heard the                                                               
proposal  that the  gas would  be taxed  on gross  value, because                                                               
lease  expenditure  reduces  the  gross value  at  the  point  of                                                               
production down to  the level that the state would  be taxing, so                                                               
that would be  the deduction.  Because the state  would be taxing                                                               
on  gross,  the lease  expenditures  would  go somewhere  and  he                                                               
believes  they would  be taken  against  the gross  value at  the                                                               
point  of production  for  oil to  determine  the production  tax                                                               
value.  The cost for processing  gas is generally not as great as                                                               
oil; however, at the LNG facility those costs are very high.                                                                    
                                                                                                                                
3:06:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON concluded, then,  that all production costs                                                               
on gas  would get accounted  for in  oil, reducing value  for oil                                                               
taxation, that that is the interchange between gas and oil.                                                                     
                                                                                                                                
MR.  BULLOCK agreed,  saying the  whole theory  of the  petroleum                                                               
profits  tax (PPT),  Alaska's Clear  and Equitable  Share (ACES),                                                               
and SB 21 is that there  are so many common facilities and common                                                               
costs  in a  field  that  it is  very  difficult  to divide  them                                                               
between gas  and oil.   Legislators looked at the  combination of                                                               
gas and oil in the progressive part  of ACES and how the more gas                                                               
produced dilutes that  average and brings the tax  down, which is                                                               
known as the decoupling issue.   However, it is not anywhere near                                                               
the impact of mixing oil and  gas values when just taking some of                                                               
the lease  expenditures and using them  against the oil tax.   It                                                               
is  an incentive  for  producers  with oil  and  gas deposits  to                                                               
produce gas, which would help this project along.                                                                               
                                                                                                                                
3:08:10 PM                                                                                                                    
                                                                                                                                
MR. BULLOCK,  responding to Representative Olson,  noted the date                                                               
of  [July  31,  2014]  is  a  trigger  date.    If  the  enabling                                                               
legislation is  not actually in effect  as of that date,  i.e. if                                                               
the effective date fails, the  legislation must be signed 90 days                                                               
before  that date,  otherwise the  parties  will look  at it  and                                                               
decide whether it has triggered the abandonment of the MOU.                                                                     
                                                                                                                                
MR.  BULLOCK, responding  to  Representative  Hawker, agreed  the                                                               
date  has a  provision that  allows it  to be  extended with  the                                                               
joint  approval  of  the  parties.   That  date  is  one  of  the                                                               
flexibilities,  he said,  and there  is also  flexibility on  the                                                               
parties' interpretation  of whether  the enabling  legislation is                                                               
satisfactory.                                                                                                                   
                                                                                                                                
REPRESENTATIVE   TARR  posed   a  scenario   in  which   enabling                                                               
legislation  goes  through, but  sometime  later  the process  is                                                               
disrupted and  does not continue.   She asked whether there  is a                                                               
grey area in  those transition agreements for getting  out of the                                                               
AGIA  license  and  whether  the legislature  could  be  given  a                                                               
financial liability because of actions by the executive branch.                                                                 
                                                                                                                                
MR. BULLOCK responded there are  liabilities in this agreement if                                                               
things  do not  happen as  expected.   Drawing  attention to  the                                                               
seven contingencies in  Article 4.1 of the MOU, he  said only one                                                               
[4.1(a)]  does not  put  the  state at  risk  of  having to  make                                                               
payments.   Article  4.2(a) recognizes  that  certain things  are                                                               
continuing  to happen  under AGIA  as  it mentions  "net of  AGIA                                                               
reimbursement...."   Enabling legislation gives the  authority to                                                               
the  administration to  make  it work,  but it  will  have to  be                                                               
within the bounds of the legislation passed by the legislature.                                                                 
                                                                                                                                
3:12:00 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER understood that  TransCanada would receive a 7.1                                                               
percent return on  its development expense [Article  4.2(a)].  He                                                               
inquired  how much  development  expenses are  likely  to be  and                                                               
whether 7.1 percent is reasonable.                                                                                              
                                                                                                                                
MR. BULLOCK deferred to the  administration for an answer, saying                                                               
he is not  sure about the 7.1  percent but that it  probably is a                                                               
negotiated percentage based on cost  plus.  He noted that "AFUDC"                                                               
stands for Allowance for Funds Used During Construction.                                                                        
                                                                                                                                
CO-CHAIR  SADDLER understood  Mr.  Bullock to  have earlier  said                                                               
that  the  enabling  legislation   would  allow  qualified  lease                                                               
expenditures for  gas production to  be deducted from  oil income                                                               
for tax purposes.                                                                                                               
                                                                                                                                
MR.  BULLOCK confirmed  that is  the way  lease expenditures  are                                                               
handled in  the enabling  legislation, but it  could change.   It                                                               
comes back  to the  issue of  whether those  costs can  really be                                                               
separated.                                                                                                                      
                                                                                                                                
CO-CHAIR  SADDLER  understood that  would  be  after the  initial                                                               
contract period.                                                                                                                
                                                                                                                                
MR.  BULLOCK  replied that  the  current  tax provisions  in  the                                                               
governor's  enabling  legislation  have   an  effective  date  of                                                               
January 1,  2015.  In the  bill the present tax  rate is referred                                                               
to as the tax  in effect on and after January  1, 2014 and before                                                               
January 1, 2022.   The bill adds  a section that will  tax oil at                                                               
35 percent of the production tax  value and will tax the gross at                                                               
10.5 percent.   A new provision in the bill,  AS 43.55.014, would                                                               
allow a  taxpayer to  elect to  pay its  tax in  the form  of gas                                                               
instead  of dollars.    To  be able  to  make  that election  the                                                               
taxpayer has  to be a  taxpayer that had its  leases renegotiated                                                               
under the authority of the bill.   If the legislation passes with                                                               
those changes,  then starting January 1,  2015, negotiations with                                                               
the producers  who want to pay  their tax with gas  will commence                                                               
and the state  will learn how much gas percentage  it is going to                                                               
get from  the total  production on  the North  Slope, as  well as                                                               
what gas it will get as royalty  in kind rather than value.  Once                                                               
this gas percentage is known,  the ownership options discussed in                                                               
the MOU can  be considered and the state will  have a better idea                                                               
about  the actual  percentage  of the  project  that the  limited                                                               
liability company  would own that the  state could buy into.   It                                                               
is a chain  of events.  One  thing leads to another  and they all                                                               
have to happen in a certain order.                                                                                              
                                                                                                                                
3:15:50 PM                                                                                                                    
                                                                                                                                
MR.  BULLOCK   turned  to  his  presentation   to  address  state                                                               
ownership in the midstream part  of the Alaska LNG Project [slide                                                               
17].  He said  there seems to be two options -  an option to pick                                                               
up the  option to  buy in  and then  a point  at which  the state                                                               
actually requires the  equity interest.  However, he  said, he is                                                               
unsure how  that works and what  the timing is.   Regarding state                                                               
ownership, he paraphrased from slide 18 which states:                                                                           
                                                                                                                                
     Under the  MOU an  affiliate of TransCanada  would hold                                                                    
     that  portion of  the midstream  project  equal to  the                                                                    
     percentage of North Slope gas  the state may receive as                                                                    
     royalty in kind and production  tax on gas paid as gas.                                                                    
     May  be 20-25  percent depending  on amount  of royalty                                                                    
     gas in kind and production tax paid as gas.                                                                                
                                                                                                                                
MR. BULLOCK, addressing slides 19-21,  urged committee members to                                                               
be aware of  the economic impacts of an agreement  to pay for the                                                               
gas transportation cost over [the 20-25 year] period of time.                                                                   
                                                                                                                                
3:16:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER offered his  understanding that a sole-risk                                                               
expansion  would be  another  way that  the  state could  acquire                                                               
ownership in the project.                                                                                                       
                                                                                                                                
MR. BULLOCK responded  the expansion comes up once  the state has                                                               
this percentage  of ownership.   The state can open  its interest                                                               
to other  producers in the  state and if that  requires expansion                                                               
of the  pipeline, then  how it will  be paid and  how it  will be                                                               
done is another subject.                                                                                                        
                                                                                                                                
REPRESENTATIVE  HAWKER said  he is  looking for  affirmation that                                                               
instead of acquiring  a greater interest in  the partnership with                                                               
the TransCanada entity, the State  of Alaska could actually own a                                                               
direct equity  interest in the  midstream part of the  project by                                                               
taking a sole-risk expansion.                                                                                                   
                                                                                                                                
MR. BULLOCK confirmed this is addressed  in Exhibit C of the MOU,                                                               
[Alaska LNG Midstream  Services Term Sheet], page 7, item  7.  In                                                               
further response, he said he is  unsure how it works and that the                                                               
people  who  wrote  the  agreement   would  be  able  to  give  a                                                               
definitive answer.                                                                                                              
                                                                                                                                
3:19:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P. WILSON  surmised a  sole-risk expansion  would                                                               
cost the state  more because there would need  to be compression,                                                               
resulting in [the state] not getting as much for its gas.                                                                       
                                                                                                                                
MR.  BULLOCK  answered  that   expansion  by  adding  compression                                                               
capabilities can  actually reduce  the cost.   However, expansion                                                               
by looping,  which is  the building of  another pipeline  next to                                                               
the current pipeline, can have costs  that get quite high.  Under                                                               
AGIA, a person is required to  commit to rolled-in rates in which                                                               
the existing shippers  help pay for the cost  of expansion within                                                               
certain   bounds;  however,   that  commitment   is  not   really                                                               
enforceable  because  it  is  up   to  the  regulatory  agencies.                                                               
Generally, he  continued, any cost  of adding capacity  is passed                                                               
on to whoever will be shipping their gas through.                                                                               
                                                                                                                                
3:20:37 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  pointed out that a  main feature of the  Heads of                                                               
Agreement is that the cost of  any expansion will be borne by the                                                               
party doing  the expansion  and the  original equity  owners will                                                               
not see an  increase in their cost unless they  elect to buy into                                                               
the expansion.   Thus, the  future expenses of the  equity owners                                                               
are protected.                                                                                                                  
                                                                                                                                
MR.  BULLOCK replied  that is  a  good observation  and said  the                                                               
common  situation  between  HB  4,  which  allowed  for  contract                                                               
carriers, and this situation, which  is an industrial approach to                                                               
getting gas, is  that the people with gas know  they will be able                                                               
to ship it.  A North  Slope producer is not precluded from buying                                                               
gas from  a new producer  and shipping  that gas, which  would be                                                               
another way that  new gas could get into the  project.  The state                                                               
would have  the option  of adjusting its  capacity to  accept new                                                               
gas in  the part of  the midstream project  that it owns.   Also,                                                               
AGDC could  participate in  the LNG plant  [slide 21]  as another                                                               
way of  state ownership.  Gas  not sold instate would  go through                                                               
the LNG plant, so the state would become part of all of it.                                                                     
                                                                                                                                
3:22:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  posed a  scenario in  which the  state, to                                                               
promote economic  development, sells  gas to  various development                                                               
projects  around the  state, thereby  reducing the  throughput to                                                               
the LNG  plant.  He asked  whether this scenario would  require a                                                               
subtraction or  addition of tariff  to the  price of the  gas for                                                               
the state's capacity on the pipeline.                                                                                           
                                                                                                                                
MR.  BULLOCK  responded that  would  all  be  part  of it.    For                                                               
example, the proposed terms in  the MOU allow for three different                                                               
tariffs  depending on  where the  gas is  going to  be delivered,                                                               
which would affect the cost.                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  surmised that  if the  state did  not have                                                               
the additional  25 percent  of the  gas to  go down  the pipeline                                                               
because the  Alaska Oil and  Gas Conservation  Commission (AOGCC)                                                               
did  not increase  the available  gas  off the  North Slope,  the                                                               
state would  have to  decide whether it  wants to  stimulate that                                                               
economic  development and  tack on  the additional  capacity that                                                               
would then not be used going down to the LNG plant.                                                                             
                                                                                                                                
MR.  BULLOCK replied  this is  where  the state  is the  caboose.                                                               
Whether the  state gets  anything at all  depends on  whether the                                                               
three producers are producing.   He recalled there was discussion                                                               
in the terms of Point Thomson  as to whether the state would take                                                               
its royalty of the  gas at the time it came  out of Point Thomson                                                               
and went to pressurize Prudhoe Bay  and that the tax would not be                                                               
due until it came  off the cap in Prudhoe Bay,  but added that he                                                               
does not think  anything came of the discussion.   Generally, the                                                               
state does not get  gas and does not get tax  unless there is oil                                                               
or gas produced.   This is why the state is  the caboose, not the                                                               
engine.  The  state cannot say to start  producing the one-eighth                                                               
of the gas because it wants its royalty now.                                                                                    
                                                                                                                                
3:26:16 PM                                                                                                                    
                                                                                                                                
MR. BULLOCK returned  to his presentation, saying  that the state                                                               
does not  know why the  first open season failed  [slides 26-29].                                                               
For example, did the producers  think TransCanada's project was a                                                               
good one but the taxes were not  worth it, or that the market was                                                               
not pretty  enough, or  that the producers,  being the  ones with                                                               
the  gas, wanted  to pick  who  to go  into business  with?   The                                                               
producers may not know the  details of building a gasline through                                                               
permafrost like TransCanada does, he  continued, but they are not                                                               
part of  the process of  who is going  to represent the  state in                                                               
this project.                                                                                                                   
                                                                                                                                
CO-CHAIR  FEIGE inquired  whether there  were specific  statutory                                                               
requirements in AGIA mandating that  that open season information                                                               
remain confidential.                                                                                                            
                                                                                                                                
MR.  BULLOCK  answered  AGIA  had  a  number  of  confidentiality                                                               
provisions that  were necessary because  an entity does  not want                                                               
to publish  why the  open season  failed and  possibly jeopardize                                                               
the  next open  season.   Communication  would be  helpful.   The                                                               
license was issued  in 2008, open season ended on  July 30, 2010,                                                               
and   appropriations   were    being   made   for   reimbursement                                                               
expenditures  for that  period  without  [the legislature]  being                                                               
able to know  whether the state was getting the  bang it expected                                                               
for the  buck.   A reason HB  4 was attractive  is that  there is                                                               
more  open communication  and  more  open reporting  requirements                                                               
along the  way.   He advised  that information is  going to  be a                                                               
problem  -  these  are billion  dollar  business  decisions  that                                                               
people   want  to   hold   close  to   their   vests,  which   is                                                               
understandable.   But  at  some point  legislators  need to  know                                                               
enough information  when trying  to determine  how much  money to                                                               
appropriate, what  the state's money  is going for, and  what can                                                               
be expected from it.                                                                                                            
                                                                                                                                
3:29:15 PM                                                                                                                    
                                                                                                                                
MR. BULLOCK, turning back to  his presentation, said the licensed                                                               
AGIA project  was, in  his opinion,  the Alberta  project [slides                                                               
26-29].   But,  he said,  TransCanada always  said that  it would                                                               
solicit information to Valdez at  the same time, Valdez being the                                                               
focus for the  LNG facility.  So, there was  discussion about LNG                                                               
facilities.  While it was a  different format than the Alaska LNG                                                               
Project, the pros and cons must  have come up in conversation and                                                               
those would  be good things to  know.  Also important  is the big                                                               
difference between the AGIA project  and the Alaska LNG Project -                                                               
the  AGIA project  was  mostly  a pipeline.    In  the past,  the                                                               
producers have  been reluctant to  participate in a  project that                                                               
they could not own a part  of; that, plus other terms like common                                                               
carriage, made  a stand-alone  pipeline project  less attractive.                                                               
The negatives  of the AGIA  project go  away with the  Alaska LNG                                                               
Project  where the  producers are  part owners.   He  pointed out                                                               
that he is talking about the  producers because they are the ones                                                               
that are  going to  decide whether  or not gas  comes out  of the                                                               
ground,  although the  AOGCC will  say when  and how  much.   The                                                               
producers will  have the Alaska  LNG Project  all the way  to the                                                               
LNG facility and into the tanker.                                                                                               
                                                                                                                                
3:31:37 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER  brought  attention  to slide  28  and  queried                                                               
whether  the question  regarding what  happened is  about whether                                                               
interest was or was not expressed.                                                                                              
                                                                                                                                
MR. BULLOCK  answered yes.   A question  is whether  changes were                                                               
identified  that would  have made  the AGIA  project viable;  for                                                               
example, maybe  the project was  too small.   Responding further,                                                               
he  noted  there  was  a  formal   open  season  in  2010  and  a                                                               
solicitation of interest  in 2012.  The state does  not know, for                                                               
example, whether  conditional commitments were made,  such as the                                                               
agreements would be signed if the  tax rates on gas were reduced.                                                               
Or perhaps  it was a dislike  of the way the  project was formed.                                                               
The information  required for an  LNG project was as  complete as                                                               
for an  overland project,  but there  was never  full information                                                               
for an LNG project like there was for the overland project.                                                                     
                                                                                                                                
CO-CHAIR SADDLER, regarding the question  asked on slide 28 about                                                               
whether changes were identified that  would make the AGIA project                                                               
viable, inquired  which route is  specifically being  referred to                                                               
as the AGIA project.                                                                                                            
                                                                                                                                
MR. BULLOCK  replied both.   He  noted the  interest is  that the                                                               
overlap was solicitations to Valdez and the Alaska LNG Project.                                                                 
                                                                                                                                
3:33:51 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER suggested  that  the question  could be  better                                                               
expressed by  asking whether changes  were identified  that would                                                               
make "an" AGIA project viable.                                                                                                  
                                                                                                                                
MR. BULLOCK agreed,  but added that because the  open seasons and                                                               
the solicitation  of interest  were related  to the  AGIA project                                                               
the discussion  would have  been to  the AGIA  project.   But, at                                                               
that same time, the Valdez  LNG option would have been discussed.                                                               
Why the AGIA  project was not viable would have  been because the                                                               
LNG was a better option.   In further response, he clarified that                                                               
2010-2012  is the  timeline  being referred  to  in his  question                                                               
about  whether  any  changes were  identified.    Regarding  what                                                               
changes were  identified, he said  he is meaning what  would have                                                               
to change for someone to sign up to ship gas.                                                                                   
                                                                                                                                
CO-CHAIR  SADDLER  surmised Mr.  Bullock  is  saying that  he  is                                                               
unsure whether  a viable  deal was  presented and  negotiated but                                                               
not committed to.                                                                                                               
                                                                                                                                
MR. BULLOCK replied that if it  was not committed to, then it was                                                               
not a  deal.   He said  he thinks it  was more  of the  terms and                                                               
conditions during that discussion of what  it takes to make a gas                                                               
project  in Alaska  work.   Because  there  were not  commitments                                                               
during the  open season,  something was missing  and it  would be                                                               
nice to know what that was.                                                                                                     
                                                                                                                                
MR. BULLOCK  urged committee  members to  remember that  the most                                                               
control  they have  over this  process  is being  members of  the                                                               
legislature that  will write  the laws  and appropriate  money to                                                               
make anything happen.                                                                                                           
                                                                                                                                
3:36:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P.  WILSON  requested Mr.  Bullock's  opinion  on                                                               
whether the  HOA and  the MOU provide  the state  with assurances                                                               
that any other  pipeline the state is doing does  not kick in the                                                               
clause that would make the state pay triple damages.                                                                            
                                                                                                                                
MR. BULLOCK  responded he thinks the  state has to be  careful as                                                               
specific things  under AS  43.90.440 are the  trigger.   The AGIA                                                               
inducements were to  provide the services of  an AGIA coordinator                                                               
to help  move things along.   The  royalty and tax  incentives in                                                               
AGIA were  to induce  producers to make  a commitment  during the                                                               
first binding  open season, and the  benefits of when and  how to                                                               
take  gas as  royalty  in kind  or  royalty in  value.   The  tax                                                               
incentive to a  producer committing during the  first open season                                                               
was that the  producer would be exempt from increases  in the tax                                                               
rate.   That  was one  of the  ways the  constitution allows  for                                                               
exemptions; it does  not allow for contracting it  away.  Another                                                               
inducement was  the grant  of state  money, the  reimbursement of                                                               
costs.   A further assurance to  the licensee was that  the state                                                               
would  not  also give  to  a  competing  natural gas  project,  a                                                               
project of  more than 500  million cubic feet  a day.   A concept                                                               
behind the 500  million cubic feet was that it  was the amount of                                                               
gas identified  that the  state would need,  but that  amount was                                                               
also related  to the amount  of gas  that the AGIA  project would                                                               
need to  be viable.   Regarding the  Alaska LNG Project,  he said                                                               
there  are  many good  lawyers  in  the  Department of  Law,  the                                                               
governor's bill is  well written, and he trusts  those lawyers to                                                               
make sure the  state is not approaching  that point, particularly                                                               
since the MOU  does not address the risk  of providing incentives                                                               
to a competing  pipeline.  He qualified that the  statute must be                                                               
looked at  and he does  not know everything  that is going  on in                                                               
the background.   The agreements  can be looked at,  the products                                                               
of discussions can  be seen, he said, but he  does not know "what                                                               
is behind these or how they got there."                                                                                         
                                                                                                                                
3:40:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON commented  that the pages of information                                                               
provided by  Mr. Bullock do not  state exactly what she  wants to                                                               
hear.                                                                                                                           
                                                                                                                                
MR.  BULLOCK  stressed  he  is  not  going  to  say  the  state's                                                               
likelihood of  success in  any litigation.   The  legislature and                                                               
its  lawyers will  defend legislative  contracts, but  it is  the                                                               
Department  of Law  that  represents the  state's  interest.   He                                                               
pointed  out  that  the information  he  provided  the  committee                                                               
refers  members  to,  [and includes],  his  [February  15,  2013]                                                               
memorandum  to Representative  Hawker that  is part  of the  HB 4                                                               
record, which discusses  the assurances in AS  43.90.440 and what                                                               
has  to be  in  place.   For example,  TransCanada  would not  be                                                               
eligible for treble  damages if it is out of  compliance with the                                                               
terms of  the AGIA  license or  if it is  not in  compliance with                                                               
applicable  state and  federal law.   Another  set of  conditions                                                               
that  would  have to  be  met  is  that  the state  has  provided                                                               
benefits  to a  particular competing  project.   But it  also has                                                               
exclusions  - lowering  the  tax  for everybody  would  not be  a                                                               
benefit  to  a  competing  pipeline  and  renegotiating  a  lease                                                               
agreement  under existing  law would  be okay.   The  state would                                                               
only have  exposure if it  has provided particular  incentives to                                                               
somebody that  would threaten the  project that  was contemplated                                                               
under AGIA.                                                                                                                     
                                                                                                                                
3:42:01 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  inquired whether  TransCanada is  in compliance                                                               
with AGIA.                                                                                                                      
                                                                                                                                
MR. BULLOCK  replied he thinks it  is safe to say  TransCanada is                                                               
in compliance  with AGIA.   Through TransCanada's  partnership or                                                               
working arrangement  with Exxon, it still  files quarterly status                                                               
reports  with the  Federal Energy  Regulatory Commission  (FERC).                                                               
The Alberta project  is still alive and in the  background and in                                                               
the future that may be  the more economical option because things                                                               
change.  For example, in 2008, shale  gas was not an issue and it                                                               
looked  like Alaska's  market was  going  to be  in the  Midwest.                                                               
Within a couple of years, the  Midwest is where most of the shale                                                               
gas became  available and gas prices  went up enough that  it was                                                               
worthwhile.   Hydraulic  fracturing (fracking)  of shale  is more                                                               
expensive  than   producing  from  Alaska's  fields   which  have                                                               
sufficient pressure to not need  fracking.  Alaska's advantage in                                                               
the  LNG market  is that  its cost  of production  could be  more                                                               
competitive against a fracking operation.                                                                                       
                                                                                                                                
3:43:33 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  inquired about Mr. Bullock's  earlier statement                                                               
that the  enabling legislation would  change the location  of the                                                               
point of production.                                                                                                            
                                                                                                                                
MR. BULLOCK confirmed that is one  of the amendments in the bill.                                                               
There are  additional costs  with taking  custody of  the state's                                                               
gas,  he explained.   For  example, if  the state  takes its  gas                                                               
where it enters  into the transmission lines from  Prudhoe Bay or                                                               
Point Thomson,  that gas will  then need to go  to what may  be a                                                               
combined  gas  processing  and   gas  treatment  facility.    Gas                                                               
processing  takes the  liquids out,  so the  gas generally  going                                                               
into  the  pipeline   is  methane,  a  single   carbon  and  four                                                               
hydrogens.    Gas treatment  has  to  make  the gas  of  pipeline                                                               
quality.  There will be  other things besides hydrocarbons in the                                                               
gas, such as  sulfur or carbon dioxide.  The  farther up the line                                                               
the state gets  its gas, the more costs  associated with actually                                                               
transporting that gas.  The  point of production is important for                                                               
tax purposes,  because that is  going to  be the point  where the                                                               
gross value is determined.                                                                                                      
                                                                                                                                
3:44:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER understood the  state currently takes possession                                                               
at  the point  of  production at  the wellhead.    He asked  what                                                               
location is proposed in the enabling legislation.                                                                               
                                                                                                                                
MR.  BULLOCK addressed  page 48  of  HB 277,  noting current  law                                                               
states that  for gas  that is  not subjected  to or  recovered by                                                               
mechanical  separation or  run through  a  gas processing  plant,                                                               
"the  first point  where the  gas  is accurately  metered".   So,                                                               
traditionally, he explained, the gas  is measured as it comes off                                                               
the lease.  The bill changes that language to:                                                                                  
                                                                                                                                
     the furthest upstream of the  first point where the gas                                                                  
     is  accurately  metered,  the  inlet  of  any  pipeline                                                                  
     transporting the gas  to a gas treatment  plant, or the                                                                  
     inlet of any gas pipeline system transporting gas to a                                                                   
     market.                                                                                                                  
                                                                                                                                
Thus,  he  elaborated,  instead  of  one  particular  point,  the                                                               
enabling legislation  would establish  a new point  of production                                                               
relative to  the gas  treatment plant.   The bill  also redefines                                                               
gas treatment  plant and  gas processing  plant.   This provision                                                               
does not  apply to  the state's  royalty, he  pointed out,  or to                                                               
where the state  takes possession of the gas,  which is something                                                               
else  to look  at.   This  provision addresses  for tax  purposes                                                               
where  the value  is  going  to be  determined  at  the point  of                                                               
production.                                                                                                                     
                                                                                                                                
3:46:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON,  [referring to the  enabling legislation],                                                               
understood that  in the future  these terms would apply  not just                                                               
to  the North  Slope but  to all  of Alaska,  including the  Cook                                                               
Inlet sedimentary basin.                                                                                                        
                                                                                                                                
MR. BULLOCK replied  that the bill as  currently written provides                                                               
that, on  and after  January 1,  2022, oil will  be taxed  at the                                                               
rate it  is now;  the rate  applicable to oil  and gas  will only                                                               
apply to oil.   Gas tax will  be on gross value and  will be 10.5                                                               
percent.   People not having a  lease modified, or people  with a                                                               
lease  modified but  not electing  to pay  the tax  as gas,  will                                                               
continue  to pay  the  tax in  dollars  and it  will  be at  10.5                                                               
percent of  the gross value  at the  point of production.   While                                                               
this may  be changed after the  first version of the  bill, it is                                                               
something to look at.                                                                                                           
                                                                                                                                
REPRESENTATIVE  SEATON concurred  it is  something the  committee                                                               
needs  to look  at  because it  is quite  a  change from  current                                                               
treatment of gas in Cook Inlet.                                                                                                 
                                                                                                                                
MR.  BULLOCK, in  regard to  the amount  of gas  the state  could                                                               
receive,  pointed out  that the  state only  gets royalty  off of                                                               
state  land.    So,  those  are  the  only  leases  that  can  be                                                               
renegotiated and  the only leases  that could pay  the production                                                               
tax  as  gas.    Production  off of  land  claims,  oil  and  gas                                                               
reserves, and federal oil and gas  reserves is subject to tax but                                                               
not to royalty.                                                                                                                 
                                                                                                                                
3:48:58 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER  inquired  whether   the  MOU  provides  enough                                                               
information to  able to  calculate whether there  is going  to be                                                               
residual value.   He said  he is concerned that  legislators know                                                               
before making  commitments in legislation whether  there is going                                                               
to be residual  value for the state  and that it will  not all be                                                               
eaten up in transportation, processing, and other costs.                                                                        
                                                                                                                                
MR. BULLOCK answered  that the February 14,  2014 presentation by                                                               
the legislature's  consultants is  probably the  most significant                                                               
of what has  been heard.  He  said it all comes down  to what the                                                               
gas can be sold  for, who is going to buy it, and  what has to be                                                               
done to  get it to  the buyer.   For example, the  state's barley                                                               
project  created a  great product  without a  market.   The state                                                               
must be careful  to do everything it  can, as soon as  it can, to                                                               
identify  its markets  and try  to get  itself in  a position  to                                                               
deliver.   These  are long-term  contracts.   Gas  prices are  in                                                               
flux.   As seen by the  graphs [on February 14,  2014], the older                                                               
contracts  were   tied  to  oil   value,  the   newer  contracts,                                                               
especially from some of the LNG  exporters in the Gulf of Mexico,                                                               
will  be tied  to the  Henry Hub.   It  is a  competitive market.                                                               
Each  of  the many  LNG  suppliers  have  different costs  and  a                                                               
buyer's approach  may be to  look at  the cost of  production and                                                               
base what the  buyer is willing to pay on  that rather than tying                                                               
it to oil.                                                                                                                      
                                                                                                                                
3:51:07 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no  further business before the  committee, the House                                                               
Resources Standing Committee meeting was adjourned at 3:51 p.m.                                                                 
                                                                                                                                

Document Name Date/Time Subjects
HRES Outline by Don Bullock 2.17.14.pdf HRES 2/17/2014 1:00:00 PM
HRES 2.17.14AGIA Timeline.pdf HRES 2/17/2014 1:00:00 PM
HRES 2.17.14MOU Summary.pdf HRES 2/17/2014 1:00:00 PM
HRES 2.17.14 HB4 Legal Memo RE AGIA.pdf HRES 2/17/2014 1:00:00 PM
HB 4
HRES 2.17.14 - Revised Document Authority to end AGIA project.pdf HRES 2/17/2014 1:00:00 PM
HRES 2.17.14 Bullock MOU Powerpoint.pdf HRES 2/17/2014 1:00:00 PM