Legislature(2015 - 2016)BARNES 124
01/28/2015 01:00 PM House RESOURCES
| Audio | Topic |
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| Start | |
| Overview(s): | |
| Alaska Lng Project | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
January 28, 2015
1:00 p.m.
MEMBERS PRESENT
Representative Benjamin Nageak, Co-Chair
Representative David Talerico, Co-Chair
Representative Mike Hawker, Vice Chair
Representative Bob Herron
Representative Craig Johnson
Representative Kurt Olson
Representative Paul Seaton
Representative Andy Josephson
Representative Geran Tarr
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
OVERVIEW(S):
Department of Natural Resources
- HEARD
Alaska LNG Project
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
MARK MYERS, Commissioner Designee
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint overview of the
Department of Natural Resources.
NIKOS TSAFOS, Partner, enalytica
Consultant to Legislative Budget and Audit Committee
Washington, DC
POSITION STATEMENT: In consort with Mr. Mayer, provided a
PowerPoint overview and update of the Alaska Liquefied Natural
Gas (LNG) Project.
JANAK MAYER, Partner, enalytica
Consultant to Legislative Budget and Audit Committee
Washington, DC
POSITION STATEMENT: In consort with Mr. Tsafos, provided a
PowerPoint overview and update of the Alaska Liquefied Natural
Gas (LNG) Project.
ACTION NARRATIVE
1:00:46 PM
CO-CHAIR BENJAMIN NAGEAK called the House Resources Standing
Committee meeting to order at 1:00 p.m. Representatives Hawker,
Johnson, Olson, Seaton, Josephson, Tarr, Talerico, and Nageak
were present at the call to order. Representative Herron
arrived as the meeting was in progress.
^OVERVIEW(S):
Department of Natural Resources
OVERVIEW(S):
Department of Natural Resources
1:01:54 PM
CO-CHAIR NAGEAK announced that the first order of business is an
overview of the Department of Natural Resources.
1:02:29 PM
MARK MYERS, Commissioner Designee, Department of Natural
Resources (DNR), began by noting he has been on the job as
Commissioner Designee for 16 days, but is no stranger to DNR.
Over the last 25 years he has worked in DNR in various
functions, from petroleum geologist to director of the Division
of Oil & Gas, state geologist, and working on the gasline
projects. During his 32 years in Alaska he has also worked 10
years in the oil industry and then was the director of the U.S.
Geological Survey (USGS) in Washington, DC, under the Bush
Administration. He said his wide variety of experience with
natural resource issues also includes a doctorate in geology
from the University of Alaska Fairbanks (UAF) and spending four
years as Vice Chancellor for Research at UAF.
COMMISSIONER MYERS outlined the organizational structure of DNR
[slide 2], pointing out that the department is divided into two
parts, each with a deputy commissioner, one being Ed Fogels and
the other Marty Rutherford. The department has seven divisions
and four major offices. The division directors are very
experienced and present at today's hearing. He praised the
directors for their advanced degrees and life experience in
their areas of expertise, garnered in both public and private
sectors. These experts run their divisions well and are great
resources for legislative members.
1:05:01 PM
COMMISSIONER MYERS said DNR has a fundamental series of missions
[slide 3]. First, DNR is the economic engine for Alaska with
most of the development in Alaska occurring on state lands.
Most of the state's revenue - petroleum revenue - comes off
state lands that are managed by the Division of Oil & Gas.
There are many more mining claims and active mines on state
lands and on Mental Health Trust lands than there are on federal
lands. A timber industry is active on state lands and public
safety is provided through the forestry [division]. Agriculture
lands are dominantly state lands. While management of fisheries
is by the Alaska Department of Fish & Game, management of the
land and waters is by DNR. The Department of Natural Resources
is the equivalent of the Department of Interior for Alaska, but
even more so since there is so little private land and therefore
state land drives the economy. He addressed DNR's mission of
public safety, saying one of the state's largest risks is
natural disaster, such as earthquakes, tsunamis, volcanoes,
floods, coastal erosion, and fire. The department has a
leadership role in managing fire and for the other natural
disasters DNR provides the scientific data and much of the
warning capacity. Another mission is access, with DNR providing
land sales so Alaskans can own a part of Alaska. Public
recreation is also provided through management of state parks
and public lands. A science agency, DNR is fundamentally data
driven - it maps, understands, researches, and makes good
management decisions based on sound science and good data. The
department manages significant information technology resources
in order to have scientific data bases that are useable at all
scales. It helps adjudicate issues with the federal government
through strong science and the Department of Law. Economic
growth is the responsibility of DNR.
1:07:45 PM
COMMISSIONER MYERS displayed slide 4, saying he depicted a map
of Alaska over the Lower 48 to show the scale and scope of the
land that is managed by DNR, which is shown in blue. The sites
managed by DNR are hundreds of miles apart and in some places
thousands of miles apart. An incredibly diverse ecosystem base
is managed by DNR - from high mountains to arid North Slope
lands to temperate rainforests. The 100 million acres of
surface lands and 60 million acres of submerged lands managed by
DNR are an amazing portfolio of natural resources. Because many
of those resources are poorly understood, DNR's assessment of
them is really important. The state does not control federal
lands, so an understanding of the state's future economy is
driven by the state's ability to do what it can on state lands.
1:09:03 PM
COMMISSIONER MYERS turned to slide 5 to review the divisions and
major programs within DNR. Regarding the Alaska Liquefied
Natural Gas (LNG) Project, he explained that Senate Bill 138
authorized DNR to manage the state's royalty share of gas and to
market that gas. Under this bill the state will take its taxes
as gas, so up to 25 percent of the project will be managed by
the state. The upstream, the marketing part, and ensuring the
state is fiscally wise in its decisions is under the [Alaska
Gasline Development Corporation] and is integrated between DNR
and the Department of Revenue (DOR). The cost of the front-end
engineering and design (FEED) phase is potentially $1 billion or
more, so to do that the state must figure out how it will market
its gas, how to deal with property tax by working with DOR, plus
a series of other negotiations that must occur. In addition to
this commercial function, DNR is the lead in coordinating
permitting for the gasline and liquefaction plant. Thus, DNR is
playing a key role in the Alaska LNG Project.
1:10:48 PM
COMMISSIONER MYERS discussed the Division of Agriculture [slide
6], noting that farming is a relatively underutilized resource
and is critical to Alaskans. Food security relies on the
state's ability to grow more food locally. Value-added is
happening in Alaska, with peonies and other products. Although
agriculture is not a big revenue generator, it is jobs for
Alaskans. The Division of Agriculture provides land, assures
that agricultural inspections are safe, deals with invasive
species, and works to provide opportunities for farming for cash
crops. Small-scale agriculture is becoming more important in
Alaska. The Plant Materials Center provides the key seeds for
commercial development and is the official test site for seeds.
The division's 2014 highlights [slide 7] include the addition of
84 new farms to the Alaska Grown Program, the quarantine of five
invasive aquatic species, and the Farm to School Program which
provides locally grown food to Alaskan schools.
1:12:11 PM
COMMISSIONER MYERS reviewed the Division of Forestry [slide 8],
saying its number one mission is keeping Alaska safe and forest
fire. Of the division's budget of $46 million, $39 million goes
to fight fires. Alaska has lots of fires, with fire frequency
growing as the climate is changing and lightning strikes occur.
Many of Alaska's lands are drying and tundra fires on the North
Slope are being seen. Year to year it varies, but overall the
boreal forest is burning at record rates. In partnership with
federal firefighting, the division prepares by strategically
pre-positioning equipment and doing work upfront, allowing the
work to be done cheaper. Firefighting is significant to rural
economies, providing about [$6] million [in wages]. The
firefighters trained by Alaska's Division of Forestry work
throughout the US, with many of those firefighters coming from
rural Alaska. The division manages 27.5 million acres of
forested state land, which includes [three] state forests. Most
forestry work in Alaska is now on state lands and state forests.
COMMISSIONER MYERS moved to slides 9-10, pointing out that local
jobs are generated by the Division of Forestry, including wood
pellets for biofuel and birch trees for the Great Alaska Bowl
Company. Commercial lumber and timber provide the opportunity
for increased value-added production. Roads and infrastructure
built into state lands and state forests provide hunting and
recreational use in addition to the primary use of forestry.
Private contracting, including firefighting, is a huge economic
engine for many people in Alaska; additionally firefighting
protects structures. A highlight of 2014 was that 99.9 percent
of fires were suppressed and most were kept small.
1:15:31 PM
COMMISSIONER MYERS explained that the Division of Geological &
Geophysical Surveys [slide 11] collects, interprets, and manages
geologic data for oil, gas, and mineral development. It is
increasingly working on issues of public safety with respect to
groundwater, slope stability, earthquake, permafrost, volcano,
flooding, and other natural disasters. It provides information
for the public - publishing [an average] of 75 new technical
reports and geologic maps, with more than 300,000 publications
distributed. Thanks to the legislature, the division will be
opening its new Geologic Materials Center [this] April 15. It
costs billions of dollars to collect these materials, so the
center is invaluable to new mineral explorers and new oil and
gas explorers. Warehousing and making this data available to
look at provides a real incentive for additional exploration;
for example, he used the core facility heavily when he was an
exploration geologist.
COMMISSIONER MYERS, regarding economic impacts of the Division
of Geological & Geophysical Surveys [slide 12], stated that good
information allows resource development to happen in a safe way.
The discovery of only one oil field will pay for this survey
many, many times. A 100 million barrel oil field on state lands
will return to the state over $3.5 billion over the life of that
field. Mineral assessments, unaffordable to the smaller miners,
help identify new mineral prospects. The division is mapping
Cook Inlet, looking at source rocks for potential new oil. This
is usually done in cooperation with federal agencies, such as
the USGS. The division is also conducting geochemical analysis
for minerals and oil and gas, as well as geothermal assessments.
1:17:53 PM
COMMISSIONER MYERS said DNR's workhorse division is the Division
of Mining, Land and Water [slide 13]. Whether for a small
permit or for managing the overall surface estate of the 160
million acres, it is this division. It is responsible for the
stewardship of state waters, making land conveyances to
individuals and municipals, holding individual homestead land
sales, handling rights-of-way issues, the permitting of mining
projects, and [regulatory oversight] of dam safety and coal
exploration. A big challenge in Alaska has been the backlog in
permits. Due to additional funding from the legislature that
backlog was reduced by 61 percent, which is over 1,600 permits.
The division made its records electronic by scanning over a
million documents into a content management system. The
division also works with water reservations and has been pro-
active with protecting state interests. For example, the state
is beginning to assert its rights on the Arctic National
Wildlife Refuge (ANWR) border. There is an opportunity for the
state to gain additional acreage because the boundary of the
refuge was defined on the Canning River, but [the division]
thinks it was actually done on the Staines River. The division
is surveying and searching the records to make a case to the
federal government. The division is ensuring that the federal
government is honoring the federal legislation with respect to
land management and water management issues.
1:19:36 PM
COMMISSIONER MYERS stated that the Division of Oil & Gas [slide
15] is "the economic engine in the economic engine" because 90
percent of the general unrestricted funds comes from oil and gas
generated off of state lands. Management by this division
occurs in a sequence of events: assessing of oil and gas
prospects, providing leasing terms, doing a best interest
finding, permitting of exploration wells, unitization,
determining that the resources are being properly developed so
oil is not left in the ground, and overseeing the dismantlement,
removal, and restoration when the oil field is done.
COMMISSIONER MYERS said the economic impacts of this division
are huge [slide 16] - $2.5 billion for fiscal year (FY) 2014.
It is also the reason why Alaska has a permanent fund - 25
percent of the royalty goes into the permanent fund and for
leases prior to 1979 it is 50 percent. Lease sales have
provided over $200 million to the state since 1999, with $65
million provided in 2014. Opportunities for local energy
include work in Nenana Basin and coalbed methane leases near
Healy. The division provides a process for low-cost access for
new exploration. Highlights in 2014 include the third biggest
north Alaska lease sale in history, the issuing of 166 oil and
gas leases, and collecting $20 million in royalty and net profit
share lease (NPSL) audits.
1:21:50 PM
COMMISSIONER MYERS outlined the work of the Division of Parks &
Outdoor Recreation [slide 17], noting that the division provides
Alaskans with outdoor opportunities on state lands at very
reasonable cost. Alaska has the largest park system in America.
Run on a relatively modest budget, the division is being very
creative in finding funding sources external to the general
fund, such as merchandising and potential public-private
partnerships. Volunteers are used extensively - the number of
volunteers dwarfs the number of employees by 8 to 1. The
logistics of managing remote sites that are far apart across the
state and off the road system is quite challenging. Development
of new parks like "Denali South" are new tourism opportunities
for Alaska. Alaska's state parks draw a lot of people, but
about 80 percent of the users are Alaskans. The division's
[award]-winning boating safety program keeps Alaskans safe. The
Office of History and Archaeology manages historic trails and is
critical to the permitting of any projects that go across land
that may have archaeological significance. Division highlights
in 2014 include upgrading roads, parking lots, and scenic
trails. Rates were raised last year for the first time as a way
to require less in general funds.
1:23:44 PM
COMMISSIONER MYERS stated that the Office of Project Management
& Permitting (OPMP) is a success story [slide 19]. A major
project takes hundreds of permits, he explained, and involves
multiple agencies with differing opinions on what the criteria
are. Often each agency might request a different version of one
piece of data. So, OPMP coordinates the schedule, coordinates
the agencies, makes it easy for the applicant to get its permits
without lowering the standards, and adjudicates issues and
conflict between agencies. This office has been very successful
on mining projects and is crucial in the future to the large
gasline projects. Less than $1 million from the general fund
goes into this office because it is mostly funded by program
receipts from the people choosing to use these services.
Positive feedback indicates that OPMP is helping to accelerate
and build confidence that people can come to Alaska and deal
with the risk of all the state and federal permits that are
required. Most large oil and gas developments will use this
office [slide 20]. For FY 2015, there are signed memorandums of
understanding for eight new [oil and gas] projects. A statewide
wetlands compensatory mitigation program is a way to deal with
issues like those potentially at Alpine in the National
Petroleum Reserve-Alaska (NPR-A). Such a program will allow
flexibility in development in wetlands but not sacrifice
environmental quality because there can be a tradeoff of
wetlands. The office was a cooperating agency with federal
agencies on the [Greater] Mooses Tooth and Chukchi Sea, which
protects the state's interests. In a recent meeting, he
related, a senior ExxonMobil person praised OPMP for its help in
getting permits for development of the Point Thomson field.
1:26:10 PM
COMMISSIONER MYERS discussed the State Pipeline Coordinator's
Office [slide 21], explaining that it provides the rights-of-way
for pipelines on state lands. This is for pre-construction,
construction, operation and termination of contract, and common
carrier pipelines, not in-field lines. For cost cutting in the
governor's budget this office will be rolled into the Division
of Oil & Gas. The people doing the work will not be eliminated,
only the management structure. Highlights of 2014 include the
issuing of 51 field permits, 3 new pipeline rights-of-way,
continuing the pre-application permitting efforts for the
state's big gasline projects, and finalizing multiple amendments
to the Trans-Alaska Pipeline System (TAPS) right-of-way.
COMMISSIONER MYERS reviewed the Division of Support Services
[slide 23], saying that duplication is reduced by having a
centralized administrative services office. This division
provides human resource services and, increasingly, information
technology support as there has been centralizing of information
technology, records keeping, and digitalization of records. The
Information Resource Management (IRM) system, run by this
division, is critical because it has a huge amount of data for
the state. The division developed full electronic recording so
people can file and can see records without having to go into
the office, a very important service for the state economically.
Over the past six months, the division's mapping and land
reporting service was visited 70,000 times.
COMMISSIONER MYERS noted that the Mental Health Trust Land
Office [slide 25] is in DNR but reports to a separate board. It
manages over one million acres of land for timber sales, real
estate, and energy exploration and development, with the money
going into operating expenses and trust programs. Moving to
slide 26, he reported that the trust generated $11.2 million
from trust lands in FY 2014, and over the last 20 years has
generated $168 million.
1:29:09 PM
COMMISSIONER MYERS directed attention to the backgrounds of the
slides in his presentation, explaining that he put in these
topographic, resource, and water maps as a way to show the
amount of data and the types of data needed to manage the
state's resources. He pointed out that this data is available
to the public. While DNR manages the resource it is also
establishing the resource base. It is providing the technical
services the state needs to effectively manage its land. The
department also has the technical data that is needed when the
state has issues with the federal government so that it can
effectively make strong arguments based on merit and not just
based on legal points. That is huge because the better
technical data will often win a dispute. Commissioner Myers
advised that systematic development of these information sets
over time will make the economic opportunities in Alaska better,
communities more resilient, and public safety much greater. An
example of the lack of data is that less than 8 percent of the
[federally owned] continental shelf along Alaska is mapped. The
state worked in cooperation with the federal government to
acquire high resolution satellite data that is now served on
state servers at the university in cooperation with DNR and the
Alaska Geospatial Council. Additionally, DNR is applying
digital elevation data. This may not sound significant, but a
few centimeters of difference on a coastline matters,
understanding floodplains accurately matters, and it matters for
aviation flights through mountain passes. Thus, DNR is taking
the lead to coordinate state efforts to work with the federal
government to acquire data where it is known to be inadequate.
COMMISSIONER MYERS further advised that as things change, such
as from forest fires or coastlines erosion, data coverage needs
to be repeated. The department is working with some very
effective technology to provide services so it can get repeat
coverage of these areas. This is very expensive, involving very
sophisticated use of different satellites, airborne platforms,
and ground-based platforms. Through these processes DNR is and
will be identifying new mineral opportunities, new oil and gas
opportunities, better areas to construct roads, better forest
management, and ultimately better data for decision making by
communities. This data will be public and will not have to be
purchased commercially. He said he knows from his experience
with the federal government that when this is done correctly the
private sector will create value-added products that far exceed
the cost of acquiring and managing that data. He urged members
to think of DNR not just in terms of its land management but
also in terms of its fundamental knowledge about the state and
developing those data sets for the state.
1:32:32 PM
REPRESENTATIVE SEATON, regarding making data available to the
public, noted that the Department of Environmental Conservation
(DEC) has so far been unable to make contingency oil spill plans
(C-Plans) available online so they could be looked at by ship
pilots or others when there is a problem. He asked whether the
quantity of data being made available by DNR through web-based
systems is similar to the C-Plans. He further asked whether
there could be an inter-departmental sharing for how to make
that kind of data available online.
COMMISSIONER MYERS responded that the state, through the Alaska
Geospatial Council in cooperation with the USGS, funded airborne
surveys along the coastlines where good data was absent.
Coastlines are changing dramatically in many places and will
look much different in five years. Much of that coastline was
recently covered with light detection and ranging (LIDAR) and
interferometric synthetic aperture radar (IfSAR). Those raw and
imagery datasets are critical. The system being talked about by
Representative Seaton is actually best in oil spill software
developed by the National Oceanic and Atmospheric Administration
(NOAA). The spill prevention people at DEC work with NOAA to
populate NOAA's system, which has satellite imagery, assessment
of the shoreline areas, and susceptibility and classification of
that shoreline for vulnerability, but it is still not at the
desired high resolution. In collaboration with the university,
a state survey is using a specialist who maps the coastline and
looks at coastal erosion and vulnerability. He said he thinks
that that dataset exists, but is managed through NOAA's program,
not DEC.
1:35:01 PM
REPRESENTATIVE SEATON clarified he is talking about getting the
submitted C-Plans put online so they can be reviewed by the
public. He inquired whether there is any consistency between
the data availability and web posting such that DNR could help
DEC accelerate the process of getting the plans posted online.
COMMISSIONER MYERS replied that currently the university serves
the data with funding from DNR, the Alaska Geospatial Council,
and the USGS. The data is processed and service is through the
Geographic Information Network of Alaska (GINA). He said he
does not know whether that geospatial data is used by DEC in
discussion within a C-Plan. For federal leasing the C-Plans are
done by the Bureau of Safety and Environmental Enforcement
(BSEE), which are available online, he believed, because oil
spill risk assessment of the coastline is done within the NOAA
framework. There is no easy place to get all data for state and
federal plans together, he said, because it is in different
places. He offered to work with DEC to do that.
1:36:33 PM
REPRESENTATIVE HERRON inquired as to what has been a surprise to
Commissioner Myers since his return to Alaska state government.
COMMISSIONER MYERS answered that when he was at the university
there was good coordination with DNR, so there has not been a
whole lot of surprises. While he was at the university there
was a tremendous amount of involvement with the Arctic Council
and with the U.S. State Department; however, that is something
at which the state has been unsuccessful and he is surprised at
that. So, the state, through the Arctic Policy Council, did a
really good thing. There is opportunity as the U.S. takes the
chair for the state to have involvement, which is Craig
Fleener's new job, but the legislature has an opportunity. He
commended Representative Herron for the Alaska Arctic Policy
Commission and the great report that it put out which is a
potential beginning of the state presenting its face to the
Arctic Council. It is important there be both a state and
national effort because the state is the Arctic part of it.
While the federal agencies represent a portion of that, the
state clearly has different interests and different
opportunities to present. As the Arctic Council has its
meetings in Alaska, he said, he would like to see those
opportunities continue. So, the surprise is that the state has
not been more successful with engaging the federal government on
the state's role on the U.S. chairmanship.
REPRESENTATIVE HERRON asked what else in DNR has surprised the
Commissioner in his return to [state] government.
COMMISSIONER MYERS replied he is very pleased with the quality
of DNR's directors and the work done in the agency. The agency
has had a challenge in maintaining highly qualified people
because state pay is not what the industry pays in many cases.
The leadership is high quality, he continued, but he is
concerned with the significant brain drain at the technical
workforce level. A strongly skilled workforce in this highly
technical organization is necessary to maximize economic
development and public safety and provide services in the most
economical way possible. Therefore, he is concerned about
maintaining quality of workforce, particularly with the budget
cuts that are having to be made.
1:39:47 PM
REPRESENTATIVE OLSON inquired whether Commissioner Myers will be
poaching and bringing back to Alaska any of the incredible crew
that he had back in Washington, DC.
COMMISSIONER MYERS responded he has no money with which to bring
them back, although he did poach DNR's new legislative liaison,
Courtney Sanborn, from the university. Realistically, DNR is
downsizing, not upsizing. However, on the natural gas side he
will have to poach the best he can find because it is a world
class opportunity and world class challenge to get it right.
1:41:05 PM
REPRESENTATIVE TARR asked what will happen to the Farm to School
Program, completion of the Denali visitors' center, and other
programs with the budget cuts.
COMMISSIONER MYERS answered that a 5 percent cut means a
definite cut to services; an 8 percent cut is even more severe.
In the last decade DNR only grew 2.7 percent, the lowest of any
of the state agencies, so the cuts are really significant to
DNR. The department prioritizes on economic development and
public safety issues, so it can be imagined where the more
likely cuts are. He said DNR is streamlining and downsizing
administration as much as it can, but a 5 percent cut cannot be
done without taking out some programmatic areas. He offered to
discuss those areas once the budget is received.
The committee took an at-ease from 1:42 p.m. to 1:50 p.m.
^Alaska LNG Project
Alaska LNG Project
1:50:41 PM
CO-CHAIR NAGEAK announced that the next order of business is an
overview of the Alaska Liquefied Natural Gas (LNG) Project
provided by the firm, enalytica.
1:51:07 PM
NIKOS TSAFOS, Partner, enalytica, explained that his firm is
contracted by the Legislative Budget and Audit Committee to be
the legislature's consultant. He said he spent 10 years in the
oil and gas industry mostly as a consultant, with natural gas
commercialization being his specific area of expertise. He
added that he has worked with companies as well as sovereigns in
figuring out what to do with the gas they have or how to get gas
that they need.
JANAK MAYER, Partner, enalytica, noted that this is his fourth
year as consultant to the legislature regarding oil and gas
taxation issues, and Senate Bill 138 and the Alaska LNG Project.
He said his background is in project economics, finance
evaluation, and the impact on those issues from things such as
fiscal terms. He explained that enalytica was requested to
provide members with a reminder, overview, and update about
Senate Bill 138 and the Alaska LNG Project and what needs to be
done to make this project actually happen. He pointed out that
enalytica is an independent, outside advisor on this project; it
is not part of the negotiating team which has the formidable
task of developing and negotiating the various agreements and
understanding the information before the state can reach the
point where the project can progress to its next milestone.
1:53:58 PM
MR. MAYER reviewed the Alaska LNG Project's timeline [slide 2],
explaining that any major LNG project needs to move through a
timeline of these same activities. The Alaska project must move
through three big stage-gated phases between now and the middle
of the next decade when, all going well, an LNG project might
come on line. Currently, the project is in the pre-front end
engineering and design (Pre-FEED) stage, where the fundamental,
detailed, conceptual engineering design work is being done to
determine pipeline routing, the exact technologies that will be
used, and how everything from gas treatment on the North Slope,
to the pipeline, and to liquefaction will work. All the precise
conceptual details are being laid out to start to understand
what this project is, how it is going to work, and to narrow
down the range of cost estimates and whether it is an
economically viable project for all the different partners in a
wide range of circumstances. If the work in Pre-FEED determines
that it is worth spending the money to move forward, the next
stage-gate will be FEED. In FEED every last miniscule detail of
engineering design is developed, such as specification of every
last flange valve. These precise details are then sent out to
engineering, procurement, and construction (EPC) contractors for
bids to actually construct the project. A final investment
decision (FID) will be made by all the partners to commit the
dollars to make this happen. The project is then constructed
over the next several years and eventually comes on line.
1:56:55 PM
MR. MAYER pointed out that in addition to the engineering, a
vast range of other processes must happen at the same time to
move from stage-gate to stage-gate. For example, during Pre-
FEED the process of initial marketing discussions will occur
with potential LNG buyers. These discussions will be carried
out by the partner companies and, under the structure of Senate
Bill 138, by the state. These discussions ideally will lead
toward eventual signings of high-level nonbinding agreements,
such as memoranda of understanding (MOU) and Heads of Agreement
(HOA) to set out initial pathways of how the companies and the
state might dispose of their share of LNG. Once in FEED, those
will become more concrete agreements, maybe even some firm
binding sales and purchase agreements, particularly to the
extent that that is required to achieve sufficient financing to
enable a final investment decision to occur. After construction
there may be some additional sale and purchase agreements for
any LNG that was not firmly contracted by buyers prior.
Ideally, however, a lot of the sale and purchase agreements
would come before final investment decision is taken.
1:58:31 PM
MR. MAYER discussed the financing process, stating there would
be initial talks to understand the range of possible financing
structures, whether that be one financial structure for all the
partners or different financial structures for different
partners, and how all of that can work. Once in FEED, more
specific financing terms would be defined and loans and
securities would be signed. Most of the financing for the
project will be achieved, in place, and signed, by the time the
final investment decision comes. At some point at the very end
there will be a room full of vast stacks of paper that include
LNG sales and purchase agreements, financing, and so forth, and
all the parties will be walking around those tables signing
those documents. That said, additional financing may still be
needed by some parties during the construction phase. As each
of these stages progresses, the overall level of risk in the
project steadily comes down, and the further the project has
progressed the cheaper financing tends to be. Once the project
is on line there may, for the same reason, be refinancing of
some of the debt that was taken on earlier.
2:00:18 PM
MR. MAYER reviewed the project structure and ownership process,
noting that the initial structure is being defined under the
current Pre-FEED stage. However, he noted, project structure
and who are the equity participants can change dramatically over
the course of the Pre-FEED, FEED, and construction stages.
Partners may come and go. Some may decide they do not have the
appetite for the project and some of the LNG purchasers may
decide to purchase some share of the equity.
MR. MAYER outlined the investment process, reporting that the
publically-stated estimate for the project's [construction] is
$45-$65 billion. Between now and when construction begins,
$400-$500 million will be spent through Pre-FEED and $1.5-$2
billion will be spent to get through FEED. The state's share
through Pre-FEED is about $50 million with TransCanada's
participation, and closer to $125 million without TransCanada's
participation. Through FEED, the state's share is about $200
million if TransCanada remains, and about $500 million if the
state decides to carry its full share through all portions of
the infrastructure, including the gas treatment, processing, and
the pipeline as laid out under the agreements of last year.
During the construction phase, the state will need to cover its
share of cash contribution, the amount of which will depend upon
whether the state's share is 25 percent of everything or 25
percent of only the liquefaction. Depending upon the structural
considerations, such as the involvement of TransCanada, the
state's share will be between $6 and $15 billion.
2:02:57 PM
MR. MAYER turned to slide 3, stating that the agenda to go from
Pre-FEED to FEED is formidable. Many things must come together
before, in enalytica's view, the state can achieve the needed
level of comfort for making the decisions that eventually lead
to signing of agreements and binding commitments that move the
project to FEED. The things needing to happen [over the next
12-18 months] fall into five categories: technical, commercial,
organizational, fiscal, and regulatory. He said he and Mr.
Tsafos will discuss what will likely be the big issues and
difficulties in each of the categories and will address the
questions of how the state will handle domestic gas and the
marketing of its LNG. He drew attention to two papers prepared
by enalytica, one entitled, "MARKETING ALASKA'S GAS FROM AK LNG:
KEY ISSUES" and one entitled, "HOW LNG AFFECTS LOCAL MARKETS?
LESSONS FOR ALASKA FROM WESTERN AUSTRALIA".
MR. MAYER said that much of the technical category is the domain
of the project team, managed by Mr. Steve Butt. The team is
working on a vast range of technical issues that include
purchasing land, precise details of pipeline routing, and
specific engineering decisions. This work is being done with
the focus of driving down costs overall and driving down the
uncertainty around those costs so that the range of $45-$65
billion can be substantially narrowed to provide an
understanding of what this project looks like and how feasible
it really is.
2:06:06 PM
MR. MAYER addressed the commercial category, stating that much
hard work will be required from the state - the administration's
team - on negotiating a range of agreements with the companies.
Those include domestic gas, such as how supply for the market is
going to occur and whose responsibility that will be; for
example, whether it will be a requirement only for the state and
its share of gas or, more realistically he suggested, a
requirement that is shared between all of the partners and how
is that responsibility met and shared and how is domestic gas
priced. All of these will need to be negotiated in some degree
of detail. It may be something that interacts with, and is
included in, the fiscal agreements that need to be reached and
that will ultimately provide some degree of stability and
certainty for the companies as to what the long-term fiscal
structure is going to look like and how the state proposes to
guarantee that structure not changing over time.
2:07:31 PM
MR. MAYER continued discussing the commercial category, noting
that the question of off-take and balancing is particularly
crucial. A benefit of this structure is that it is one project
overall, but in many ways four projects within a project. Each
of the four partners has its own share of the gas with a
corresponding 25 percent share, assuming the state decides to
take its royalty and taxation entitlement as gas rather than
cash, thereby becoming an aligned equal partner with a roughly
25 percent equity stake in the infrastructure investment and 25
percent of the gas passing through that. Crucial to think about
is that the other three partners also have a working interest in
the upstream and two of them have operatorship of at least one
of the fields involved. The state has no working interest in
the upstream fields and, in particular, the state and one of the
companies do not have operatorship of either of the principle
upstream fields that will supply the project. If the state
takes its royalty and tax entitlements as gas it will at some
point be incurring firm binding commitments to deliver LNG to
counter-parties downstream, such as utilities. So, it will be
crucial to the state managing its own risk to ensure that it
knows exactly what it is getting at the wellhead or at the gas
treatment plant in terms of gas being delivered and how that
relationship with the working-interest owners and the field
operators is going to work. For example, if there is
underproduction in one month, what does that mean for the
state's share of LNG, how is it ensured that the state is made
whole, and, in particular, how is it ensured that the state can
meet its binding commitments? These negotiations and analysis
by the administration will be difficult to do and to understand
whether the state's potential liabilities to others can be met
and that the risk of taking royalty and tax as gas can be
adequately managed.
2:10:46 PM
MR. MAYER further noted that the state has already been going to
destination markets, such as Japan and China, to meet with
companies that would be interested in purchasing the state's
share of LNG. If the state is comfortable taking its tax and
royalty in-kind, decisions will need to be made about how the
state proposes to market its LNG. For example, whether to do
that primarily through the established producers or through the
state building its own capacity. In terms of financing, the
state must determine how to come up with the capital for its $6-
$15 billion commitment. This was difficult to contemplate last
year and now even more so in the current fiscal environment.
There are many ways the state can go about this serious issue.
For example, whether the state continues having TransCanada take
its share in the gas treatment plant (GTP) and pipeline and
signs a firm transportation services agreement with TransCanada
to do that, or the state instead finances that additional share
and arranges the financing options.
2:12:37 PM
MR. MAYER turned to the organization category, pointing out that
this includes the joint-venture agreements and all of the
governance agreements that organize how this structure works -
who has right of veto over what decisions, what is an obligation
for whom. Those will need to be in place further down the line
but there is going to be an entire process, in particular
probably a Heads of Agreement, that specifies all of these in
detail as to where it is thought that the project is heading in
terms of structure and how things will work. If the state is
comfortable that it can manage the risks involved in taking
royalty and tax entitlement in-kind as gas, modifications to the
leases of the fields involved will be needed to enable the off-
take and balancing. For particular leases, things like net
profit share would need to be taken out to actually enable that
royalty-in-kind structure to function in practice.
2:13:59 PM
MR. MAYER, regarding the fiscal category, reiterated that it
will be a daunting task to really understand what is needed to
get this project off the ground in terms of fiscal
stabilization. A degree of comfort that terms are not going to
change is needed to commit the $45-$65 billion of capital at the
end to make this happen. Also needed is how to implement that,
given restrictions in the Alaska constitution on making binding
commitments on future legislatures. Much thought has already
been given to the wide range of ways in which that particular
hurdle can be overcome, but much further thought on structures
through which that can occur is still needed. There will be
difficult negotiations between the state and the companies on
what the state thinks is reasonable and what the companies think
they require, and how those two things can meet in the middle.
2:15:01 PM
MR. MAYER advised that the regulatory category will be at play
all the while that the other categories are ongoing. There are
the questions of the Department of Energy and export permitting,
and the Federal Energy Regulatory Commission (FERC) and its
environmental and other permitting processes, all of which will
interact with such things as route, location, and local
communities. The FERC process will develop an understanding of
what the specific project impacts will be on the different
communities, and a negotiation process will occur around how
project impact payments should be structured and made.
MR. MAYER, returned to discussion of the fiscal category,
stating that community property taxes can impact the project.
Property tax as currently structured is quite harmful to the
project economics upfront and provides uncertainty due to past
property tax battles. The municipal advisory group has been
looking at how property taxes for this project might be
structured. Further refinement work needs to be done, such as
whether it be a payment in lieu of taxes or some other structure
that will provide adequate revenue for both the state and
municipalities, certainty for both parties, and a workable
structure that enables the project economics to work.
MR. MAYER pointed out that all of the aforementioned must happen
over the next 12 months just to get to Pre-FEED. He urged
committee members to think about the impact of all of these
issues on things that fundamentally matter to the legislature.
He further urged members to think about all of these things as
representing agreements that will be coming back to committees
and the legislature as a whole for approval. Legislators need
to be involved and understand what the administration is doing
in the negotiating so that legislators have a level of comfort
when those agreements do come back and the issues involved and
the tradeoffs involved are well understood.
2:17:42 PM
REPRESENTATIVE HAWKER agreed the task ahead is daunting. He
requested advice as to which things on the aforementioned list
should be priorities for legislator's to consider this session.
MR. TSAFOS replied that he will first state what he thinks
legislators do not need to worry about - not because they are
unimportant but because there are established processes or
someone else is doing the work. Legislators do not need to
worry about the technical side because it is driven by the
companies with the support of the administration. There are
some broad strategic questions that have a technical
implication; for example, the answer to the strategic question
of which communities get gas has a technical implication because
it tells where to put the pipe and the compression. Legislators
also do not need to worry about the regulatory category because
it has established processes - the Department of Energy for
export approvals and FERC for the permitting process.
2:20:06 PM
MR. TSAFOS continued, saying he sees legislators playing a
significant role in the [commercial, organizational, and fiscal
categories]. Regarding fiscal stabilization or property tax,
the legislature would clearly play a role as to what it is
willing to live with, thinks is fair, thinks appropriate, and
represents the state's interest. Regarding the organizational
category, he said a real question for the state is how this
governance is going to work. In particular, the legislature's
role should be to determine what things are veto areas, what are
the things the legislature wants to ensure will go ahead unless
a, b, or c has been approved. Those things are going to be
codified in governance agreements, so the more legislators can
think about it and say "I want to make sure that this governance
agreement gives us this right to have a veto or to have a say,
those are things that will help … the administration
negotiating." Regarding the commercial category, Mr. Tsafos
said he thinks of these things as preparing the groundwork for
future decisions. For off-take of gas, selling gas to Japan,
and financing, the legislature will not have too much on its
plate over the next 6-12 months. However, these are areas where
legislators can have a very constructive conversation to
understand the boundaries, the trade-offs, and where the
legislature would like to go, and then give input to the
administration to make sure it negotiates things that could pass
the legislature. That is partly why enalytica wrote the
aforementioned papers on domestic gas and LNG marketing. Those
are areas where legislators ultimately have to think about very
broad questions, such as how much risk to take as a state, what
kind of volatility the legislature is willing to live with, and,
on the financing side, how much the legislature is willing to
put the state's credit at risk for this project. Those are big
strategic questions, but the legislature will not have very
concrete things to decide over the next 12-18 months.
Legislators will have to think about some very broad directional
questions and enalytica is hoping to work with legislators on
those. However, for fiscal and property, legislators may have
some more concrete things to get at.
2:22:46 PM
MR. MAYER added that, overall, the financing considerations are
broad; they are not about specific loans, tranches, or financial
instruments. However, one crucial decision that the legislature
needs to make over the next 12 months will profoundly impact
financing and structure of the project, and that is the role of
TransCanada moving forward. At the moment TransCanada is the
partner taking the state's 25 percent shareholding in the gas
treatment plant and the pipeline. As such, TransCanada is the
entity fronting all of the capital that the state would
otherwise have to front to enable the Pre-FEED work to continue.
In October 2015 the state will have to decide whether it is
ready to sign a firm transportation services agreement with
TransCanada; once signed, that is set in place. There are
strengths and weaknesses to having TransCanada in that
arrangement. Benefits include having a very experienced
pipeline player, having an independent pipeline operator in the
mix that is expansion oriented and has a different set of
incentives to the other companies involved in the project, and
that is potentially aligned with the state's interest on certain
areas. In particular, those are benefits if TransCanada can
eventually be the operator of the gas treatment plant and the
pipeline. Whether TransCanada would or would not be the
operator is part of the ongoing negotiations that need to occur.
MR. MAYER, regarding cost, noted there is also the question of
how much debt and other forms of capital the state can raise for
its total share of this project. What would be the state's cost
without TransCanada? There is a wide range of permutations for
that: how much the state tries to finance through recurrent
revenue; how much the state tries to use the assets of revenue
streams associated with the permanent fund; when the state
issues debt, how much is its own direct obligations; and how
much the state can rely on limited or non-recourse financing.
Each of those different sorts of finance has a cost. Much work
needs to be done to understand all of those variables and what
the difference in cost would be with and without TransCanada's
involvement in those financing options.
2:26:59 PM
REPRESENTATIVE HAWKER said it caught his ear when it was stated
that the legislature really does not have any decisions to make
for 12-18 months. He said he therefore appreciated Mr. Mayer
clarifying that in accordance with Senate Bill 138, the
legislature is anticipating a special legislative session later
in 2015 to approach some of these questions that are raised.
MR. MAYER replied that this is a very, very ambitious timeline,
but ideally there will be legislative session later in 2015 in
which that and all of these agreements, or a large number of
them, would be coming back to the legislature for approval.
REPRESENTATIVE HAWKER noted there was quite a list of agreements
last year that the legislature anticipates seeing at the end of
2015.
2:28:12 PM
REPRESENTATIVE SEATON, regarding TransCanada's involvement,
posed a scenario in which the state does not buy part of that
back. He inquired whether any consideration is being given to a
prohibition of TransCanada selling its part to the producers so
that the state does not get into the same alignment problem it
has with the Trans-Alaska Pipeline System (TAPS).
MR. MAYER, regarding the decision point ahead, clarified that
there are two questions. The initial question is whether the
state signs a firm transportation services agreement so that
from FEED onward TransCanada is or is not in the mix. If
TransCanada is in the mix, the second question is whether
TransCanada carries the full 25 percent or the state backs into
40 percent of that share. If the state does not sign a firm
transportation services agreement, it simply carries its share
onward. If the state does sign a firm transportation services
agreement, but does not back into that 40 percent of the 25
percent share, it seems to him that what restrictions do or do
not exist on TransCanada for whether other parties could be
involved in TransCanada's share of that infrastructure will
depend in large part on the details of that agreement. The
precise binding contractual relationship between the state and
TransCanada could be specified either in that agreement or in
the series of agreements that will go with it.
2:30:42 PM
REPRESENTATIVE TARR inquired whether "governance agreements" are
the suite of agreements that being talked about for this fall.
MR. MAYER replied that the agreements of this fall will cover a
wide range. Many of the things seen under commercial, fiscal,
and organizational are on the timeline to be negotiated by later
this year - some in preliminary form and some in final form,.
REPRESENTATIVE TARR asked whether enalytica is generically
referring to those as governance agreements.
MR. TSAFOS responded that governance agreements are anything
that relates to the relationship between the different parties -
agreements that codify the relationship, rights, and obligations
that one party has to the other, such as joint-venture
agreements or firm transportations services agreements.
2:32:03 PM
REPRESENTATIVE JOSEPHSON understood that if the state does not
sign a firm transportation services agreement [with TransCanada]
then the state will have its full equity share, unless there is
some other new contracted party.
MR. MAYER answered correct.
2:32:46 PM
MR. TSAFOS drew attention to slide 4, stating that enalytica is
trying to "plant some seeds" in members' heads in terms of how
to think about some of the questions before the legislature. He
clarified that enalytica is presenting the issues that will have
to be grappled with and how to start thinking about them, not
coming before the committee with answers or suggestions.
Addressing the issue of marketing LNG, he reminded members that
under Senate Bill 138 the state can take possession of the gas
and be responsible for disposal of this gas. He explained that
the next three slides, along with enalytica's accompanying paper
["MARKETING ALASKA'S GAS FROM AK LNG: KEY ISSUES"], lay out
some ideas in how to start thinking about marketing and how to
think about the best way to protect the state's interest.
2:34:01 PM
MR. TSAFOS stated that slide 4 summarizes six parameters for the
sale of LNG using seven or eight recent projects from around the
world, the details of which are outlined in enalytica's
accompanying paper. Regarding the parameter of how much gas to
sell before taking final investment decision - going to
construction - he said all the projects included in the summary
sold at least 70 percent of their gas before going to
construction, many of them selling 100 percent. Standard
practice is that a project does not go to construction without
pre-selling a large share of the gas. Regarding the parameter
of counter-parties, the average was 2.9 buyers per project, but
the range was from 1 to 6 buyers. Some smaller projects had
just one buyer and others of similar size to the Alaska LNG
Project had six buyers. Because each partner in the Alaska LNG
Project is going to be selling its gas separately, that
automatically creates more buyers. Regarding the parameter of
price exposure, he noted that many of the Lower 48 projects are
linked to Henry Hub, the gas price in the U.S., while projects
outside the U.S. are mostly still linked to oil. Regarding the
parameter of contract size, Mr. Tsafos related that this varied
from 1 million tons [per annum] to over 4 million. With the
Alaska LNG Project at 16-18 million tons and the state having 25
percent of that, the state is looking at selling 4-5 million
tons. The state could probably contract to sell that amount to
just one company as that is a size of contract seen elsewhere,
but the state could also easily sell to three or four companies.
Regarding the parameter of transfer point, the question is
whether to sell this gas at Nikiski or to get into the shipping.
Broadly speaking, there is no clear trend between who does the
shipping - the buyer or the seller. The point is that if the
state wants to get into the shipping it probably can, but, if
not, no one will hold the state responsible or penalize it.
Regarding the parameter of equity partnership, about one-third
of the buyers had ownership in the project - either because the
project developers sold gas to themselves or because a buyer
coming to the project to buy gas also wanted a piece of the
ownership. Thus, there are some basic trends but also a lot of
wiggle room. Legislators do not have to think about a "cookie-
cutter approach", they can develop a path that works for Alaska.
2:37:55 PM
REPRESENTATIVE JOHNSON recalled Larry Persily's statement before
the committee [on 1/23/15] about shorter contracts, such as five
years. He surmised this will make it harder for financing and
inquired how it will play into the Alaska LNG Project.
MR. TSAFOS replied he thinks shorter contracts are a clear trend
for projects that are under operation and for companies that
have a big portfolio, companies like BP or Exxon that have gas
from five or six different places. For new projects there is
still a preference for long-term contracts. So, the trend is
there but it is not for new developments.
2:39:04 PM
MR. TSAFOS, responding to Representative Seaton, clarified that
slide 4 is a sample of seven or eight LNG projects in the world
and is for the entire project. For example, it includes the
entire Sabine Pass Liquefaction Project in the Lower 48, which
had four counter-parties that it sold gas to. So, in some ways
the summary applies to the entire Alaska LNG Project, not to
just the Alaska share of the project.
REPRESENTATIVE SEATON, regarding pre-sale of between 70 and 100
percent of the gas, asked when the amount of gas available will
be known from the Alaska Oil and Gas Conservation Commission
(AOGCC). He asked whether enalytica's assumption is that the
pipeline will be full at the start of the Alaska LNG Project.
MR. TSAFOS answered that he cannot comment specifically on the
AOGCC question, but the overarching presumption is that the
project will get approval to get to full capacity pretty
quickly. He said he does not think anyone has the intention of
building a $45-$65 billion piece of equipment and not utilize
it, so one of the assumptions is that this can be done with
permission that it is not going to hurt oil recovery. With the
project having three trains, there may be 6-18 months between
trains and therefore a staging in terms of construction. Once
things come on line the interest is generally to get to 100
percent as quickly as possible.
REPRESENTATIVE SEATON inquired how much additional gas must be
found on the North Slope to support that production over time.
He noted that some North Slope fields are currently having to
import natural gas from other fields and inquired whether there
are other North Slope competing uses that could affect the gas
that is available and therefore the wellhead price that the
project is being built on.
MR. TSAFOS replied that the overarching assumption is that there
is sufficient gas between Prudhoe Bay and Point Thomson to
underwrite 20-some years of production, and then there is either
expansion or the discovery of new resources to backfill as these
two projects run out of gas.
2:42:40 PM
MR. TSAFOS moved to slide 5, stating that after distilling the
experience of other countries enalytica has come up with four
principles to guide the state's marketing efforts. The first
principle is to think about performance over time. When getting
into a 25-30 year deal, the wisdom of decisions cannot be judged
on a day-to-basis. It is a volatile market with prices going up
and down - the best price today may not be the best price later.
Legislators need to think about what is going to serve the
interests of the state over a long-term period. The second
principle is to focus on risk, not necessarily the highest
price. For example, it is easy to feel short-changed if Alaska
is selling its gas for $11 while someone somewhere else is
selling gas for $12. The LNG market is so fragmented that it is
always hard to know what the highest price is and prices can
reflect different conditions, different times, and different
terms. The idea is not necessarily trying to maximize price,
but rather trying to limit volatility, trying to manage risk.
2:44:30 PM
MR. TSAFOS addressed the third principle by noting there was
discussion during consideration of Senate Bill 138 about whether
to have the producers sell the state's gas. He said enalytica
thinks that is a legitimate option for the state and something
legislators should think about. He cautioned, however, that if
the state sells its gas through the producers, the state is
basically adopting the producers' risk profile. While the
producers are experienced, they may do things that the state
would not because they are willing to take on risk that the
state is not willing to take. So, it important to think about
what the state's risk appetite is, and ask the producers whether
they are willing to meet that risk profile rather than just
outsourcing and adopting the producers' risk profile. The
producers have operations around the world and different
exposure around the world; therefore they may be willing to take
risk that the state may not be willing to take.
2:46:10 PM
MR. TSAFOS emphasized the importance of the fourth principle,
building in-house expertise, and said it is combined with the
third principle. In looking at sovereigns around the world,
enalytica found that those that outsourced the knowledge to oil
companies came to regret it. Deep knowledge and understanding
of the market is crucial, especially when faced with
renegotiations or events like Japan's Fukushima Daiichi nuclear
crisis, because these events impact the bottom line. This can
only be done by staffing up. The ability to understand the
state's risk profile, as well as to sell gas in a way that meets
the state's risk appetite, is going to be dependent on having
people that know how to do that.
2:47:09 PM
REPRESENTATIVE JOSEPHSON observed the statement on slide 5, "the
highest price could mean being priced out of a market and having
LNG unsold". He surmised that would only be true in the case of
a spot sale because if 100 percent of the gas is committed then
someone is buying the gas and so there would be no unsold gas.
MR. TSAFOS said the answer is "yes and no". It is yes in the
broad sense that the state will have pre-sold its LNG, but
usually LNG contracts have wiggle room. For example, a contract
might be for 1 million tons, but there may be a take-or-pay
liability so that the buyer only needs to buy 800,000 tons on a
firm basis. If the state has very expensive gas, people are
going to try to bring the state as low as they have to and may
not go all the way up to their contractual obligation. This was
seen with "Kenai", which was selling gas into Japan for a long
time. Then, towards the later part of the project, 2009, there
was a renegotiation and Kenai went from some of the most
competitive gas in Japan to some of the most expensive gas in
Japan. But, when it came for renewal, the Japanese were not so
keen. So, there are some tradeoffs.
2:48:47 PM
REPRESENTATIVE HERRON offered his appreciation for the four
principles, saying he completely understands enalytica's advice
on the fourth. Regarding the third principle, he asked whether
risk tolerance could be negotiated between the state and the
producers so that it is to the state's tolerance.
MR. TSAFOS confirmed this could be negotiated, but said it gets
tricky. For example, the state selling its gas through Exxon at
the risk profile the state wants is sort of different than Exxon
selling this gas on the state's behalf. Down the road the state
might feel that Exxon is taking this gas and making a huge
markup on it, creating some displeasure. So, while it is
possible, it would not necessarily be that the producer is
selling the gas on the state's behalf, the state is just
deciding to sell it to the producer. However, quite a few times
enalytica has seen some risks to that arrangement down the line.
There are multiple transactions between the time the gas leaves
the field and ends up at the consumer, and there are some times
when there are huge markups, and that usually leads to a lot of
tension and leads to calls for renegotiation arbitration. So,
there are some cautions that he would put to his statement. It
is absolutely right that just the same way that the state can go
to a Japanese buyer and say this is the risk tolerance that it
has, ExxonMobil and Conoco could give the state the same terms
possibly.
2:50:41 PM
REPRESENTATIVE TARR said she wants to ensure that this
discussion is specific to the final version of Senate Bill 138
on this point. She recalled that [the committee] approached it
from the angle that if [the state] entered into that kind of
commercial agreement for [producers] to sell the state's gas,
that the [producers] would have to sell the state's gas at a
price as least as good as [the producers] were selling their own
gas. While later amended by the House Finance Committee, the
intent of that language was still in the bill. However, she
pointed out, the committee did not look at it from the risk
profile perspective. She asked how this third principle can be
addressed given the language used in Senate Bill 138.
MR. TSAFOS replied that Representative Tarr is correct and said
the idea of a different risk profile is something that enalytica
tried to highlight last session as well. He said he thinks that
that language speaks specifically to selling the gas on the
state's behalf rather than selling the gas to the producers. It
will be interesting to see if there is any meaningful
distinction between those two things because the state can
really just say it is selling the gas to the producers and the
producers can do whatever they want with it, which is slightly
different than saying "here is an amount of gas that you have to
sell on the same terms". He said he thinks the aforementioned
language was used in the legislative intent and it must be
respected and used for guidance in this process. Enalytica is
trying to push members to the next stages of that. At some
point there will be terms and the question is how do legislators
judge them and those are the kind of principles that could help
legislators judge the terms.
2:52:40 PM
MR. TSAFOS turned to slide 6 entitled, "WHAT LEVERS DOES THE
STATE HAVE?" He pointed out that in regard to what he said
about risk profile, these are the tools at the state's disposal.
He urged members to read enalytica's accompanying paper.
MR. TSAFOS noted that in regard to financing [slides 9-10],
there is not yet much new information and therefore a lot of the
financing part is the same conversation as last session.
MR. TSAFOS addressed slides 7-8, stating that when there is LNG
export, the question is what happens to a local market. This is
a legitimate question that is being asked by Alaskans, the Lower
48, and other jurisdictions as well. Rather than doing
modeling, enalytica decided to study a similar project to see
what happened. Western Australia had so many similarities with
what Alaska is going to experience that enalytica wrote a paper
on it ["HOW LNG AFFECTS LOCAL MARKETS? LESSONS FOR ALASKA FROM
WESTERN AUSTRALIA"]. Drawing attention to slide 7, he said five
things are striking about Western Australia. Some are
counterintuitive and changed his own understanding of the link
between exports and domestic markets.
2:54:27 PM
MR. TSAFOS continued, stating the first finding is that there is
no set link between exports and domestic prices, as illustrated
by the top right graph. Second, just because there are exports
does not mean people are going to abandon the domestic market.
As seen in Alaska's own Cook Inlet, an export facility has not
meant that companies are uninterested in exploring and producing
gas for the local market; this same thing is seen in Australia.
Third, Western Australia has a reservation policy that basically
forces LNG projects to commit a certain amount of gas to the
local market. That effort to commit gas to local market crashed
the market, as depicted in the bottom right graph. The
Northwest Shelf LNG project came on line in 1989, but had a
domestic stage that came on line in 1984. When it started
producing, Northwest Shelf had almost 100 percent of the market
for about a decade because the state committed them to supply so
much gas to local market that there was no room for anyone else
to come in and it took a while for that overhang to work through
the system. This is a lesson that applies to Alaska. Fourth,
the reservation policy definitely makes LNG projects pay
attention to the local market. In the natural scheme of things
an LNG exporter is not inclined to supply the local market; an
exporter does that because of its obligation to the state, the
citizenry, and having a license to operate, so there is
definitely a role for policy to come in and think about how to
address the local market. Fifth, Western Australia found that
having a domestic reservation policy is not enough to create a
well-functioning market. Work must still be done on regulation
to create transparency and competition. The question is not
"How do I keep this gas at home?" Rather, it is "How do I
regulate this market that now includes a really big supplier
that does LNG?"
2:57:11 PM
REPRESENTATIVE JOHNSON pointed out that Alaska's constitution
says to maximize the resources for all citizens. That is
interpreted such that if gas is sold for $10 offshore it is sold
for $10 onshore in terms of some of the state's royalties with
refiners and so forth. There may be the ability to back out
transportation, but other than that the basic number has to be
the same. He inquired whether Australia has anything similar to
this or could give away the gas locally if it wanted to.
MR. TSAFOS responded that Australia does not. Australia allows
buyers and sellers to agree to whatever they can meet in the
marketplace and agree to. This is why there has been a range of
prices, with prices going up again in recent years as markets
have become tighter. So, there is no overarching guideline that
drives the direction of gas pricing.
2:58:23 PM
MR. TSAFOS moved to slide 8, addressing the question of how to
apply Western Australia's experience to Alaska. He said many of
these things also ring true to Alaska. Alaska's experience
shows that domestic prices have sometimes correlated with
exports and other times not, in large part driven by whether the
Regulatory Commission of Alaska (RCA) says that the domestic
price should be linked to oil or Henry Hub. Pricing in the Cook
Inlet is driven by local market forces, not what is happening in
Japan. Western Australia experienced this as well; it is driven
by supply/demand in Western Australia, not by supply/demand in
Japan. However, the fact that LNG can be exported does have an
impact because it is a source of demand, but it does not
automatically mean that that is really what drives the price.
Lastly, as seen with Hilcorp, just because Alaska has exports
does not mean that companies will be uninterested in coming [to
Alaska] to explore and produce gas for the local market.
2:59:49 PM
MR. TSAFOS advised there are two takeaways from that for the
path forward. First, it is very tempting to make sure that
every single bit of local demand is met by the Alaska LNG
Project. However, the unintended consequences of that must be
looked at, one of which is that no one will have an interest, or
the ability, to develop smaller deposits of gas because all of
the market will have been taken, as shown in Western Australia.
Second, as seen in Western Australia, rather than how will
Alaska LNG meet demand, the question is how to bring affordable
energy to all Alaskans given that there is Alaska LNG. What are
the regulatory and policy toolkits that should be employed given
there is Alaska LNG? Part of last year's discussion was about
putting some of the royalty into a fund for all Alaskans. Those
are the kind of things that can drive that conversation. Rather
than asking how to regulate Alaska LNG, instead ask how to make
this system work given that Alaska LNG is there. Those are the
broad, strategic, high level directional questions that
enalytica is submitting to members, with the understanding that
the conversation is just getting started. While everyone knows
where the overall objective is, the nuances of how to get there
are what enalytica has presented today.
3:01:53 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:02 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| enalytica AK LNG Marketing Issues Jan 2015.pdf |
HRES 1/28/2015 1:00:00 PM |
enalytica AK LNG Marketing Issues |
| enalytica How LNG Affects Local Markets January 2015.pdf |
HRES 1/28/2015 1:00:00 PM |
enalytica How LNG Affects Local Markets |
| enalytica HRES AK LNG Project Update January 2015.pdf |
HRES 1/28/2015 1:00:00 PM |
enalytica AK LNG Project Update |
| 1.28.15 HSE RES DNR Dept. Overview.pdf |
HRES 1/28/2015 1:00:00 PM |
Department of Natural Resources Overview |