Legislature(2015 - 2016)MAT-SU ASMBLY CHMBR
09/09/2015 06:30 PM House RESOURCES
| Audio | Topic |
|---|---|
| State's Gasline Team Update | |
| Adjourn | |
| Start | |
| Aklng Update | |
| State's Gasline Team Update |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
JOINT MEETING
SENATE RESOURCES STANDING COMMITTEE
HOUSE RESOURCES STANDING COMMITTEE
Palmer, Alaska
September 9, 2015
6:31 p.m.
MEMBERS PRESENT
SENATE RESOURCES
Senator Cathy Giessel, Chair
Senator John Coghill (Online)
Senator Bill Stoltze
Senator Peter Micciche (Online)
Senator Bert Stedman (Online)
Senator Bill Wielechowski (Online)
HOUSE RESOURCES
Representative Benjamin Nageak, Co-Chair
Representative David Talerico, Co-Chair
Representative Mike Hawker
Representative Andy Josephson
Representative Bob Herron (Online)
Representative Geran Tarr (Online)
Representative Paul Seaton (Online)
MEMBERS ABSENT
SENATE RESOURCES
Senator Mia Costello
HOUSE RESOURCES
Representative Craig Johnson
Representative Kurt Olson
OTHER LEGISLATORS PRESENT
Senator Mike Dunleavy
Senator Charlie Huggins
Senator Anna MacKinnon
Representative Shelley Hughes
Representative Charisse Millet (Online)
Representative Dan Saddler
Representative Lynn Gattis (Online)
COMMITTEE CALENDAR
UPDATE: Alaska LNG Project
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
LARRY DEVILBISS, Mayor
Matanuska-Susitna Borough
Palmer, Alaska
POSITION STATEMENT: Welcomed the joint committee to Palmer.
STEVE BUTT, Senior Project Manager
Alaska LNG Project
POSITION STATEMENT: Provided AKLNG Project update.
BILL MCMAHON, Senior Commercial Advisor
AKLNG Project
POSITION STATEMENT: Provided AKLNG Project update.
DAN FAUSKE, President
Alaska Gasline Development Corporation (AGDC)
POSITION STATEMENT: Provided AKLNG Project update.
VINCENT LEE, Director
Major Projects Development
TransCanada
POSITION STATEMENT: Provided AKLNG Project update.
DAVID VAN TUYL, Regional Manager
BP Exploration Alaska, Inc.
POSITION STATEMENT: Provided AKLNG Project update.
DARREN MEZNARICH, Project Integration Manager
AKLNG Project
ConocoPhillips Alaska, Inc.
POSITION STATEMENT: Provided AKLNG Project update.
RIGDON BOYKIN, Lead Negotiator
AKLNG Project
POSITION STATEMENT: Provided AKLNG Project update.
MARTY RUTHERFORD, Deputy Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Participated in the AKLNG Project update.
DONA KEPPERS, Deputy Commissioner
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Participated in the AKLNG Project update.
JUSTIN PALFREYMAN, Director
Global Power, Energy & Infrastructure Group
Lazard Freres
POSITION STATEMENT: Participated in the AKLNG Project update.
ACTION NARRATIVE
6:31:04 PM
CHAIR CATHY GIESSEL called the joint meeting of the Senate and
House Resources Standing Committees to order at 6:31 p.m.
Present at the call to order were Senators Micciche, Coghill,
Stedman, Wielechowski, and Chair Giessel; Representatives Tarr,
Seaton, and Herron.
^AKLNG Update
UPDATE: Alaska LNG Project
6:33:08 PM
CHAIR GIESSEL announced the fall quarterly AKLNG Project update
provided for in SB 138. She welcomed Mayor Devilbiss to give an
opening welcome to the committee.
6:34:00 PM
LARRY DEVILBISS, Mayor, Matanuska-Susitna Borough, Palmer,
Alaska, welcomed the joint committee to Palmer. He said unlike
Anchorage and Fairbanks that have a large part of their tax load
carried by commercial properties, the Mat-Su Borough is more
than 80 percent residential. So a project that jumps over $1
billion is really significant and they have been told that 20
percent of just the pipeline is going through borough property.
He is currently working on recommendations for taxation issues
for the special session.
6:35:58 PM
CHAIR GIESSEL invited Steve Butt to provide the AKLNG Project
update.
6:36:30 PM
STEVE BUTT, Senior Project Manager, Alaska LNG Project,
Anchorage, Alaska, said he represents about 1,000 people who are
working on the project; about 130 are employees from the sponsor
companies who work directly within the project and about 250
people are in the field in Alaska (about 80 percent are
Alaskans) gathering the data needed to get the permits to build
this project. In addition, 500-700 contractors are doing the
design work. The design work and field data gathering all feed
into the regulatory process, which underpins the project and
helps get the permits needed to move forward.
MR. BUTT said the AKLNG Project is trying to treat the gas
(removing non-hydrocarbon elements) and transport it just over
800 miles from the north to the south. The gas is on the other
side of the Brooks Range where there isn't a market. Once the
gas is transported to the southern coast, it gets liquefied.
When it gets very cold, it condenses down to a ratio of 600:1.
Moving it in an un-liquefied (uncompressed form) would take 600
ships whereas it can be done with one ship in a liquefied form.
Moving the gas product from Alaska to Asian markets takes 12-14
days. Six hundred ships is an enormous number compared to one.
6:39:56 PM
MR. BUTT said the modules have arrived at Point Thomson - and
incidentally, that Alaska had pioneered the use of modular
construction where things are built in one place and moved to
more difficult places on the North Slope. "Plug and play" is
basically pushing the modules together, welding up the flanges
where needed and getting the equipment ready to run.
6:40:52 PM
MR. BUTT said it's been a real advantage for this project to be
able to work seamlessly under FERC III with the Prudhoe Bay
operator, because the parties involved in AKLNG are the same
parties involved in the upstream, for the most part. The core
concept that underpins what makes AKLNG different from previous
attempts to commercialize gas is all of the resource claimants
are working together. Those parties are BP, ConocoPhillips and
ExxonMobil (often called "the producers"); the fourth party is
the State of Alaska, which under SB 138 is a 25 percent equity
participant in the project. All Alaskans are represented by the
state and the state benefits and receives 25 percent of the
revenue that the project might generate. That framework of
moving the gas, bringing it into the project, having all four
parties together is the core element of AKLNG.
6:42:20 PM
MR. BUTT said the gas gets treated in a Gas Treatment Plant
(GTP) and they have found ways of reducing the cost of
construction (about $1 billion) by going from four trains down
to three and he said, "It continues to go very well." Once the
gas is treated, all the impurities are removed and the CO is
2
taken out and put back in the ground. The gas is what is left -
mainly methane and some ethane - and that gets transported down
from the GTP to the south in a pipeline. A lot of progress has
been made on the pipeline: everyone agrees on the routing, but
more work still needs to be done on the sizing.
Once the gas gets down to the south, it goes to the liquefaction
facility. A lot of design work has been done positioning it for
optimization and really improving the layout to make sure the
LNG plant can be built as efficiently as possible.
Over the last several months, they continue to focus on safety.
It's the most important thing, because if they are successful in
moving the project forward, it will have 9-10 years of design
and construction life, but then it will have 25-50 years of
operating life. They really want to build the right environment
where people can work safely; it's called a "culture of caring."
Mr. Butt said little incidents have happened, but fortunately
nothing has been a reportable incident.
6:43:28 PM
MR. BUTT said they also continue to progress the pre-FEED design
work spending about $243 million on it in addition to a $107
million on concept work. Right now they spend about $32 million
a month because they are in peak summer work; that falls off a
little in the winter.
The pre-FEED work that was initially scoped under the Joint
Venture Agreement (JVA) is about 75 percent complete and the
field work is about 50 percent complete. There is about 2 more
weeks of intense summer work. This is the third year of summer
field work and it is focused mainly south of Livengood now. They
are trying to understand geotechnical issues, so that when the
project is built the pipeline can be designed safely around
earthquake-prone areas.
6:44:38 PM
They seek sites of historical or cultural significance and work
with the State Historic Preservation Office (SHPO) to make sure
they aren't impacted in any way by the project.
6:46:21 PM
MR. BUTT said their focus remains on basic design and execution
work. The project will cost $45-65 billion and they are working
to push it towards the bottom of that range and hope to have
that work done towards the end of 2015 and beginning of 2016.
6:46:55 PM
REPRESENTATIVE HAWKER asked how spending had been allocated
amongst the partners.
MR. BUTT replied that spending ties back to the equity shares.
The largest gas resource owner - ExxonMobil - has 32.6 percent,
the state has 25 percent, ConocoPhillips has 21.6 percent and BP
has 21.4 percent.
6:47:58 PM
MR. BUTT said permitting work continues, because it underpins
everything they do. A range of federal, state and local permits
are needed. Fortunately, the permitting process is going well.
The project continues to have a lot of community open houses,
sessions where folks are told what the project is and advised
that Alaskan citizens are owners of the project.
Work is also continuing on a 48-inch pipeline system (which he
would talk more about in a few more slides). The 2016 work
program and budget is a near term milestone, because of the way
the JVA is structured. Each party has to have a good
understanding of how each of the participants are going to be
represented in 2016 and how they are going to fund their share.
It is a critical decision that has to be made over the next
several weeks and if the decision isn't made, they face a lot of
consequences that adversely impact timing or project
[indiscernible].
6:50:10 PM
MR. BUTT said he always likes to talk about a couple of key
messages. From an AKLNG Project perspective it is an integrated
project. Every piece of the project talks to every other piece.
If temperature or pressure is changed at any one point in the
project, it touches everywhere else in the project. As an
integrated system, it has been permitted under FERC III; the DOE
export authorization and all the permitting work is tied to it.
This allows design integration, which makes it easier to
progress at Prudhoe Bay, because they can talk to the operators.
Under different structures, it's a lot more difficult to have
that conversation because there may be competitive or regulatory
concerns. But because the four primary resource entities are all
represented in the project, those concerns are mitigated; the
conversation can be much more transparent, which allows the
design and construction to be a lot more efficient.
MR. BUTT said they have worked to understand what the five
offtake points might look like and where they might be, and
continue to reach out to the state's representatives,
principally the AGDC, to understand where the hydraulics can be
completed. It is an important question to answer, because they
know how much gas is flowing from the top of the system to the
bottom and where the gas moves out impacts how the compression
is designed along the system. This issue needs to be resolved
soon.
Most of all, he repeated, they are focused on trying to reduce
cost of supply, a term which is used in the LNG business to
describe how much money is spent to move the amount of energy
that has been produced over the life of the project. So, if a
project takes $45-65 billion to build and moves 32-35 tcf/gas
over a 30 year period, the cost is calculated for moving every
million btus of gas. LNG is often sold in "millions of btu units
or therms," a convenient phrase that folks use to define how
much energy they are consuming. Put into context, the State of
Alaska (SOA) uses about 220 mmcf/gas a day. This project has the
ability to liquefy 2.7 - 2.8 bcf/gas a day, enough to fuel an
economy the size of Germany or Canada. When it comes on stream,
it has the ability to replace, plus or minus 5 percent, of all
the LNG in the world. It's an enormous number, but it only works
if the cost of delivering that energy is low enough to compete
with other people who are selling gas.
Gas is a true commodity, he explained. Most folks aren't
interested in where the gas comes from, because it goes into
their utility grids and domestic distribution systems, and one
molecule of gas looks a lot like another. This gas has a little
more ethane, so it's a little bit richer or hotter, but the
methane is identical. The content of the ethane can be
manipulated. So, gas is a true commodity and the only thing to
compete on is price. In today's world where LNG is selling for
less than half of what it was when this conversation was started
three years ago, the cost of supply becomes critically
important. They haven't found ways to cut the $45-65 billion in
half and this is one of their primary concerns.
6:54:50 PM
The way that is done is through the ARC of Success:
-Alignment of all the parties: can issues be resolved amicably
and not adversely impact cost of supply.
-Risks associated with project: can they be reduced, because as
one goes through the life of the project costs go up, and risks
need to go down so that investors and buyers want to be part of
the project with you.
-Success is measured in cost of supply.
6:55:51 PM
MR. BUTT said the initial design scope for the LNG plant and
marine terminal is 72 percent complete. The team is focusing on
the geo-technical issues, making sure that if this LNG facility
gets built in the Nikiski area that it will work. The way that
is done is they drill a lot of bore holes and collect a lot of
seafloor data to make sure they understand that what sits under
the heavy equipment is stable and won't move. To date, nothing
but encouraging data has been found, and they continue to think
that the folks who did the initial design work in the 60s and
who selected the east side of Cook Inlet just below the
forelands made some really good choices; and the characteristics
of the area continue to be positive.
MR. BUTT said it all comes down to costs. Right now the team is
saying ok, if I build it with this layout, how would I move the
pieces in there and how can I do that as efficiently as
possible?
MR. BUTT reported that the pipeline side is also continuing to
make a lot of progress; the initial scope is about 78 percent
complete and most of the work on well development procedures has
been finished.
He explained that there are lots of different ways pipe can be
welded and today he had visited the Northern Industrial Training
(NIT) facility and saw their excellent welding facilities. They
are doing those exact same things: testing different ways to use
electrodes to make sure the weld is stronger than the body of
the pipe. The weld has to be 20 percent stronger than the body
so it never fails. This testing has been completed on the 42-
inch system and now they are looking at testing the 48-inch
system. It's also very important that when the pipe is put in
the ground it doesn't have any sort of deterioration or
corrosion, so it gets coated. Where and how it gets coated is a
very important consideration and it is a key issue that is being
worked on now.
In response to the state's request, he reported that about $1
million of project funds had been allocated to buy 48-inch pipe.
One overseas supplier was found that was willing to give them
enough material to do the tests. The team is now working with
the federal regulators to look at design issues that will
accommodate the interior of Alaska where it gets very hot in the
summer and very cold in the winter. When that happens the ground
moves up and down and the pipe has to be designed so it doesn't
move. This is called strain-based design and means the pipe is
loaded to be heavy so that it doesn't move as the ground moves.
6:58:07 PM
The federal regulatory agency in charge of all pipelines in the
U.S. is called the Pipeline Hazardous Material Safety Agency
(PHMSA). They make sure the design, construction and execution
of pipelines are safe. The partners are very interested in
testing the 48-inch system, because early tests on a 42-inch
system weren't always successful.
7:00:08 PM
MR. BUTT presented a graph depicting ramp-up, plateau and
decline of the Prudhoe Bay (PBU) and Point Thomson (PTU) units
and explained why a 42-inch system was used as the lead case for
the pre-FEED stage. The North Slope has 32 tcf/gas (known and
discovered). They assumed that LNG buyers would want to write
contracts in the 20-25 year timeframe and worked with the
Department of Energy (DOE) to get a 20-25 year export
authorization. Then they asked what size system makes sense to
monetize the amount of gas they know is there in that timeframe.
So they looked at different balances and came up with these
curves [in the graph] to try and create balance between the GTP
design, the pipeline design and the LNG plant design including
expansion capabilities. To balance the system the GTP was sized
to use three trains that handle about 3.3 bcf/gas that could be
expanded up by about 1 bcf/gas. The LNG plant at the bottom
would receive 2.7 - 2.8 bcf/gas for three LNG trains. The reason
the sizing - 3 GTP trains, 3 bcf/gas in the pipeline and 3 LNG
trains - matters is if one wanted to expand it, everything stays
balanced. A fourth GTP train would contain 1-1.1 bcf/gas; the
expansion capacity in the pipeline is about 1-1.1 bcf/gas and
the LNG train, after fuel, gets about .8 bcf/gas.
No portion of the system gets overbuilt, because they don't want
to spend money on a portion of the system that doesn't generate
value. The project is sized to handle about 25 years of the
known resource. Realizing that there will probably be some
upside, capacity about the size of another Point Thomson was
included on his graph and labeled "other." The system was built
on a 30-year basis and needs to find another Point Thomson to
keep it loaded. Expanding the system would be done by putting
another 1 bcf/gas line on top of that Point Thomson line, which
over a 30-year life is another 6 tcf gas.
MR. BUTT explained that if everything worked well and the life
of this project were to be extended - very often the case in LNG
- and from 30 years to 50 years, that would need another 25
tcf/gas or another Prudhoe Bay. So, they think a 42-inch system
provides the ability to keep the system in balance, gives some
expansion capability in the event more gas can be found sooner
and gives some spare capacity late in the life of the project.
The project doesn't see all the data across the whole state the
way other folks do. They know what the known resource looks like
and how to keep a 42-inch system in balance, but other parties
want them to look at a 48-inch system. So, they have done a lot
of work to try and get the 48-inch system matured to a similar
level and then test it, do the weld procedures, test the tensile
and compressive strengths, make sure the pipe can be properly
built and designed, basically making sure a 48-inch system would
work.
7:04:09 PM
MR. BUTT said that both systems, in terms of peak capacity,
would still handle about 3.3 bcf/gas, delivering 2.7-2.8 net of
fuel for instate use; the question then becomes what is left
over for export. The cost of capex and opex for a 42-inch system
is lower, because it costs less capital to build. A 48-inch
system might cost less to operate, because less fuel is used for
the bigger pipe (because the pipe is bigger, it's easier to move
gas through it). That is why about 8 stations are needed for a
42-inch system and probably only 4 or 5 are needed on a 48-inch
system. This number is a range because more work needs to be
done on it.
He related that they have been working on the 42-inch system for
years but only a couple of months on the 48-inch system. Mr.
Butt explained that the 8-station design provides more
redundancy, meaning if you lose one station you still have 7. On
the flip side, the 48-inch system uses a lot less fuel because
it has only 4 or 5 compression stations. Either system can be
expanded by 25-30 percent (1 bcf/day), and that balance could
still be preserved by adding 10 stations on the 42-inch system
and about 5 stations on the 48-inch system.
7:06:45 PM
With that said, Mr. Butt continued that they don't understand
all the risks yet. The 42-inch system is bigger and heavier (by
20 percent) and at a higher pressure than any other system that
has been built in North America. A 48-inch system would be about
60 percent heavier. To put that into context, a 42-inch system
weighs about 5.8 tons per joint, which is about the equivalent
two F-150 pickup trucks. A 48-inch system is about 7.8 tons per
joint, which is about three F-150s. To put that into capacity
terms, a truck can move six joints of pipe for a 42-inch system,
but only four joints per truck for a 48-inch system. So, instead
of 150,000 truckloads of pipe moving up and down the pipeline
right-of-way there will be 225,000 truckloads of pipe for a 48-
inch system.
7:08:47 PM
What does that do in terms of sourcing? Right now they have not
been able to find a North American supplier of pipe for a 48-
inch system and may not even be able to find one for a 42-inch
system, but one will be found somewhere. Evaluating a 48-inch
system will result in a 6-8 month impact on the FEED timing, but
the project team doesn't want it to impact the final investment
decision (FID) or startup times and wants to find ways to
recover that time.
7:09:43 PM
SENATOR MACKINNON asked if the administration had given him any
information on who is expected to pay for the upsizing.
MR. BUTT replied that a lot of conversations on that had
occurred, but no decision. The project team recommends spending
monies within the existing project budget to mature a 48-inch
design to a level similar to what has been done with a 42-inch
design so an apples-to-apples comparison can be made. But that
comparison is only going to tell how much extra a 48-inch system
will cost and how much extra risk it's going to take. A lot of
conversations will be needed about how any costs or risks will
be borne.
SENATOR MACKINNON said the sooner that number is known the
better since they are talking about a 6-8 month delay, and under
the previous administration those delays cost hundreds of
millions a month. The state doesn't know where it's coming up
with its share of the money.
7:11:08 PM
CO-CHAIR NAGEAK asked about the cost differential between the
42-inch and 48-inch pipe.
MR. BUTT answered that it is a little premature, but the
additional cost of the pipe is well in excess of $1 billion, but
fewer compression stations will save money. Their modeling told
them that the larger pipe would add 10-15 cents to every cubic
foot of gas. That sounds like a small number, but it adds up
into the hundreds of millions when you're talking about 32-35
tcf/gas.
7:12:51 PM
CO-CHAIR NAGEAK asked about the operating cost differential.
MR. BUTT answered that the operating costs on a 48-inch system
are a little bit lower assuming lower fuel use. However, propane
might be needed on the 48-inch system, because the distance
between the compression stations gets much larger. In a 42-inch
system, the compression stations are spaced about every 80 or 90
miles, so the gas stays at a relatively consistent temperature
and can be managed at the compression stations. In a 48-inch
system, there are only 5 compression stations and propane
chilling might be needed to keep the gas at the right
temperature. That would change the math. If the parties
involved feel it's important, that work needs to be done before
moving through the gate, because that is what core project
management and alignment is about.
7:14:09 PM
REPRESENTATIVE HAWKER said he first became aware of the 48-inch
system when a five-point letter from the administration to the
project was released. But he hadn't seen any engineering or
economic support for that change coming from the administration.
He asked if the project received any rationale for that
decision.
MR. BUTT answered that the letter of June 8 was received, but no
information was with it.
REPRESENTATIVE HAWKER said the letter requested rerouting the
project and asked if they are contemplating that.
7:15:22 PM
MR. BUTT replied that from conversations with AGDC and the
administration he knows that all parties are comfortable with
the western route. Conversations about spurs that take gas from
the mainline back to population centers are happening, but there
is no alignment on them yet.
REPRESENTATIVE HAWKER asked if the preferred western route
requires a crossing of Cook Inlet.
MR. BUTT answered yes.
REPRESENTATIVE HAWKER asked him to explain the notation "CI
crossing complexity" for construction of the 48-inch system.
MR. BUTT answered that they are a lot less confident in their
ability to lay a 48-inch pipeline across the Cook Inlet. Laying
any pipeline across a body of water is a challenge, particularly
where it enters and exists. High directional drilling is needed
to position the pipe properly and then a lay bar is used to pull
the line. One of the challenges of the other route is its high
tidal movement and shoreline mud and not being able to really
get a construction barge into those areas. A 48-inch pipe is so
much heavier that it is always trying to flex down and sink.
They are fairly confident they can do it with a 42-inch system,
but it will be very difficult.
7:17:41 PM
SENATOR STOLTZE asked if Mr. Butt is an "Exxon guy."
MR. BUTT responded that he worked for Exxon, but now he reports
to the project and he works on behalf of all the stakeholders,
which includes everybody in this room, as Alaskans. As such, he
tries to make fact-based decisions. One of the questions was the
routing, east or west, but all parties are in alignment on the
western route. The eastern route has some pretty significant
issues like construction through an ordinance range, crossing
near the Knik Arm that has a lot of seabed movement (30-40
feet), the existence of eight Chugach Electric lines in that
area and trying to put in a lay barge with a 300-foot anchor
span. Crossing the Cook Inlet there is very difficult and would
cost a lot more money than building a spur back to the Mat-Su.
Getting back to the core purpose of an LNG project, he explained
that the intent of any party is to make sure they have access to
the gas and utility value, and it's a lot easier to build a
small spur than move a big mainline. However, how that gets paid
for and how the risks are carried are open questions. But from a
technical and engineering design perspective, putting a 42 or
48-inch system in a very difficult-to-construct place makes a
lot less sense than putting a 12-16 inch line into an existing
utility system that can be expanded in the future.
7:20:50 PM
SENATOR STOLTZE said when he first met Mr. Butt he was trying to
find out what his connections were and he very skillfully evaded
any mention of Exxon, which he found troubling.
7:22:05 PM
MR. BUTT responded that while he appreciated his comments, he
does work on behalf of all the stakeholders. This means there is
an integrated team with people from all the companies, and he
holds himself to that standard; everyone on the project does.
With that said, he had worked for Exxon since the merger. His
bio is clear and has been read at every public meeting. He is
proud to work for Exxon; it has done an outstanding job on the
project. The commitment of each of the parties has been written
about many times. He does not speak for any one party.
7:23:24 PM
REPRESENTATIVE JOSEPHSON asked Mr. Butt if some of the other
participants are interested in upgrading to a 48-inch pipe, not
just the administration.
7:24:29 PM
MR. BUTT answered that it wasn't fair to say that any of the
project participants had made a decision yet on the 48-inch
pipeline, because none of them has all the information. The
project team, which is an integrated entity of people from all
the companies, has said they will take money from their existing
budget and try to study the 48-inch system to really understand
the additional costs for capital, the potential savings in
operating expense and what the whole execution risk looks like.
One party has agreed to put up its share of the cost to do that
work and that party is ExxonMobil. The other parties have two
more weeks to look at the data and make their own decisions.
7:26:05 PM
REPRESENTATIVE JOSEPHSON said he referred to "some disagreement"
but he used the word "we," which he though meant AKLNG was more
comfortable with a 42-inch plan visa vie other participants.
MR. BUTT replied that by "we" he means the integrated group of
people trying to advance the project.
7:27:26 PM
SENATOR MACKINNON asked the "commonality" of a 48-inch pipe in
the world and if pipe is normally bought in America, whether
it's 48 or 42 inches.
MR. BUTT replied that that information is still emerging,
because more work is needed on the 48-inch system, but a 48-inch
pipe is much harder to build. A 4-foot piece of steel that is
8/10ths of an inch thick needs to be rolled or turned and
welded, and not a lot of mills have that capacity or people who
have that skill. AKLNG was not able to find a mill in the U.S.
able to do that work now. That doesn't mean it can't be done.
The project needs to understand if the line size decision
changes the sourcing in any way.
7:28:55 PM
SENATOR MACKINNON asked, worldwide, if there is a lot of 48-inch
pipe.
MR. BUTT answered that TAPS is a 48-inch line and early design
work on the Denali and APP lines were around a 48-inch line,
because it was a very long line and a lot of economies of scale
were needed to make it work. There are a couple of 48-inch lines
in the Lower 48 - Rex and Ruby - but they are not this long and
not at these pressures, and they don't have the same wall
thickness. There are no 48-inch systems like they are talking
about anywhere in the world. It's not just the diameter of the
pipe; it's the operating pressure, the length and the
characteristic and composition of what is in the pipe. In Alaska
the ground moves and a "strain-base" design will have
consideration. That is a lot bigger than any other 48-inch
lines. He said Turkey has a 52-inch line, but it's much thinner
and the weight per joint is less than those for the 42-inch
line.
7:30:26 PM
SENATOR MACKINNON said she appreciated the partners slowing down
and reallocating resources to make sure the right size pipe is
chosen.
7:30:43 PM
REPRESENTATIVE SADDLER asked if any vendors supplying either the
42 or 48-inch pipe could demand an equity position in the
pipeline as a condition of that sale.
MR. BUTT answered that pipeline mills usually do not want equity
in a project, because they would be in it for 30 years. Pipeline
mills work on a three or four year project life.
7:31:49 PM
MR. BUTT reported that the Gas Treatment Plant (GTP) is going
very well and is about 86 percent complete. Focus is continuing
on the acid gas rejection unit (AGRU), the main system that uses
amine to strip the non-hydrocarbon components from the
hydrocarbon component. Everything is being done to reduce
weight, because it all has to be modularized and taken up to the
North Slope to be put together. A lot of permit work has been
done on the train layout and design that involves the Federal
Energy Regulatory Commission (FERC), the National Environmental
Process Act (NEPA), and the overarching Environmental Impact
Statement (EIS) process. A lot of really good work is being done
with the Prudhoe Bay operator on understanding how the GTP will
impact integration with other Prudhoe Bay systems as cost
effectively as possible.
An important characteristic of the Alaska gas at Prudhoe Bay is
that is has very high CO(11 percent or about 450 mcf/day), and
2
removing it is one of the very expensive parts of the project.
Putting that into context, the State of Alaska uses 220 mmcf/gas
for all of the state's energy needs. The CO is recognized as a
2
greenhouse gas and gets put back into the ground for
environmental protection and this project is unique in that they
have a clear understanding of how that will be done.
7:34:02 PM
MR. BUTT said a lot of work had been done on integrated
logistics meaning how all the stuff will get moved. The GTP
weighs as much as an aircraft carrier, about 270,000 tons. The
LNG plant weighs about 220,000 tons. There is well in excess of
1 million tons of pipe in a 42-inch system and that goes up by
40 percent (1.5 million tons) for a 48-inch system. They have
looked at all the ports and all the ways to move materials in
and out of the communities to make sure that impacts are
minimized and as cost effective as possible. They want to
understand how to move big, heavy pieces of equipment by rail
and sea, and how people and the more time-sensitive materials
will be moved by air.
He said that this work was started with Pacific Rim Logistics, a
local Alaskan company. He related that 250 modules which will
have to clear customs will be moved through Dutch Harbor. By
comparison, Point Thomson has five modules and even that was a
big amount of work. The southern ports will have to bring in
200-400 thousand tons of material in 150,000 containers. A lot
of the pipe will have to move through the Mat-Su area. A lot of
work will have to be managed on the rail and fuel systems.
Construction activities will have to be managed in a way that
doesn't adversely impact the community. It has to make sense all
across the system. About 150,000 loads of pipe will be trucked;
a bigger system would require 220,000 loads. Sourcing and moving
all that has to be figured out and that is what the logistics
study does.
7:36:25 PM
MR. BUTT reported that a lot of work is being done on integrated
labor and early estimates indicate 9,000 - 15,000 jobs will be
needed to build the AKLNG Project. Preliminary availability
analyses are being done on where to get the skilled craftsmen
and it's hard to find them. Workforce development and capacity
building will have to be undertaken. He said the work study is
about half-way done. A lot of conversations had happened with
labor groups and the Department of Labor and Workforce
Development (DLWF) to understand their concerns. Gap analyses
are being done to find where more capacity is needed and where
people can be found to do this. That information will be built
into their recommendations and that will probably take until the
end of the year.
7:38:02 PM
SENATOR DUNLEAVY asked if Exxon decided independently from the
Five Point Letter to commit some resources to studying the 48-
inch line or as a result of it.
MR. BUTT answered that he wasn't sure if it was fair to divorce
that decision from the letter or not. There have been a lot of
conversations with this administration as well as the previous
one about the size of the line. It's not fair to say that any
one party made a decision independent of the other parties.
Within the project team, they believe they need to take some
time and money to study it, and one party has had an opportunity
to vote. The other parties have their votes pending and he
didn't want to presume how they will vote. Then they will move
forward. This is an example of how a mega project is worked. In
pre-FEED the big questions of how to do different things are hit
and parties don't always see it the same. How that is managed so
the people feel comfortable with progressing determines the
ability to keep costs down.
MR. BUTT related that they want to make sure that this group
under the SB 138 legislation gets the information on these
activities that are being completed on their behalf.
7:40:35 PM
SENATOR MACKINNON asked if he meant one person has voted, so the
Walker administration has requested that the other partners
consider an upsizing of the line.
MR. BUTT answered that he hoped he had said that they have a
recommendation to take money from the existing budget and change
the work scope, because the JVA was written to design a 42-inch
system. A change in that requires an agreement of all parties,
because all have agreed that this is the work they are going to
do. They have to all agree to do something different and the
state as a party has said it would like to look at a 48-inch
system. The project team has said to do that will cost this much
money and it will take this long to do. One party has had an
opporutnity to say yes and the other parties have time to
evaluate that per the JVA and they can vote as they chose. The
vote has to be unanimous. Everyone has to be willing to move
forward or they have to "go and talk to each other." That sounds
difficult, but that is how mega projects are managed. It has
been proven time and again to move forward without everyone
feeling comfortable with how the resources are being used is not
prudent use of them.
7:42:24 PM
SENATOR DUNLEAVY asked if the 48-inch concept had not come from
the administration, would Exxon still be looking at dedicating
resources to study it.
MR. BUTT answered that when he talks about the project team he
means people from all the parties. TransCanada provides the
leader for the midstream portion and they have looked at a 48-
inch system multiple times over the last three years. They are
always trying to understand what makes the most sense to move
that gas to deliver the curve shape he referenced. All of their
analysis has found that a 48-inch system costs more. The
question is if more gas is found from other sources, would that
changed the math. They want to understand what the cost/risk
looks like. Exxon as a party has worked with all the parties to
frame this issue. If any party had brought it forward, they
would have looked at it, because when any party brings up a pre-
FEED question, it gets considered.
He stated that mega projects are successful when all the
participants work in an aligned manner and find ways to resolve
differences of opinion, and you're going to have them. It's just
a fact. The challenge is to get the data to make a quality
decision that everyone can support.
7:45:14 PM
MR. BUTT recognized what all the work crews are doing in the
field: 200-250 people at any one time and 225,000 hours of data
collection field work. This is fundamental and crucial work, but
everything hangs on the ability to keep regulatory work on track
to get the permits, because without them they don't have the
authorization to construct. The core of what they are doing
until the permits are secured is called a "critical path". This
is their third summer field season and one more will be needed.
That information next year will inform the application process
which triggers the EIS. It continues to go really well. Dozens
of Alaskan companies are involved.
7:46:42 PM
"External Engagement" is another critical element. With the
state as 25 percent participant with a derivative right to the
revenues from that production, they want to make sure that
Alaskans understand what is being done. They also have an
obligation under the NEPA process to have community engagement.
FERC takes over once the resource report is filed and the docket
is established. That was done earlier this year. As such, FERC
is actually leading the community conversations. This engagement
process is core to securing the permits based on all the data
they have talked about.
He said they had done a lot of outreach to 500 Alaskan
businesses to try and help them understand what the project
might mean to them. This is a mutually beneficial process,
because all those people will be needed to do the work. Outreach
has been done with the Alaska Native Regional and Native
Corporations, the Alaska Federation of Natives and Alaska Native
groups, village and tribal, who want to ensure that their lands
are respected. The time and energy invested is very valuable and
continues to go well. One of the Native corporations is directly
a participant in the both the LNG plant design and the GTP
design.
7:49:05 PM
MR. BUTT said mega projects fit together by having a gated
process: moving from concept to pre-FEED, then to FEED, then to
Engineering and Construction to the Final Investment Decision
(FID). The strength of the gated project management process is
that no one moves through the gate until everybody is
comfortable. In focusing on the importance of the gate, they may
not have done enough work to talk about what happens with any
phase.
In the concept phase, you identify and rank projects on ideas:
how are all the different ways to do this. Very broad questions.
Using building a house as an analogy, how many bedrooms do you
want and how big should they be. They don't have an exact
perfect answer, but it needs to be framed in a manner that is
satisfactory to all parties to be able to move into a much more
detailed design phase that optimizes the design and tests it:
and how it can be constructed with the lowest risk and most cost
efficient manner possible.
7:51:18 PM
MR. BUTT said the project is now in pre-FEED, and in FEED more
information on the regulatory and design processes gets done.
Process flow diagrams were created depicting how all the fluids
would move. Those are translated into process and
instrumentation diagrams that details every nut and bolt. Those
are given to the regulators to be tested for safety concerns and
all the other regulatory issues that they are responsible for
monitoring.
The execution stage is where the project is actually built. Each
of the phases is about reducing uncertainty and risk as
resourcing and costs increase. This matters because as cost
exposure increases the project doesn't want to get hung up on a
point of difference. The core element of the mega-project
concept is that big decisions are made early in concept
selection. About $35 million a year was spent during concept. In
pre-FEED about $35 million a month was spent. In the FEED stage
about $35 million a week will be spent - because many more
people will be doing more detailed design. What is really
important is that once the permits are acquired one is
positioned to go into the construct phase where $35 million a
day will be spent! His slide 11 graphed this concept using the
actual AKLNG spend curve and the initial design estimate of $45-
65 billion. A red line was laid over the spend curve showing
when the big decisions are made. He pointed out that as the
phases are moved through the process the ability to change
things goes down. Once permits are obtained around citing and
routing, design, and machinery, it can't be changed. A restart
would be required.
7:54:52 PM
MR. BUTT summarized once the project gets to construction they
have basically locked in a set of documents which are thousands
of pages long that they give to dozens of contractors to align
the work of thousands of people to build the project. The two
curve shapes show why alignment is so important.
He said they feel like they have made a tremendous amount of
progress since the pre-FEED work was initiated in June 2014. The
integrated project which has members from all the parties
including the state and its representative, TransCanada, and
AGDC has done a lot of work that he has summarized here. Some
great milestones have been met and some regulatory hurdles
achieved that many other projects in the U.S. have not achieved,
in a time that they are really proud of, and they are trying to
do it in a way that builds alignment.
7:55:53 PM
REPRESENTATIVE MILLET asked if there is alignment for the 48-
inch pipe with all the producers and if he had documentation of
what has been agreed to with the partners.
MR. BUTT answered that TransCanada is the state's representative
in the mid-stream and Vincent Lee, Director, Major Projects
Development for TransCanada, could best explain conversations
between TransCanada and the state. To her question about
pipeline size, he said the state, a 25 percent equity
participant, through its representative has said it would like
to look at a bigger pipeline and make sure that as those gates
are passed - as the project's influence goes down and its costs
go up - that it is building the right pipeline.
The project team has said that they need to spend a few tens of
millions of dollars out of the existing budget, reallocate some
resources, buy some 48-inch pipe and take the 48-inch testing to
the same level it has on the 42-inch system, because several
years of work has been done on the 42-inch system and only a few
months of work on the 48-inch system - so, we can make a real
fair comparison - apples to apples - how a real comparison can
be made of risks. All project participants want to be
comfortable that if they go to the next step what they want is
getting built.
The JVA was aligned around a 42-inch system so all parties had
defined the work scope and costs accordingly. One party has said
it is willing to pay its share of the work to test the two
systems. No one has agreed on what makes sense going forward and
believe the process under SB 138 is their opportunity to share
that information and view, so that people are comfortable with
what they are doing.
7:59:42 PM
REPRESENTATIVE MILLET asked if he had any analysis of what the
increase from a 42 to a 48-inch line would cost and what the
return on investment would be.
MR. BUTT answered that the work that has been done to date
indicates the 48-inch pipe will cost hundreds of millions more,
which will increase the cost of supply of the project, which
impacts its competitiveness. That cost benefit analysis is based
on preliminary work that was done at the concept level. They are
willing to commit the resources to do the same level of work for
a 48-inch line. One party is willing to support that
recommendation, but the other parties, including the state, have
yet to cast their vote.
8:01:08 PM
REPRESENTATIVE SADDLER said some of the more cynical Alaskans
have seen progress on gasline projects that have not proceeded
to fruition, but he is excited about the momentum and the
potential around the work that has been done on this one and
hopes it proceeds. He asked how much work from previous projects
provide a foundation for the AKLNG Project's team's work.
MR. BUTT answered that the AKLNG Project has reached a new level
and that has been done, because they have tried to preserve
alignment as much as possible. Previous incarnations of the
project were all around moving gas by pipe: both the Denali and
APP projects were designed to take gas from the North Slope
where it doesn't have a market to Alberta for access to the
Lower 48, and there is no market there, either. Everyone is
lucky they didn't invest resources in making that happen. With
that said, he respects the skepticism of all the Alaskans he has
talked to. AKLNG is very different than previous incarnations,
because this is the first time all four parties have been trying
to work together. That's part of the reason they aren't very
good at it; there isn't a lot of history doing it. But the state
is never going to be successful until it can find a way to make
a project work for all parties.
The core philosophy of AKLNG is to try and create a relationship
where the parties share risks and share returns. The state puts
up its money and shares its risks and has the same voting rights
as everybody else. It draws on the technology and expertise of
the other three parties who have a lot of global LNG and
construction experience. It is something that has never existed
before.
8:04:10 PM
The earlier incarnations of this project did get an
Environmental Impact Statement (EIS), but the plan was to vent
CO. That is environmentally irresponsible and he wouldn't want
2
to be part of a project that planned to vent more than 450
mcf/COa day. This project must do things no other project has
2
done before. This gas is getting treated and the non-hydrocarbon
elements will be put back into the ground. But because they are
under FERC III, they can work together with the Prudhoe Bay
operator, and because of the Point Thomson settlement structure
they have an access to those resources and have economies of
scale.
Think about it: the first molecule of LNG that gets made is the
most expensive. Paying for the first molecule is the challenge
everyone thinks about and that is why the project curve gets so
important. They have been working together for years now and
AKLNG has been structured in a very different way. The SB 138
framework gives them a chance they have never had before.
8:05:50 PM
SENATOR HUGGINS said almost eight months ago the Senate
communicated to the administration to target October for a
special session on AKLNG or a pipeline and they are now burning
through October. He asked Mr. Butt, as the spokesman tonight,
what things he would like to see next.
8:06:57 PM
MR. BUTT answered on behalf of the project, it needs some
clarity on what the state as a participant wants in its role,
and particularly how it wants to be represented in the
midstream. Because as they move forward and look at contracting
for FEED, he didn't know whose name to put on those contracts.
Something else that is very important is to understand how those
additional activities would be funded in the event they are
changed, because the appropriation is needed. Under the JVA the
work program and budget have to be funded by all the parties
before the end of the year, so that as they go into the new
year, everyone has agreed on what is going to be done.
8:08:27 PM
REPRESENTATIVE HUGHES asked how the pipe size decision affects
the overall timeline.
8:09:33 PM
MR. BUTT answered they think they can bring the 48-inch design
to a similar level of maturity in 6-8 months. The first step is
getting the pipe and that will probably be in early 2016. As
soon as they get the pipe, they will start doing the weld and
compression testing, the tensile strength testing and the PHMSA
testing that is needed to have the same level of confidence in a
48-inch system that they do in a 42-inch system.
He stressed that pipeline diameter is only a piece of the
puzzle, because the pipeline in Alaska is very different. There
are wall thickness issues and the pipe itself is actually five
different designs for different Alaskan environments. The most
important thing about those 6-8 months is making sure
information is shared on the way and in a way that keeps the
project moving forward at a prudent pace to keep costs down.
Then a decision will be made. Each party under the JVA has a
vote and a unanimous decision is required.
8:11:44 PM
REPRESENTATIVE JOSEPHSON remarked that Exxon found enough merit
in the request to pony up its share.
MR. BUTT answered that was correct. The other parties are doing
their work; he is not impugning any company. You don't move to
more expensive decisions until you have alignment around your
design. Every project in the world that does that lives to
regret it. Everyone needs to be okay with it and you can't get
okay with it until you have quality data about capex and opex
differentials and other things. He said they have been studying
one system for three years and comparing it to one that has been
studied for four months. They can take what they have learned
and catch up real quick, but they don't want it to impact
startup.
MR. BUTT went back to the curve and said that time is your
friend prior to the final investment decision. When the curve
starts to go straight up the wall, time is no longer your
friend. It's $35 million or more a day.
8:15:38 PM
REPRESENTATIVE TARR asked if they are sticking to the former
commissioner's labor and workforce development plan and if he
was following the budget reductions that are limiting some of
the things that are happening at the Department of Labor and
Workforce Development (DOLWD) and the university to make sure
that areas of workforce development aren't cut.
MR. BUTT answered that they are continuing to have good
interaction with Department of Labor and Workforce Development
(DOLWD) Commissioner Drygas. Their conversations are "very
productive and very collaborative." One of the most important
considerations in the workforce development puzzle is what long
terms skills Alaska wants to build here. Talk is about folks who
are going to weld pipe, but they are only going to be welding
pipe for a few years. Other skills are needed like
instrumentation and long-term operating jobs. He said, "You
really want to get Alaskans positioned for the long haul."
8:17:48 PM
CHAIR GIESSEL thanked Mr. Butt for his presentation and welcomed
the project fiscal team.
8:19:58 PM
BILL MCMAHON, Senior Commercial Advisor, AKLNG Project, provided
an update on the financing progress and offered to answer
questions. He invited Mr. Fauske to introduce himself.
8:20:53 PM
DAN FAUSKE, President, Alaska Gasline Development Corporation
(AGDC), Anchorage, Alaska, read the following statement that the
governor and Gasline Team asked him to present:
We are here tonight to present the quarterly
legislative update mandated by SB 138. You just heard
the technical update from Steve Butt and I think
you'll agree that the AKLNG Technical Team is doing
well progressing the design, engineering, and
permitting on the AKLNG Project. However, the State
Team is very concerned about the lack of progress on
many of the key commercial and fiscal issues. The
process we are currently involved in assumes that all
parties are equally motivate to getting a project
built as soon as possible within reasonable
engineering and design constraints. That may have been
an unreasonable assumption given the different
alternatives and economic considerations of each
party. I the State Gas Team's opinion, the progression
of the following key agreements will not allow them to
be completed in time for a special session this fall:
- Gas balancing negotiations are at a virtual
standstill with little progress amongst all parties
having been made in the last several months. This is a
critical issue that needs to be resolved for the
process to move forward;
-Commercial agreements including governance and
operating agreements are being negotiated but are not
on schedule for a review by the legislature in this
calendar year;
-A tax stability agreement, historically referred to
as a fiscal agreement has yet to be agreed and there
is little common ground between the parties;
-Provisions for withdrawal by a party which would
allow the state to proceed without interruption or
delay if a party wanted to withdraw have yet to be
agreed. In addition there is no agreement on
milestones to insure that the parties are reasonably
progressing the project. The failure to meet the
milestones without good cause would result in a loss
of the fiscal stability provisions.
Without these foundation agreements is will not be
possible of the State Gas Team to present a project to
the legislature for review this fall. The State Gas
Team does not intend to bring an incomplete package to
the legislature and expect a decision from you on a
change to the Constitution to the the producers the
tax certainty they desire.
However, there are policy decisions including issues
related to the state's participation and interim
funding necessary for continuing the state's
participation that may need to be resolved by a
special session before the end of this calendar year.
On behalf of the State Gas Team, I thank you for your
continued support of AGDC and the state's
participation in the AKLNG Project.
MR. FAUSKE said the issues he has pointed out are in negotiation
and the governor wanted him to be clear that these are critical
issues that need to be resolved and the public should understand
them.
8:26:23 PM
CHAIR GIESSEL asked for that statement to be provided to the
committee. She said some issues are 100 percent within control
of the State of Alaska and asked where those milestones are. For
example, what is the status of the royalty in kind (RIK)
determination?
MR. FAUSKE deferred to DNR Deputy Commissioner Rutherford who
had a statement prepared on that issue. He also noted 11
questions that he had answered that he was prepared to deal with
in the next phase of the agenda.
CHAIR GIESSEL responded that he could do that now, but before
getting to that asked if the AGDC has the location of the five
off-take points, which falls 100 percent within their
jurisdiction.
MR. FAUSKE answered no, but they had sizes and cost estimates of
the offtakes.
8:28:50 PM
CHAIR GIESSEL said that determination is a piece of the progress
needed and pointed out that the state has faltered in its part
on some of these elements, as well. She said they had not seen
legislation on the PILT (Payment in Lieu of Taxes) issue,
either. That, again, is within the state's purview.
8:29:41 PM
REPRESENTATIVE HAWKER said he hoped they had representatives of
all the sponsors of the project before them.
MR. FAUSKE answered yes.
REPRESENTATIVE HAWKER asked if Mr. Fauske was representing the
state's 25 percent interest in the project and who is
responsible at the state for making AKLNG decisions. What is the
state's AKLNG organizational structure? "Are you head of the
state's AKLNG Project?"
8:31:01 PM
MR. FAUSKE answered no, he is not; the lead negotiator for the
state is Rigdon Boykin.
REPRESENTATIVE HAWKER asked if the buck stops at his desk for
all things AKLNG.
MR. FAUSKE answered yes.
8:32:18 PM
SENATOR MACKINNON asked if the team is aware of the gauntlet -
in the letter he just read - he just laid down in terms of the
state's inability to accomplish something. She asked if the
state's partners had been provided the opportunity to know what
he was going to say before today.
MR. FAUSKE answered no. He was asked to keep it in confidence.
SENATOR MACKINNON asked if the governor specifically threw out a
51 percent ownership on the table.
MR. FAUSKE answered no. He was in that meeting when there was a
representation as to what the state could possibly do to have
the ability to finance more of the pipeline. He had never been
in a meeting where anyone ever suggested that the state own 51
percent. It was a finance question based on the state's ability
to capture financing that might be beneficial to the project.
8:33:55 PM
SENATOR MACKINNON remarked that she heard talk about the
instability that this administration has created for this
project and noted the governor's op-ed piece about a 51-percent
ownership, about selling our own gas, about buying out
TransCanada, about cutting tax credits that he asked the
legislature for, about a constitutional amendment and a reserves
tax. "Please balance that for me with creating stability, so a
financial team can put together something to bring the project
forward."
MR. FAUSKE said he couldn't address everything the governor said
or what he had written, but he could say he that is proud to be
a member of this team and that there is a lot of good work going
forward. It is important to point out that there are certain
things that are very difficult right now in these agreements
that are trying to get done and there has been a great deal of
discussion as to the need for a special session. The governor's
message is that until these agreements get done, there is no
need for a special session. Everyone is working hard to get
those agreements done, but some difficult issues are on the
table and being discussed every day. These are not impossible
goals.
8:35:37 PM
SENATOR MACKINNON said it didn't sound like the team was working
for the same goals. She hoped everyone could work together for
Alaskans. The state's gas balancing and commercial agreements
have created instability and she hoped resolutions could be
found.
CHAIR GIESSEL noted the document being passed out to the
committee and said it is concerning that elements the state is
responsible for have not been completed and at the same time
others are being accused of not completing their work in the
appropriate time table.
8:37:27 PM
REPRESENTATIVE HAWKER asked how Mr. Boykin fit in with the
legislature's intent when it passed SB 138 and very carefully
preserved certain responsibilities to their appointed and
confirmed commissioners who are accountable to the people of the
State of Alaska. Holding people responsible was a big part of SB
138. He asked if it is the administration's intent to remove the
DNR and DOR commissioners from the significant process they were
assigned in SB 138.
MR. FAUSKE answered of course not. He said they are in contact
and working with Mr. Boykin every day. When he says negotiate,
he means that Mr. Boykin is the one who is leading the
negotiations to report back to the rest of the team. That does
not mean that anyone has not carried out their duties and
responsibilities. Mr. Boykin's role is lead negotiator and he is
good at it in trying to move these issues along that have been
very difficult to complete.
REPRESENTATIVE HAWKER said he appreciated Mr. Fauske's awkward
position.
8:39:59 PM
SENATOR HUGGINS asked if the HOA has to be renewed at the end of
this year.
MR. FAUSKE answered that the Joint Venture Agreement has to be
renewed by December 15.
SENATOR HUGGINS asked how that will be addressed.
MR. FAUSKE replied that the plan for everyone is to continue
working very hard to try and resolve the issues he pointed out
in order to get to FEED.
8:41:28 PM
SENATOR HUGGINS said there are two potential Special Sessions;
one is buying out TransCanada and another is the HOA. The state
has to get its ducks in a row and tell the legislature when it
should meet and on what items. The legislature plays a role in
the HOA and they need a feel for that. Everyone wants to be
organized so they can do the best they can by Alaskans and the
AKLNG Project.
8:43:19 PM
REPRESENTATIVE JOSEPHSON asked if Mr. Fauske agreed that the
payment in lieu of tax issue is wholly within the state's
authority to determine.
MR. FAUSKE answered that it is totally within the state's
purview under the Department of Revenue and the legislature in
agreement with the partners. Significant work has been done on
the PILT issue and there will be another hearing on September
23.
REPRESENTATIVE JOSEPHSON asked if anyone in the AGDC or DNR has
the kind of background Mr. Boykin brings in terms of these
significant LNG worldwide dimension projects.
8:44:54 PM
MR. FAUSKE answered that he is very impressed with Mr. Boykin.
He has a long resume and record of negotiating these types of
deals around the world. No one else that they could reach out
and grab has his experience in negotiating these types of large-
scale projects.
8:45:53 PM
REPRESENTATIVE HAWKER asked if Mr. Fauske could identify a
single successful global LNG project that Mr. Boykin had ever
represented a sovereign entity on.
MR. FAUSKE replied that he couldn't name them off hand, but he
had worked on large scale energy projects in Russian and China.
MR. BOYKIN responded from the audience that there were none.
8:46:48 PM
CHAIR GIESSEL asked if the opening on the AGDC board had still
not been filled.
MR. FAUSE answered that it hadn't.
CHAIR GIESSEL remarked that it has been functioning without a
full board even today.
MR. FAUSKE said that was correct.
CHAIR GIESSEL said that falls under the governor's purview.
8:47:24 PM
SENATOR DUNLEAVY asked if aspects of the financing would have to
go before the people for a constitutional change.
MR. FAUSKE answered that a constitutional amendment is being
proposed to secure long-term fiscal terms. He added that would
occur in November 2016 in a general election.
8:48:29 PM
CHAIR GIESSEL said they hoped it would be November of 2016 and
said if the constitutional language is not approved by the
legislature expeditiously it could actually miss that deadline
and not fall until November of 2018. It could be reviewed in a
special session next month.
CHAIR GIESSEL added that they hold him in high esteem and don't
mean to attack the messenger.
MR. FAUSKE said thank you.
8:49:25 PM
SENATOR DUNLEAVY asked if Mr. Boykin is a resident of Alaska.
MR. FAUSKE answered that Mr. Boykin is a resident of the State
of South Carolina.
8:49:51 PM
REPRESENTATIVE HAWKER said the administration has said they are
not going to entertain a constitutional amendment until all the
governance agreements are on the table, and asked how each of
them would respond to the question of being willing to proceed
to FEED without having a constitutional amendment voted on by
the public.
8:50:53 PM
VINCENT LEE, Director, Major Projects Development, TransCanada,
read the following statement:
Madam Chair, Mr. Co-chairs and members of the
Committee, for the record my name is Vincent Lee. I am
the Director of Major Projects Development at
TransCanada. I serve as the commercial lead for
TransCanada in the Alaska LNG project and represent
TransCanada on the project's Management Committee.
Over the last few months, the Governor has been very
clear with Alaskans about his desire for the State of
Alaska to take on a bigger role in the Alaska LNG
project. One way to accomplish this objective is for
the state to take over TransCanada's interest in the
project. The Precedent Agreement that the state and
TransCanada entered into in June 2014 allows either
party to terminate the agreement.
At the Governor's request, TransCanada has been
working with the Administration to agree on a process
for the State to terminate the Precedent Agreement and
allow the state to assume TransCanada's interest. If
an agreement is reached, we expect it will provide a
roadmap for TransCanada's exit from the project,
including an agreement by the administration to
request an appropriation to reimburse costs that
TransCanada has invested in the LNG effort since the
beginning of 2014.
TransCanada will work diligently to ensure that the
termination occurs as smoothly and reasonably as
possible. I recognize that some may want more detail
on the termination discussion between TransCanada and
the state, but due to confidentiality, I am not
permitted to share more information beyond what I have
just described.
TransCanada has been involved in advancing a natural
gas pipeline in the State of Alaska for four decades
and has made significant contributions to the
advancement of the current LNG efforts. Anticipating
TransCanada's role in the Alaska LNG project may come
to an end soon, I would take this opportunity to wish
our project partners and the State of Alaska well in
this endeavor to bring Alaska's abundant natural gas
resources to global markets.
Madam Chair, Mr. Co-Chairs, I also would like to
extend my thanks to you for inviting me here today.
One final point, TransCanada looks forward to working
with the administration and the legislature to
complete the transition in a timely fashion to allow
the other JVA Parties and the State continue to be
focused on advancing the Alaska LNG project.
Thank you.
8:53:31 PM
CHAIR GIESSEL said the MOU with TransCanada talks about a 90 day
period of time when a buyout measure is initiated and asked if
that had begun yet.
MR. LEE answered no; it would start on the day they receive a
termination notice from the administration.
8:54:53 PM
DAVID VAN TUYL, Regional Manager, BP Exploration Alaska, Inc.,
Anchorage, Alaska said he is currently on the Joint Fiscal Team
and BP's representative to the AKLNG Project Management
Committee. He read the following comments:
I am very pleased to be here along with my colleagues
to provide an update on the progress of the Alaska LNG
project. The success of Alaska LNG is critical to BP's
business here in Alaska, and it's also critical to the
future of the State of Alaska and to so many Alaskans
who will benefit, both directly and indirectly, from a
successful project.
As you are all aware, the project has taken several
very important steps forward toward becoming the
reality we are all working so hard to achieve, and I
think it's worth reminding us just what we've
achieved:
- In January 2014, we signed the Alaska LNG Project
Heads of Agreement, which publicly mapped out our
agreed aligned way forward to commercialize Alaska's
Gas. That's the path we continue on today.
- A few months later, you, the Alaska Legislature,
approved SB-138, which defined the State's
participation in the project and provided the way
forward.
- The Governor signed SB-138 into law the next month.
-Then last June, the parties all signed the commercial
agreement that allowed the parties to advance through
the pre-FEED phase.
-The next month, in July, the project submitted its
export license application to the Department of
Energy.
-In September, the project initiated our Federal
Energy Regulatory Commission, or "FERC" pre-filing
process, which the FERC approved later that month.
-In November, we received DOE's approval of the export
license application for Free Trade Agreement
countries.
-In May of this year we received our non-FTA export
approval from the DOE. As we have said before, this
approval sent an important message not only to Alaska,
but to the world - the Alaska LNG project is real, and
it's coming.
-Just last month, the FERC chairman visited the Alaska
North Slope to see the existing facilities and the
location of the future AKLNG Project facilities. I
believe that's the first time every that a sitting
FERC chairman had visited the Alaska North Slope.
Project momentum is building.
Also last month, the Alaska Oil and Gas Conservation
Commission heard our application to modify the Prudhoe
Bay gas offtake rate, and allow for CO2 injection from
the Alaska LNG Project into the main Prudhoe Bay
reservoir.
- Regulatory approval of Prudhoe Bay gas offtake is
another critical step in this process.
- Certainty of gas offtake underpins our upcoming FEED
decision;
- To support that huge financial commitment we want to
reduce uncertainty wherever we can.
And as you just heard from Steve Butt, the Project
Team is making good progress on the pre-FEED
deliverables.
So while there is still much work to be done, we
continue to make progress. We understand the
Governor's recent statements about the need for
additional progress. We agree.
The agreements we are actively negotiating are
complex, and will impact this multi-billion dollar
project that will span decades. Given the complicated
issues we are working through and the fact that each
of the parties in the negotiations has its own needs
and concerns, it shouldn't surprise you that the
negotiations can be difficult. If we did not hit speed
bumps along the way, you should be concerned. It would
mean that we weren't driving down the road. We are
driving down that road and continuing to make
progress.
BP desires to get these agreements done as soon as
possible, but we also recognize that it is essential
to ALL parties that these agreements are done well.
BP is committed, just as we have been throughout this
process, to working out our remaining issues as
quickly and as fairly as possible.
We are encouraged that the project continues to make
real, tangible progress, as measured by those key
external milestones I mentioned.
BP remains actively engaged to continue progressing
the Alaska LNG project, both with the technical work
and the associated commercial work. The project
momentum is continuing. BP looks forward to seeing the
project through to its success.
Thank you,
9:01:13 PM
REPRESENTATIVE HAWKER said the legislature is just trying to
find out what they are working with so they can also make the
best decisions. He said the statement read by Mr. Fauske on
behalf of the administration was very pessimistic about their
ability to work together with the partners and Mr. Van Tuyl's
comments seemed to say that they are working together, but these
are just long, tough negotiations. He asked in all honesty if
progress was being made and if light could be seen at the end of
the tunnel or are they at an impasse.
9:02:50 PM
MR. VAN TUYL answered that progress is being made. Many
agreements are being worked on, and they are complicated. BP has
brought in international resources who have worked successful
LNG projects around the world to address these matters. The
process, while painfully slow, is under way.
9:04:27 PM
REPRESENTATIVE HAWKER asked if the project is on schedule, on
budget and on track, including taking up a special session in
fall this year to take up the commercial agreements.
9:05:36 PM
MR. VAN TUYL answered that he didn't know; everyone needs to
work through the necessary issues until they find alignment.
They won't stop working those issues, but he couldn't point to a
date.
9:06:24 PM
REPRESENTATIVE SADDLER asked if the team has enough financial
resources to continue the work it needs to do on the somewhat
extended schedule he descried.
MR. VAN TUYL answered that depends on which work he is referring
to. The commercial work necessary to hammer out all the
agreements that have been articulated are funded by individual
parties. He couldn't speak for the state's budget, but BP will
commit the necessary resources. A separate issue that Mr. Butt
alluded to about a vote late this year to approve the 2016 work
program for the project and that will allow the pre-FEED work to
continue to its logical conclusion.
9:07:48 PM
REPRESENTATIVE SADDLER asked how much money was involved with
the state's share.
MR. VAN TUYL answered that he did not know, but could find out
for him.
9:08:33 PM
MR. FAUSKE answered that currently the state has funded $67.7
million for its share through to FEED, but going forward would
require an additional $500 million.
9:10:07 PM
SENATOR DUNLEAVY asked Mr. Van Tuyl if he was surprised by
anything in the governor's letter.
MR. VAN TUYL answered that he hadn't read it, but agreed with
the sense of frustration at the lack of progress and the
magnitude of the project. He is focused more on finding
solutions past the difficulties.
9:11:29 PM
CHAIR GIESSEL said she appreciated him calling out AOGCC when BP
and ExxonMobil both asked for gas offtakes. That was a signal of
progress and their ongoing commitment to the project. She asked
how the gas reserve tax and withdrawal provisions factored into
any speedbumps on this road to negotiation.
9:12:28 PM
MR. VAN TUYL answered that he had heard about the gas reserves
tax and BP would view that as punitive taxation not helpful to
incentivizing a project. But it's best to pose those withdrawal
questions to the state.
9:13:55 PM
REPRESENTATIVE SADDLER asked if he had seen any evidence of the
Alaska Stand Alone Pipeline (ASAP) project affecting the
administration's commitment to the AKLNG Project.
MR. VAN TUYL answered that he had seen the administration
focused on the AKLNG Project and nothing to the contrary. He
added that BP's focus is not on withdrawing from the project,
but on making it successful. Their Alaskan business depends on
it.
9:15:13 PM
REPRESENTATIVE HUGHES asked if there had been a conversation
about this project in relationship to low oil prices and if BP
is committed through the long haul.
MR. VAN TUYL answered that he wished he knew how long the
current environment would last. It could be for a while -
several years. The current environment in some ways creates an
advantage for this project and they expect the oil and gas price
environment will look very different when the project is brought
on line. Investors who are pursuing LNG projects are long term
thinkers, because those projects are all about generating steady
reliable cash flow for decades. The first year of the project
and the 30th year of the project matters. Their focus is very
much long term.
9:17:47 PM
SENATOR MACKINNON asked if other nations have addressed
withdrawal concerns in advance.
9:18:57 PM
MR. VAN TUYL answered that it is common for any commercial
agreement to have some sort of withdrawal termination provision.
9:20:34 PM
DARREN MEZNARICH, Project Integration Manager, AKLNG Project,
ConocoPhillips Alaska, Inc., Anchorage, Alaska, said his role is
to integrate the team efforts on all aspects of the project:
technical, commercial and marketing. He said they are working
hard with the administration and the other parties to complete
the technical work and the necessary commercial and fiscal
agreements so the project will be ready to move to the next
phase.
As ConocoPhillips testified back in February and in June, the
most important commercial agreement from their perspective is
the gas supply agreement. It is foundational for this project
and it is the basis for determining the rate and the total
volume of gas supply to the project from Prudhoe Bay and Point
Thomson, the two anchor fields of the project.
The gas supply agreement provides assurance of gas supply. This
is critical for ConocoPhillips' marketing of the LNG as they
move into FEED. It is also critical to securing project
financing. They need certainties that the gas is going to be
there when they commit to the LNG buyers and talk to lenders
about loaning money for their investment in the project.
MR. MEZNARICH said clarity is good for the project as well as
for providing transparency and information for the state. The
gas supply agreement is also key for ConocoPhillips in asking
the legislature and by definition the public to support a fiscal
package as well as a constitutional amendment.
9:23:30 PM
REPRESENTATIVE HAWKER noted that ConocoPhillips was not a party
to the application to the AOGCC for offtake out of Prudhoe Bay
and asked if they had a position on that.
MR. MEZNARICH replied that ConocoPhillips and Chevron filed
comments on that application and testified, but they proposed a
slightly lower number than BP and ExxonMobil did.
9:24:37 PM
SENATOR STOLTZE asked if a property tax structure and a reserves
tax was part of their fiscal terms in discussing a
constitutional amendment.
9:26:14 PM
MR. MEZNARICH answered that there is an agreement on the impact
payments and property tax structure. The reserves tax is a
"carrot and a stick approach," but parties are trying to move
forward with what they can to make the project a success.
ConocoPhillips is working hard to get the gas supply agreement
done, but the governor wants the project to move forward even if
one party falls away. ConocoPhillips has said it would make its
gas available and not stand in the way of the state taking a
project forward. So, they would be willing to entertain
withdrawal terms and try to find a way forward for the state and
other parties if that became necessary.
9:27:55 PM
SENATOR STOLTZE commented on the list of community impacts from
the Kenai Peninsula Borough, but added that his community wants
the impacts of jobs and prosperity that this project would bring
it.
9:28:43 PM
MR. MEZNARICH answered that he hoped to make an impact in a
positive way.
REPRESENTATIVE SADDLER asked if he had seen any evidence that
the administration's focus had been diverted by emphasizing the
ASAP line.
MR. MEZNARICH echoed Mr. Van Tuyl's comments in that he had seen
a lot of energy and commitment to this project in trying to
resolve issues.
REPRESENTATIVE SADDLER asked about the letter's mention of lack
of progress.
MR. MEZNARICH replied he hadn't a chance to look at the letter,
but he thought it reflected everyone's frustration on how slow
things are moving and the complexity of the issues.
9:30:15 PM
REPRESENTATIVE SADDLER asked if he had any reassurances as to
Mr. Boykin's position within the organizational structure of the
project.
MR. MEZNARICH answered that he deferred to the state on who is
in charge. He has been working both with Mr. Boykin and the
commissioners.
CHAIR GIESSEL noted that the document in front of them was
received from Mr. Fauske and on the first page were his comments
and the following pages were answers to 11 questions she had
provided him a couple of days ago.
9:31:58 PM
MR. MCMAHON, Senior Commercial Advisory, ExxonMobil, said he had
been working on the Alaska LNG commercialization since 1992. He
said that ExxonMobil, as a lease holder of natural gas resources
on the Alaska North Slope (ANS), has diligently undertaken
various individual and joint activities to commercialize ANS
natural gas. ExxonMobil is now pursuing the Alaska LNG Project
(AKLNG) with the State of Alaska, AGDC, TransCanada, BP and
ConocoPhillips following the framework established by the State
of Alaska in 2014 that was set out in the AKLNG HOA (January
2014) and SB 138 (April 2014). ExxonMobil is a strong advocate
for AKLNG having funded a third of the cost of pre-FEED and
providing two-thirds of the personnel for that project.
He said that ExxonMobil has two key requirements to consider the
FEED decision: agreeing on acceptable fiscal contract terms that
are both predictable and durable and completing the pre-FEED
work. A key vote is coming up this year on the 2016 pre-FEED
work program and budget. He encouraged state action to allow
that funding to occur so that pre-FEED work could be finished in
2016 as envisioned.
MR. MCMAHON said the fiscal contract and completing the pre-FEED
work are both needed to be able to do the technical and
commercial evaluation necessary to decide if they are going to
FEED. That valuation will consider a view of the market
conditions, LNG buyer feedback and an assessment of how the FERC
regulatory process is going.
9:35:34 PM
MR. MCMAHON said ExxonMobil supports the constitutional
amendment approach and the Alaska legislature putting that
matter on the ballot at its earliest convenience. It is
important to hit the November 2016 window for the public vote,
because it can only happen in a general vote.
As Mr. Fauske said, the fiscal and commercial agreements aren't
going to be completed in time for a fall special session, but
the legislature should still consider: clarifying the state's
role in the project, getting appropriations, authorizing the
stratification vote and property tax legislation that allows
flow-related property taxes as a bonafide way to pay a property
tax obligation, and authorizing PILT construction as a bonafide
way to pay property tax. Those details could be put into a
fiscal contract.
MR. MCMAHON said they are working on all agreements that are
necessary for all the parties to be able to support the
decision. Alignment is critical for the success of any mega
project.
9:37:42 PM
REPRESENTATIVE HAWKER asked what he thought about the Calgary
Harold article citing Wood MacKenzie saying that LNG projects
worldwide today are horrifically financially challenged.
MR. MCMAHON replied that he was familiar with the article and it
coins the challenge with Alaska natural gas. Many things are
going for Alaska gas: two world class reservoirs, gas is
discovered and it is ready to go, and a host government that is
actively involved in the development of that natural gas to the
point of being willing to invest in 25 percent of the
infrastructure and to be a partner with industry to bring that
on. Alaska has a geographic advantage in being close to the
markets, which will reduce the cost of supply.
There are some challenges, as well. This business is all about
cost of supply. So the project participants need to put a
project together that has the lowest cost of supply possible and
put in place predictable and durable fiscal terms, so they can
offer prices to the market without fear of having a tax increase
or new taxes. A gas reserves tax would have a very chilling
effect on the development of AKLNG.
9:40:42 PM
REPRESENTATIVE HAWKER asked if he thought the project could
truly go forward recognizing the challenges.
MR. MCMAHON answered absolutely.
REPRESENTATIVE HAWKER wondered if the administration was keeping
the parallel backup project online and asked what happened to
the 45-day review.
9:42:09 PM
MR. FAUSKE answered about the ASAP project has been put on hold.
The information is still intact but the team is doing work for
the other project. A great deal of the money was removed from
the Instate Gasline Fund during the last session, which maybe
prohibits the ability to go forward.
REPRESENTATIVE HAWKER recalled that enough money was left in the
budget for activities that would equally benefit both projects
to allow them to kind of both move forward. He asked when the
state counseled them to consider looking into a backup plan.
9:43:36 PM
MR. FAUSKE answered if negotiations simply just
"blow up and fall apart" - no one wants that to occur - but the
state has to look at what it's going to do then - even if it's
just to go back to getting gas to the citizens, which is really
how ASAP started. They are doing work that is beneficial to both
projects, but they are not advancing any more technical
engineering work based on fiscal constraints. But if necessary,
that work could move forward.
9:45:20 PM
REPRESENTATIVE HUGHES said the governor had narrowed special
session down to two things and asked Mr. McMahon if he would be
okay with taking up PILT, the constitutional amendment and the
stratification authorization in the next regular session.
9:46:06 PM
MR. MCMAHON answered that it is within the purview of the state
of Alaska to choose when to take those matters up, but sooner is
better than later. There will be a lot of business to take up
during the 90-day session.
CHAIR GIESSEL asked if a 48-inch line would require new FERC
reports.
MR. MCMAHON answered that the nature of the early drafts of the
reports have been general. They talk about the pipeline right-
of-ways and disturbances of a certain size. They believe that
once due diligence work is done and if parties agree to change
the pipeline diameter that the next version of the draft
application could be modified to accommodate that. Their goal is
to not impact first LNG cargos, but you have to land on your
pipeline diameter before going into FEED.
9:48:41 PM
MR. MCMAHON followed up with Senator MacKinnon's question about
of what happens when a party wants to withdraw. He said when
alignment is so critical on mega projects, typically when you
get up to a decision gate, if one of the parties is not ready to
move through, to maintain alignment you work with that party
until all the parties are ready to go through the gate.
Senator Dunleavy's question about the 48-inch pipeline is a good
example. One party raised the issue; the other parties knew it
was important and so they are going to try to accommodate that.
Alignment is critical to move forward. So, a withdrawal
agreement that pre-agrees what happens if someone leaves and
also pre-agrees how that gas will be accessed would be
unprecedented in his experience around the world.
9:50:18 PM
MR. MCMAHON said the critical part of this project is how the
30-32 tcf/gas gets brought into the project. The applications
are pending before the AOGCC; formal hearings happened one and
two weeks ago. They are waiting for the record to be closed and
for the commission to act to make sure they have the ability to
supply gas into the project.
Work continues on getting the necessary commercial agreements to
go into FEED. Applications are being drafted for the DNR to
support lease modifications related to the RIK/RIV switching and
the conversion of leases at Point Thomson. A whole lot of staff
is being applied to the foundational commercial agreements and
as Mr. Meznarich pointed out, gas supply to the project is
important and that is where the gas balancing issue resides. As
Mr. Lee pointed out, long term firm transportation service
agreements between TransCanada and the State of Alaska have been
here historically but there are ongoing discussions about
potential disposition of that. These agreements will be reviewed
and approved by the legislature consistent with SB 138.
9:54:55 PM
REPRESENTATIVE HAWKER asked how important that RIK decision is
relative to gas balancing.
9:56:09 PM
MR. MEZNARICH said the HOA laid out a road map to a successful
project and the RIK was a critical element. ConocoPhillips
believes that is fundamental. If it's decided after the
agreements are ratified it could be a conditional agreement.
REPRESENTATIVE HAWKER asked Mr. Fauske when they can expect the
RIK decision.
MR. FAUSKE answered that Marty Rutherford could answer that
question later in the hearing.
9:57:02 PM
REPRESENTATIVE HAWKER remarked that he didn't know how the state
can be a party to all the agreements that are contemplated in
the big transaction if it doesn't have gas or RIK.
9:58:40 PM
MR. MCMAHON said they had aligned on the constitutional
amendment as the vehicle to provide stabilization and they are
aware that a two-thirds legislative vote is necessary to put it
on the ballot and everyone is targeting the November 2016
election.
He said there is tentative alignment on the structure of the
property taxes subject to consultation with the Municipal
Advisory Gas Project Review Board.
He said they had talked a lot about the significance of the DOE
export authorizations and the FERC process is the critical path
for the project. Their focus is on getting the final permit to
allow construction to begin.
9:59:34 PM
MR. MCMAHON said their ever-present External Affairs folks
continue to work with public outreach and building support for
the project. This will become very critical as fiscal and
commercial agreements become available. They need to be able to
effectively describe to the people of Alaska how the project is
going to proceed from a fiscal and commercial standpoint.
10:00:09 PM
SENATOR DUNLEAVY cautioned him, since people in his district
expect that they will get gas directly to their houses no matter
how far they are from the road or where they live, that there be
a real genuine attempt to get folks to understand that the
project doesn't know where or how big the takeoffs will be.
10:01:23 PM
MR. FAUSKE responded that more work needs to be done on instate
gas use. He has stated publically that this is probably going to
be one of the toughest areas of debate that the entire body will
deal with, because when you're looking at $14 million for just
the sled that takes the gas and decompresses it and trying to
serve a community of 75 people - "let's just be honest with each
other - we're probably looking at some type of subsidized
figure." Everyone wants gas, the mechanism that will be used to
get it is what is difficult. Do you just have offtake points and
it's cheaper for the residents to have gas trucked to their
homes or do you put pipe everywhere? It's not part of the
project, so it will be on the state's back. He also said it
would be hard to have people even consider a constitutional
budget amendment if they don't have any skin in the game.
10:04:07 PM
SENATOR DUNLEAVY said it's crucial that people understand that
their energy issues will benefit from the gas, but they might
not actually get it at their house.
10:06:04 PM
MR. FAUSKE agreed that it is a state responsibility to do this
work and coupling it to the people describing the project is
misleading.
CHAIR GIESSEL said they look forward to getting data on the
offtake points.
10:07:27 PM
MR. MCMAHON noted that two-thirds of the questions in their 80
public hearings are related to instate gas and he looked forward
to working with AGDC to help manage expectations.
MR. MCMAHON said slide 12 captured key accomplishments; one
being a tentative alignment on the structure for property taxes
both during and after construction. The remaining challenges
are: establishing a role for the state as a project participant,
specifically midstream participation, funding and approval of
the 2016 pre-FEED work program and budget, timely completion of
the key commercial and fiscal contracts followed by legislative
approval consistent with SB 138, royalty decisions around lease
modifications and RIK elections, legislation to put property tax
payment mechanisms in place and legislation to authorize the
public vote on the constitutional amendment to provide
predictable and durable fiscal terms.
10:09:03 PM
REPRESENTATIVE HAWKER said both he and Mr. Butt used the words
"to clarify the state's role" in describing remaining challenges
and asked what that means.
MR. MCMAHON answered that everyone has heard about plans that
the state has with TransCanada that is currently the state's
party in the midstream. Before going into FEED, clarity is
needed on which party is going to hold the state's midstream
interest.
10:11:11 PM
REPRESENTATIVE HAWKER asked him to explain what the vote means.
MR. MCMAHON answered that some of the voting outcomes could
require an appropriation this year to fund the rest of pre-FEED.
10:12:06 PM
REPRESENTATIVE SEATON asked if there is a December 31 deadline
for the TransCanada decision that will affect alignment and the
RIK decision.
10:13:34 PM
MR. FAUSKE answered that there needs to be a decision made with
TransCanada on the firm transportation supply agreements by
December 15, 2015. The state's negotiations with TransCanada
have not been finalized, yet.
10:14:49 PM
MR. LEE explained that the date of December 15 refers to when
the firm transportation agreement has to be entered into between
TransCanada and the state and be ratified by the legislature.
The question would be how to move forward and he didn't know how
that was related to the state's RIK decision.
10:15:38 PM
REPRESENTATIVE SEATON said his concern was if Alaska is the only
party owning gas that would have to pay a firm transportation
and profit margin to a third party. Then the gas going into the
LNG plant would not be aligned in cost structure, and any joint
sales agreements could mean that gas for delivery would be
profitable for the other buyers and a deficit for the state. He
didn't know if a built-in cost structure and profit margin to a
third party would influence the other commercial agreements.
10:16:44 PM
REPRESENTATIVE HAWKER said one topic in the governor's letter
had not been covered and that was the method that gas would be
marketed. The state's position is they wanted everyone to market
together.
10:18:09 PM
RIGDON BOYKIN, lead negotiator, AKLNG Project, said the state
felt very strongly that a four-party joint venture marketing
arrangement would make a huge difference in aligning the
interests of all the parties especially when the project has
such disparate ownership interest in Point Thomson and Prudhoe
Bay. However, ExxonMobil has, for business reasons, decided they
cannot do that. So, the state has conceded and is trying to
formulate individual joint ventures with one or more of the
producers to market with them, because that will help the state
and reduce some problems in terms of gas balancing and lifting
issues.
REPRESENTATIVE HAWKER asked why the state would concede to
ExxonMobil. He didn't want to concede to ExxonMobil.
10:20:22 PM
MR. BOYKIN said that maybe ExxonMobil could explain their
position better. He said at least one other party wanted joint
venture marketing of this type and argued it, but it was clear
it would not be resolved. At that point, the state had to decide
what to do and felt this was the only option for going forward.
REPRESENTATIVE HAWKER asked if a joint venture marketing
agreement is an absolute deal breaker for a $65 billion project.
10:21:34 PM
MR. BOYKIN answered in all these negotiations one has to
consider how hard and long to push an issue. ConocoPhillips was
aligned with the state on this issue. It was discussed with
ExxonMobil for four months and the state got "absolutely
nowhere." The state realized this may actually be a killer point
for ExxonMobil.
10:22:51 PM
REPRESENTATIVE JOSEPHSON said earlier comments suggested the
administration was throwing a wrench in the works or causing
delay, but it sounds like he is saying that the administration
also knows when there is perhaps something insurmountable for
one party and a need to move forward to some greater good.
MR. BOYKIN answered that it was a judgement call the state made
after four months or so of discussions with ExxonMobil; this was
extremely important for them. They came up with a way to cure
it, perhaps not as perfectly, but it could work.
^State's Gasline Team Update
State's Gasline Team Update
10:24:56 PM
CHAIR GIESSEL, finding no further comments, thanked everyone for
their patience and answering the questions, and said next they
would hear from the state's gasline team. She invited Dona
Keppers, Deputy Commissioner, Department of Revenue (DOR); Marty
Rutherford, Deputy Commissioner, Department of Natural Resources
(DNR); and Rigdon Boykin, counsel to the AKLNG Project, to the
table and asked them to address the deferred questions.
10:26:10 PM
MR. FAUSKE said he had been asked to stay and take the lead on
the questions with participation from his colleagues.
CHAIR GIESSEL said all parties received 11 questions from her
office and were asked to be prepared to respond. Mr. Fauske said
he would review the answers.
10:27:17 PM
Question 1: What conditions or milestones do you need in order
to authorize the funding for entering the FEED stage of the
AKLNG Project?
MR. FAUSKE's response: AGDC views that the milestones are
primarily technical and must include successful delivery key
pre-FEED work products and deliverables, and those work products
are now targeted for completion in early to mid-2016.
CHAIR GIESSEL asked what those items are.
10:28:16 PM
MR. BOYKIN answered they are mostly technical in nature: reports
on engineering feasibility studies and cost estimates.
CHAIR GIESSEL asked where those are in terms of achievement.
MR. BOYKIN answered that they are in the 75-percent range.
10:29:54 PM
REPRESENTATIVE HAWKER said he thought that meant things the
state needs to do in order to make its decision to enter into
FEED.
MR. BOYKIN answered that the state needs have a very good
understanding of what the deal on the project is: the fiscal
agreement, the constitutional amendment and the balancing
agreements. It needs to be done in an executable form, because
people need the security of knowing commercial terms for the
project are agreed to before spending roughly $500 million for
FEED.
10:31:17 PM
SENATOR STOLTZE asked him to relate which departments actually
formulated these answers as they are being answered.
10:32:27 PM
MR. BOYKIN responded that these questions were parceled out to
various parts of the administration with the responsibility for
those particular areas and they submitted drafts of answers.
Those were further edited with the participation of the
governor. Marty Rutherford would give responses to certain
question she felt uncomfortable with, in particular the RIK/RIV
question.
10:33:30 PM
CHAIR GIESSEL asked if Mr. Boykin is the lead (in place of AGDC)
on negotiating the conditions for this fully papered agreement.
MR. BOYKIN answered yes, "I guess I'm sort of the point person.
I'm sort of a person that has about five clients. I have the
Department of Law (DOL), I have the Department of Natural
Resources (DNR), I have the Department of Revenue (DOR); I have
to listen to all of them and in particular AGDC, because they
are the commercial lead that was intended by this legislature
for this project." He then formulates a position to try and push
this project forward and completed as soon as possible.
10:35:03 PM
CHAIR GIESSEL asked who at the end of the day he answers to.
MR. BOYKIN answered he is answerable to Dan Fauske and he also
consults with the governor; at the end of the day he is also
answering to the Attorney General. When he started leading this
effort he decided to attend the sponsor meetings with the DNR
commissioner, because his department has one of the biggest
inputs into this project at several levels.
CHAIR GIESSEL said it sounds like a complex arrangement, but his
business card simply states that he is a counsel to the
governor.
MR. BOYKIN answered that his role has changed over time. That
card reflects what the role was when it started. He hasn't been
able to find the time to work out what his new card ought to
say, because he has been so busy trying to push this project
through.
10:37:00 PM
CHAIR GIESSEL asked from the perspective of the appropriating
body, at the end of the day whose budget pays him the $120,000
per month salary.
MR. BOYKIN replied that AGDC does that.
MR. FAUSKE added because of Mr. Boykin's cross-over role between
AKLNG and AGDC, when he was approached on this contract, in-
house counsel determined AGDC should be involved. AGDC issued a
contract not to exceed $500,000, because the work was within the
parameters of what the In-state Gas Fund could be used for.
Other contracts were declined, because they did not fit in with
the legislature's designated purview.
CHAIR GIESSEL said she had requested an organizational chart and
asked what Audie Setters is doing these days.
MR. FAUSKE answered that Mr. Setters does not work for AGDC; he
is under contract to DNR.
10:38:36 PM
REPRESENTATIVE SADDLER said he sympathized with the producers'
expressed desire for clarity, but he had heard "the ball be
tossed back and forth between Mr. Fauske and Mr. Boykin twice
now, I think," and wanted to know who is in charge.
MR. FAUSKE answered Mr. Boykin is the lead negotiator on this
project. AGDC works with him and all the departments.
10:40:26 PM
MR. FAUSKE said everyone is working in various areas of their
expertise, but he reports back to Mr. Boykin who takes the
issues forward.
REPRESENTATIVE SADDLER asked who decided to concede to
ExxonMobil on the joint marketing venture.
MR. FAUSKE said after consulting with Mr. Dubler (Joe Dubler,
Vice President of Commercial Operations for the Alaska Gasline
Development Corporation) that he could tell them which
departments were contacted directly for answers to the
questions.
CHAIR GIESSEL clarified that during the last session the lead on
this project that she talked with was Deputy Commissioner
Rutherford. So, that lead her to contest the statement that Mr.
Boykin had been the lead as long as he has been involved.
10:41:49 PM
REPRESENTATIVE HAWKER said he didn't know where the buck stopped
and asked who is physically sitting for the state when a sponsor
is needed.
MR. FAUSKE answered himself, Joe Dubler and in the last couple
of months Mr. Boykin, the DNR and DOR.
REPRESENTATIVE HAWKER asked if Mr. Boykin is being paid out of
the Instate Gas Fund.
MR. FAUSKE answered that was correct.
REPRESENTATIVE HAWKER said they had been told that part of the
special session package they should expect would be the
statutory changes that would affect AGDC's authorities and asked
if AGDC has the statutory authority to do what he is doing in
moving this project forward. He recalled that SB 138 left that
authority primarily with the DNR and DOR and not with AGDC. "Do
we need to change statute to give you the authority to do what
you are doing?"
10:44:08 PM
MR. FAUSKE answered that was good question; AGDC has been called
upon for areas of expertise because of its staff expertise,
primarily on the technical and commercial side. A decision was
made a couple of months ago that Deputy Commissioner Rutherford
was stepping down from her role as the lead. That decision was
not made by him. An awful lot of work is going on and he didn't
think AGDC had exceeded its authority.
REPRESENTATIVE HAWKER said in the beginning they heard the
Attorney General's (AG) office would review all key decisions
and developments and asked if the attorney general been involved
in any of these decisions.
10:46:03 PM
MR. BOYKIN answered that the AG is intimately involved; there
are one or two Department of Law (DOL) people at every single
negotiating session; the attorney general himself has come. They
are under stick instructions from him not to pass along any
response or decision without him approving it.
REPRESENTATIVE HAWKER asked if AGDC has clear statutory
authority to conduct the activities it is currently conducting
and if that would extend to handling marketing activities.
MR. FAUSKE answered that marketing is under the purview of DNR;
but the legislature put money into AGDC's budget for marketing.
AGDC has not been directed to do that.
10:47:54 PM
REPRESENTATIVE HAWKER asked if the AG had reviewed AGDC's
statutory authority to conduct the other activities it is
involved in.
MR. FAUSKE answered not that he was aware of.
CHAIR GIESSEL asked about the personnel changes.
10:49:59 PM
MARTY RUTHERFORD, Deputy Commissioner, Department of Natural
Resources (DNR), said she was asked to step down as AKLNG lead
by the governor a couple of months ago. At that time, Audie
Setters and Rigdon Boykin became intimately involved in gasline
negotiations and leading the effort with both the FME
(specialists) as well as internal DNR/DOR/DOL employees who are
working entirely on AKLNG.
CO-CHAIR NAGEAK remarked that he hadn't come here for an
inquisition. He came here to listen to what the state team was
doing and hear the answers to the 11 questions that were given
to them.
CHAIR GIESSEL asked if there were further comments on question
1. Finding none, she moved on to question 2.
10:51:14 PM
Question 2: Is there agreement on what it takes to enter the
FEED stage of the AKLNG Project?
MR. FAUSKE answered that the deliverables for pre-FEED are all
necessary for a positive FEED decision. Those are clearly
addressed by the pre-FEED Joint Venture Agreement (JVA). While
those are mostly technical deliverables, commercial agreements
also need to be completed to ensure a commercial foundation is
in place for FEED. Mr. Boykin mentioned some of those agreements
before.
Anticipating that there may be concern by one or more producers
to making any commitment to enter into FEED until the
constitutional amendment authorizing the fiscal agreement has
been passed during the November 2016 general election, the State
of Alaska has offered that if producers make a conditional
commitment to enter FEED, in advance of the general election,
the state will funds its share of FEED expenditures expected to
be $400-500 million to meet all FEED cash calls for the parties
to enter FEED officially without further conditions.
CHAIR GIESSEL asked if payment in lieu of taxes (PILT) would be
a critical element for the partners to make a conditional
commitment to enter FEED.
MR. FAUSKE answered yes; it's absolutely essential.
CHAIR GIESSEL asked if he believed RIK would be a critical piece
for the partners.
MR. FAUSKE answered, "I do." The RIK/RIV decision is critical
and it is being worked on now. He assumed it would be RIK, only
because of all the testimony that has gone on for the last three
and a half years. But the DOR commissioner is working on that
decision and will make an announcement.
CHAIR GIESSEL asked if there is a need to hurry things along and
who crafted the answer to that question; AGDC?
10:54:26 PM
MR. FAUSKE answered yes, in consultation with Mr. Boykin and
other relevant people. The PILT question would be answered by
Ms. Keppers.
Question 3: Dealt with property tax structure and mechanisms.
10:55:09 PM
DONA KEPPERS, Deputy Commissioner, Department of Revenue, said
she works directly with Commissioner Hoffbeck. She said
Commissioner Hoffbeck has worked directly with the producer
parties in advancing the property tax structure and mechanism.
He has also interacted in a public forum with the Municipal
Advisory Gas Project Review (MAGPR) Board. A lot of the property
tax work is not in the purview of the state, although an
important piece is. The mechanisms and calculations and mil
rates are being worked on with the producer parties and a
tentative alignment on the structure has been reached.
MS. KEPPERS explained that they actually are working on
calculations and details internally and meeting on a regular
basis with the producers. At the end of this month they go back
to work with the MAGPR Board on property tax component piece.
The impact payment processes are also within the state's purview
and requires collaboration with the MAGPR Board, too. That
entails working with the producer parties as part of their
socio-economic work. They are also working with their
consultants on how the impact payment mechanisms would work in
different places. She said the DOR has to work also with the
MAGPR Board on the distribution payment process of the impact
payments, the application process and lots of detailed work.
10:58:59 PM
CHAIR GIESSEL said when Commissioner Hoffbeck presented to the
committee in June, he led them to anticipate some kind of
finalized document within two weeks and it's now been more than
two months. That is the genesis of their question: where is
this? This is similar to what the sponsor companies have
described in terms of their negotiations.
SENATOR MACKINNON asked what the plan is for distribution
between the local communities and the state.
11:00:53 PM
MS. KEPPERS replied that the state does know what is on the
table but is hesitant to talk about value until it can
communicate where it is in the process with the MAGPR Board.
SENATOR MACKINNON asked if the MAGPR's interest is more
important than the state's.
MS. KEPPERS answered that their interest is just as important as
the state's interest, because we are all in this together and it
has to balance.
11:01:33 PM
Question 4: What analysis has been conducted for determining the
buyout of TransCanada? This question was referred to DNR.
MS. RUTHERFORD responded that under the Precedent Agreement (PA)
that exists between the State of Alaska and TransCanada, a
couple of options are available for a TransCanada buyout. One is
to complete the firm transportation service agreement (FTSA)
that is identified as necessary to have in place by December 15,
2015, or the second is to buy out all of a portion of the
TransCanada interest in the midstream (the pipeline and the
GTP).
The state's analysis of the TransCanada buyout option has
generated certain conclusions and observations. In general, if
the state acquires TransCanada's ownership in the pipeline and
the GTP portion of the project (the midstream) the state,
through AGDC, would have greater voting rights, greater access
to information and increased equity in the project, which would
increase the state's potential revenues from the project.
From a technical perspective, TransCanada's involvement offers
considerable technical support to the state on midstream
engineering issues. From a financial perspective, the state's
total cash flow from the project increases with direct
participation by the state in the project midstream rather than
through TransCanada. This will mean that the state would need to
repay TransCanada's investment and handle future pre-FEED and
FEED cash calls to the project work plan and budget. The reason
she reference the potential additional pre-FEED cash calls is
because they are linked to the timing of any potential buyout of
TransCanada.
As Vincent Lee, TransCanada's representative indicated, the
state and TransCanada are currently in negotiations on the
potential of the state buying out TransCanada, but these
discussions have not been completed nor has the state provided a
termination letter to TransCanada.
MS. RUTHERFORD said they hope that these discussions will
conclude very quickly and then the administration can bring
forward to the legislature a recommendation as quickly as
possible along with all supporting documentation, a detailed
technical and financial analysis that was developed primarily
using Black and Veatch resources.
Also, since the negotiations are ongoing, she added that it is
very difficult to provide too much additional detail at this
time. Earlier today she sent Senator Giessel the quarterly
report which provides an update to the amount of money the state
may be obligated to pay TransCanada for the work they are
undertaking on the state's behalf through the Precedent
Agreement.
11:06:17 PM
CHAIR GIESSEL noted that all committee members have the letter
she sent today and it had been posted on BASIS.
REPRESENTATIVE SADDLER asked if the state wants to do a buyout.
MS. RUTHERFORD answered that is the primary focus of their
discussions. If that can't be concluded successfully, the state
would need to progress the firm transportation service
agreement.
REPRESENTATIVE JOSEPHSON asked if there is an existing document
now that describes the modeling that was done on the ultimate
revenue question to the state.
11:07:28 PM
MS. RUTHERFORD replied that there is a full analysis, but it is
a confidential document. Should Alaska progress a proposal to
buy out TransCanada's interest, it would either provide the
entire analysis under confidential provisions to those who
signed the confidentiality agreement or in all likelihood do a
combination of that to the people who have signed, as well as
create a publicly available document.
REPRESENTATIVE HAWKER said he was party to putting together a
request to the administration in May/June, because they all
heard stories about this potentially happening, and the governor
asked the legislature for $108 million to complete the buyout.
He thought the decision had been made. The legislature asked the
governor for any analysis that had been done and received no
response. He asked the rationale for the decision being under
confidentiality, because this would seem to be the ultimate in
public documents.
11:09:52 PM
MS. RUTHERFORD answered she believed the reason it is under
confidentiality is that the model used by Black and Veatch
incorporates much AKLNG confidential information as well as
confidential information the Division of Oil and Gas has. She
completely agrees that when a proposal is provided to the public
and the legislature they will have to make as much of that data
available so that there is a full understanding of the reason to
propose a buyout of TransCanada.
REPRESENTATIVE HAWKER said the legislature needed the Black and
Veatch analysis so their consultant could prepare them for a
special session. He feels a due diligence responsibility to look
out for the best interests of the State of Alaska and this
information is needed in order to do that.
11:12:02 PM
MS. RUTHERFORD responded, "I do hear you and I fully appreciate
your need to have this data and we will work to try to provide
that to you." She explained that the confidential version could
be provided only to those who signed the Precedent Agreement.
She added that they will begin immediate work to develop a
publically available analysis, as well.
REPRESENTATIVE HAWKER asked if the decision is not made to
execute the exit off-ramp for TransCanada, if it is too late to
continue the FTSA negotiation.
MS. RUTHERFORD answered that it is not too late and that many of
the FTSA elements were embedded into the confidential Precedent
Agreement. The state is prepared to move forward with the FTSA,
she said, in a very diligent fashion if that is the result of
the discussions occurring between the administration and
TransCanada.
11:13:41 PM
REPRESENTATIVE HAWKER asked if TransCanada agrees with her that
it's not too late to establish the FTSA.
MS. RUTHERFORD answered that she had not asked that question of
TransCanada but it would be valid to ask them directly.
SENATOR MACKINNON asked should the governor be successful in
getting the $108 million without talking to the legislature at
all about it, who is going to offer the expertise for the
pipeline situation.
MS. RUTHERFORD replied that SB 138 indicates that should the
State of Alaska buy out the midstream element, those interests
move to AGDC. So, it's appropriate for her to have Mr. Fauske
respond to that question.
11:16:33 PM
MR. FAUSKE replied that AGDC is a pipeline company and it has
the expertise on staff. They took the ASAP class 3 estimate for
a 36-inch, 800-mile pipe and did all the work necessary to go to
a recourse tariff filing, and that project is ready to be
sanctioned. Just a short time ago they were on time and on
budget, too. He explained that AGDC has limited personnel and
deal mainly with substantive matter experts, consultants and
engineers and bring people in to do a good job. He said
TransCanada is a great company, but if this would occur, AGDC is
set up to take on the responsibility of managing the building of
the pipe.
SENATOR MACKINNON said many people over the past decade have
said only a handful of companies in the world could handle a
project this big.
MR. FAUSKE replied that the determination of who is building the
pipeline hasn't been made yet. If AKLNG goes forward, one could
argue that ExxonMobil is going to build and manage it, but AGDC
will represent the state's share of the midstream and GTP. He
said he is quite proud of the work AGDC does.
11:18:27 PM
SENATOR MACKINNON said they do a great job, but TransCanada
brought a different level of talent to the table.
CHAIR GIESSEL said TransCanada brings more to the table than
expertise; they also have financing and carry the state's note.
She asked how the state proposes to replace that.
11:19:43 PM
MS. RUTHERFORD responded that the decision to buy out
TransCanada will be a balance of risk and reward. It will
reflect the responsibility to buy out TransCanada's expenditures
it has made to date and it will require the state to take on the
cash calls for pre-FEED and into FEED. On the other hand, a cost
of service transportation fee will be less expensive than a
third-party tariff structure. There are immediate costs and
risks associated with that decision, but there is the potential
for long term gain in lower costs, so that the net result would
be that the state's financial position would be improved. There
is no question that there is a tradeoff.
MS. RUTHERFORD said she wasn't involved in the analysis of the
financing aspect and would look to the Department of Revenue for
that.
MR. BOYKIN added that the financing TransCanada is providing to
the state has been very important, but over the long term that
financing is probably more expensive than any financing the
state might be able to obtain from other parties. It was very
advantageous to have that financing at first, but as the project
gets further down the road, the investment community that would
invest in projects like this would have more comfort lending
money to this project. At the stage TransCanada, in essence,
lent money to this project, very few people would be willing to
take that risk. He also thought that TransCanada was concerned
whether the legislature will appropriate the money to get them
paid. That is the risk they are getting paid for, to some
degree.
11:23:23 PM
REPRESENTATIVE SADDLER asked if the governor is trying to get
financing from Asian investors.
MR. BOYKIN replied that no decision had been made on that.
REPRESENTATIVE SADDLER asked if there had been discussions.
MR. BOYKIN replied that the governor has said he would explore
all options. In the last 10 years it is more prevalent for
buyers to have an investment all the way up the chain to where
the LNG is coming from. He had no idea whether they will be
interested in this project, but the state will explore that as
well as a number of other alternatives.
11:24:49 PM
REPRESENTATIVE SADDLER asked if Asian investors is one of
options.
MR. BOYKIN answered, "I'm sure it is." Another typical option is
basically vendors who will provide debt through a state
organization. That happens often in places like Japan. But at
the end of the day he felt this project would be financed
through project financing, which will entail tax exempt bonds
and a whole host of different financing techniques.
11:25:52 PM
REPRESENTATIVE SADDLER asked what other financing options were
available.
MR. BOYKIN answered that he does not provide that kind of advice
to the state, but vendors of large pieces of equipment will help
projects by loaning them money at preferential rates. Since the
state will own 25 percent of this project, it is certainly
possible that tax exempt bonds will be used for a large portion
of it. The rest of the money will probably come from
institutional investors including some even in this state.
REPRESENTATIVE SADDLER asked if by tax exempt bonds he meant
revenue or general obligation bonds.
11:27:11 PM
MR. BOYKIN answered that these bonds would be backed by this
project, not by the state at all.
REPRESENTATIVE SADDLER asked if the state is considering
pledging the Permanent Fund to back this construction project.
MR. BOYKIN answered that usually projects like this - that are
publicly financed - can use non-recourse bonds after the
completion of construction. However, most institutions that
would invest during construction only would require some kind of
credit support to make sure that construction is completed on
time and on budget. The support would pay for the interest to
the degree it isn't on time or support to pay for cost overruns.
That is something one usually cannot get contractors to step to
for a project of this size. If this were a $100-million project,
you could get that. For this project, financing parties will
probably require something like a cost overrun commitment by the
various parties involved in the project. He assumed the state
would have to step up for its share, but he had no idea what the
budget would be.
REPRESENTATIVE SADDLER asked if the administration is
considering backing this project with the Permanent Fund.
MR. BOYKIN answered that he had no idea.
11:29:09 PM
REPRESENTATIVE SADDLER asked if he was not advising the governor
about financing.
MR. BOYKIN answered no.
SENATOR MACKINNON asked him about Lazard Freres qualifications
in terms of financing.
11:29:53 PM
MR. BOYKIN answered that Lazard Freres is one of the top
investment banking houses in the country, especially on mergers
and acquisitions; however, not the top two or three for project
financing. But they may be qualified to give advice.
SENATOR MACKINNON asked who the state is relying on for advice
about project financing.
MR. BOYKIN answered that one of the problems in hiring anyone in
this area is because of the various laws passed after the
financial debacle of the last 15 years most of them are
restricted from becoming a manager of whole financing if they
are also the advisor to a state organization like this. That
constraint severely restricted the state's choices and severely
limited the number of people who would bid on a project like
this.
SENATOR MACKINNON asked who the state is relying on for project
financing.
MR. BOYKIN replied that Lazard Freres is providing an analysis
of options. When the project gets to the point of financing, he
was sure all the parties would all get together and do
integrated project financing.
11:32:40 PM
SENATOR MACKINNON asked how the market will feel about one
organization controlling everything if it's 5 percent of the
global market. "Will it be seen as a monopoly?"
MR. BOYKIN answered that this project is very unique, because
it's unusual for a state in a stable environment such as this to
have a 25 percent ownership in a project. This has unique
advantages over a project that might be in the Middle East or
Africa where the market may consider that environment less
stable.
SENATOR MACKINNON said she was strictly dealing with this
project's financing and asked if regulators would allow that
close relationship.
11:34:32 PM
MR. BOYKIN said that was a problem Exxon had when they said they
did not want to do a four-party joint venture marketing. It's
different for the state, because it is only controlling 5
million tons and that is not creating a monopoly. Just because
you finance jointly doesn't mean that you are going to sell
jointly, and it's the selling of the LNG that could create the
monopoly, not the financing.
SENATOR MACKINNON noted that Mr. Boykin advocated joint venture
marketing earlier for the state.
MR. BOYKIN answered there is no question that the state wanted
joint marketing. It ameliorated a lot of risks in the upstream,
potentially. This doesn't mean issues can't be resolved through
other mechanisms, which they are now doing. It is taking longer
and that is one of the reasons gas balancing isn't resolved yet.
11:36:47 PM
CHAIR GIESSEL asked Mr. Fauske if he felt tax exempt non-
recourse project bonds are a viable option.
MR. FAUSKE answered yes, but that gets back to either a private
letter ruling from the IRS or some sort of underwriting by a
bank. The tax exempt market in the United States is controlled
by the Internal Revenue Service; they look at who the end user
of the product is. The state is a tax exempt entity that is
involved in a for profit venture, which is not prohibited and he
thought it would be successful at some level there. He suggested
blending tax exempt and other debt instruments to structure the
deal with the lowest capital cost.
CHAIR GIESSEL said it sounded like another level of uncertainty
in the process.
11:38:51 PM
MR. FAUSKE said he didn't know at what level the tax exemption
would be and the state might be able to help its partners by
getting cheaper money for the entire project.
SENATOR MACKINNON said the people of Alaska - Native
corporations and individual Alaskan companies - had approached
the legislature about participating in this project and asked if
the state had pursued any of that financing.
MR. FAUSKE answered that there have been discussions; Alaskans
have a sincere desire to participate in the project. One idea is
allowing people to elect to participate by using their Permanent
Fund dividend. He said the project itself will be supported by
long term contracts with major buyers of the natural gas on the
international markets.
11:41:49 PM
SENATOR MACKINNON asked if he had a timeline for providing
Alaskans that opportunity.
MS. KEPPERS replied that section 76 of SB 138 requests that the
department communicates with regional corporations,
municipalities and individuals in order to come up with a high-
level plan as to how they can become co-investors in the
pipeline. That exercise took place over the summer. Lazard
Freres and First SouthWest have had several face-to-face
meetings and conference calls to understand what the financing
strategies are. She has been educating them on what this project
is and her department is learning how they make their financing
decisions in order to be able to bridge this need.
SENATOR MACKINNON asked for a timeline for seeing preliminary
numbers.
11:43:37 PM
JUSTIN PALFREYMAN, Director, Global Power, Energy &
Infrastructure Group, Lazard Freres, answered the timeline for
their report as described in the legislation is for whenever the
special session is called and assume it will be sometime in mid-
October.
SENATOR MACKINNON asked if he was including the Alaska Project
financing numbers.
MR. PALFREYMAN answered yes; it will include analysis on
capacity as well as benefits and considerations and structuring
alternatives for including Native corporations, municipalities
and retail or individual residents of the State of Alaska as
part of the overall financing plan and options available to the
state.
11:45:39 PM
CHAIR GIESSEL said the idea of terminating with TransCanada
makes her nervous, because they don't know what it would cost
the state nor how it would be funded.
MS. RUTHERFORD replied that many decisions they are engaged in
are sort of "a chicken and egg" where certain decisions are
pending other decisions.
REPRESENTATIVE SADDLER asked, absent TransCanada, if Lazard
Freres will be analyzing the financing options.
MS. KEPPERS answered that Lazard Freres prepared the report on
financing alternatives, Milbank, Tweed, Hadley and McCloy is an
internal consultant to the state for financing and First
Southwest is municipal advisor to the state. At the integrated
finance team level - when the state with the producers come to
terms on a fiscal agreement - a bankability review is needed,
which requires other finance legal counsel, and that is being
RFPd.
11:49:09 PM
REPRESENTATIVE SADDLER asked who is on the integrated finance
team.
MS. KEPPERS replied it is made up of the treasury division for
the producer parties, members of AGDC, DOR and Mr. Boykin.
REPRESENTATIVE SADDLER asked for some kind of diagram or
documentation of that. He asked who the one person is making the
decision.
MR. BOYKIN answered that it will be made by all the parties, not
any one party.
REPRESENTATIVE SADDLER asked what mechanism would be used.
MR. BOYKIN said something that requires unanimity. Everyone will
have to agree.
11:50:58 PM
REPRESENTATIVE HAWKER asked who is counseling the state on how
it is going make its investment in this. Did he hear Mr. Boykin
say it will be the partners?
MR. BOYKIN answered that he was referring to something a little
bit different. The state will have to make decisions on how to
finance its equity share, itself. Some would like to see the
debt portion of the project for all the parties financed in a
joint fashion, because that will be a great deal more efficient
and lead to simpler financing documents, because the banks that
lend to this project won't want to go after Alaska's share, then
ExxonMobil's share if there is a default or something like that.
11:53:00 PM
REPRESENTATIVE HAWKER asked the difference between the state
financing its equity share and joint financing. He asked if the
state was going to get 25 percent of this project by putting up
$1 billion.
MR. BOYKIN answered no. The intent of the state is to explore
ways of getting its equity portion through types of financial
instruments, vendor arrangements or buyer arrangements that will
minimize the amount it will have to actually put up. It may not
be possible to do that on a reasonable basis. However there is a
chance that it is in the state's interest to pursue it.
11:55:15 PM
REPRESENTATIVE JOSEPHSON said he was quite supportive of the
previous administration's gas team and SB 138 generally and he
thought the equity option was wise. He assumed they felt it was
wise, also.
MS. RUTHERFORD answered absolutely; the option that was made
available to buy out TransCanada is an appropriate alternative
to consider.
REPRESENTATIVE JOSEPHSON asked ultimately when she advises the
governor on this matter, is this going to be a decision they
agonize over?
11:57:00 PM
MS. RUTHERFORD replied that it will not be her decision; it will
be made at the highest level of the administration and possibly
include the legislature. She believed that there is uplift in
the long term for the State of Alaska in buying out TransCanada
in terms of the potential for a much lower tariff structure, but
that is offset by the immediate cash calls.
REPRESENTATIVE SADDLER asked how the state will actually pay the
$500 million for the pre-FEED decision, but also the equity
portion.
11:59:11 PM
MR. BOYKIN answered that the decision will be made by the both
the governor and AGDC, because AGDC will actually be holding
this asset. He was not involved in that decision.
12:00:16 AM
REPRESENTATIVE SADDLER asked Mr. Fauske if he believed that was
the decision process.
MR. FAUSKE answered yes.
12:01:30 AM
Question 6: What his opinion is about the constitutional
amendment on fiscal terms without the full agreement being
completed.
12:01:58 AM
MR. FAUSKE answered that the Department of Law supported
bringing a resolution on a constitutional amendment vote to the
legislature only if it was accompanied by key fiscal and
commercial agreements that fully describe the state's
participation in the project.
CHAIR GIESSEL asked if those key fiscal and commercial
agreements are settled upon and the legislature writes a
constitutional amendment and passes it forward and then
something happens and things change or the project doesn't go
forward. Could it be taken off the ballot and what opportunity
would there be to make a more generalized constitutional
amendment that simply said "a gas project going forward would be
approved based on legislative approval" or something like that?
12:03:28 AM
MR. BOYKIN answered that the intention of the state was to have
a constitutional amendment that if the project did not go
forward, the constitutional amendment effectiveness would
expire. So, there is a sunset specifically related to this
particular project.
CHAIR GIESSEL said that was her inquiry to Legislative Legal
folks who said it might be illegal.
Question 7: Who is the State of Alaska's gas team lead?
12:04:19 AM
MR. FAUSKE answered that it is Mr. Boykin and he is briefing
himself and the governor daily. Questions about the team's day
to day activities and engagements can be directed to himself or
Joe Dubler.
CHAIR GIESSEL said this was new information and the committee
appreciated having it in writing.
Question 8: How does the state plan to fund its share of the
costs through FEED?
12:04:51 AM
MR. FAUSKE said that the DOR already responded to that.
Question 9: What is the status of withdrawal questions and why
is this important to Alaska?
12:05:14 AM
MR. FAUSKE said he and Mr. Boykin had already answered this. The
process they are currently involved in allows the pace of the
project to be dictated by any party. Because of this, the state
needs to ensure that if the process fails for any reason, it
will be able to continue progressing a project to commercialize
North Slope gas. The only way for it to commercialize North
Slope gas is if it has access to that gas, which is an
underlying principle of the withdrawal process. Specifically,
the state will require the following from each withdrawing
party: 1. Such parties' equity in the project company and the
member's agreement. 2. Each producer must agree to sell gas or
ship gas through the project. 3. All rights to receive project
data plus assets, technical or otherwise, produced during the
pre-FEED process up to the point of withdrawal. This is a
difficult issue for all parties to resolve.
12:07:04 AM
CHAIR GIESSEL noted that their consultants have said that it's
rather common for a project to start out with certain partners
and as it evolves, some drop off and others come on. She was not
quite sure "what our degree of fear is coming from."
MR. BOYKIN responded that the governor realizes the project's
importance for the future. Even if the chance of a party
withdrawing is only 2-5 percent, he feels it's important that if
a party withdraws that the state has a way to still proceed with
the project. He explained that the state may be seeking a
different return on the money that is investing in this project
than a producer might have. It's likely that the producers
involved in this project have a return expectation that is
somewhere between 10-16 percent. The state would probably be
happy with a return less than that if it produced a project or
produced gas and a future for the state. So the state has
different considerations that may lead it to do a project where
one or more producers may not do it. The state also, because of
its lower return expectations, could potentially do a project
with a lower oil expectation for the future. It will be 10 years
from now when this comes on line, but that still requires a long
term view as to what the future might bring in terms of oil and
the longer the downturn exists and the more severe it gets,
they've got to be more and more concerned about that risk.
12:09:59 AM
SENATOR DUNLEAVY asked Mr. Fauske to clarify if his board still
meets and makes decisions if Mr. Boykin is in charge.
MR. FAUSKE answered that the board still meets - September 22
will be the next meeting - and makes decisions. His earlier
comment referenced the slowdown of the work AGDC was doing for
the ASAP.
REPRESENTATIVE SADDLER asked if any one of the parties withdraws
from the deal, are the parties no longer bound to remain in
terms of the HOA.
12:11:33 AM
MR. BOYKIN answered that if any party withdraws, the remaining
parties have the option to decide whether they want to stay in
the project or not. Maybe one of them won't and then the other
parties would have to look at that again with whoever is left
and decide whether they want to proceed.
REPRESENTATIVE SADDLER asked if the current joint venture
agreement would be voided and new negotiations have to take
place.
MR. BOYKIN answered no; it's envisioned that documents would
provide a process where the parties that were still in the
project could proceed under the existing agreements. Obviously,
the equity percentages would have to change, but the basic
documents would stay the same.
12:12:49 AM
REPRESENTATIVE SADDLER said for the record he is not envisioning
that and understands that the alignment of the current parties
is a good thing.
CHAIR GIESSEL asked if the HOA would be voided.
MR. BOYKIN replied that the HOA expires at the end of this year
and it's envisioned that other agreements will take the place of
that HOA.
CHAIR GIESSEL verified that it does.
REPRESENTATIVE HAWKER asked to clarify the statement: "The state
will require the following from each withdrawing party: the
party's equity."
12:14:15 AM
MR. BOYKIN answered there has been discussion about whether
there would be compensation or not. One view is that the equity
in the project isn't worth anything if the project is not going
forward with that party. He guessed if they were going to
withdraw they would make an effort to sell their interest in the
project before they even made that decision.
REPRESENTATIVE HAWKER asked if "the state will require that
party's equity" means either with compensation or without
compensation and if the presumption is that the State of Alaska
is going to take on a withdrawing entity's equity share of the
project.
12:15:34 AM
MR. BOYKIN answered that the remaining parties decide.
REPRESENTATIVE HAWKER asked if ExxonMobil decides to withdraw
does the state, itself, take over its 33 percent and what does
that obligate the state to in order to complete the project.
MR. BOYKINS replied that the state's preference in that
situation would be for the remaining parties to decide whether
they want equal shares of ExxonMobil's withdrawal or if they
don't, the state would be the taker of last resort, if the state
upon that withdrawal decided it still wanted to proceed, as
well. The state may feel it cannot proceed depending on what the
circumstances are that required the party to withdraw to begin
with.
12:17:57 AM
REPRESENTATIVE HAWKER imagined if he was negotiating this from
the other side, he would want compensation for the value of the
part of the project, which does have intrinsic value, because it
allows the state to continue completing the project.
12:20:40 AM
REPRESENTATIVE HAWKER asked if this is a drop dead provision
that the project doesn't go ahead without or is there any room
to negotiate.
MR. BOYKIN answered that there is always room to negotiate. The
state recognizes that no matter what view one may have of what
the various engineering data is worth, it is clear that the land
in Nikiski is worth money no matter what happens to this
project.
REPRESENTATIVE HAWKER asked if the state ultimately has a
contingent obligation and someone backs out, how that affects
the state's value and credit on the open market for all kinds of
things like keeping AHFC running.
MR. BOYKIN replied that the state is not making a unilateral
commitment that it will take on this interest. The state may
decide that the circumstances that lead to the withdrawal should
lead the state to make the same decision. That obligation will
not mature until the state makes the decision that it wants to
continue. Whatever administration and legislature is in at the
time will look at that and jointly make that decision.
REPRESENTATIVE HAWKER said the state as the payer of last
recourse for a purchase of one of these entities has the
contingent liability and the state's auditors wouldn't like very
well to publish financial statements that didn't disclose that
liability.
MR. BOYKIN explained that he meant if there were parties that
decided they wanted to proceed supposing one party withdrew and
there was a certain percentage interest available, the parties
would look at that and decide whether they wanted to "split it
or what-have-you." That is in the HOA. If the parties didn't
want any of it, the state could if it wanted to at that time say
it will take on the whole obligation, but the state wouldn't do
that without serious consultation with all the stakeholders in
the state.
REPRESENTATIVE HAWKER said that producers must agree to sell
their gas or ship it through the project and asked who will have
the purchase commitment for that gas and who will have to book
and record the commitment to purchase all of the withdrawing
parties' gas?
MR. BOYKIN answered whatever project goes forward would have to
take that gas.
REPRESENTATIVE HAWKER said the way the project is set up no
project owns gas. Each one of the individual partners and
stakeholders has its own share of the pipe and its own gas in
it.
MR. BOYKIN said that was correct and what happens in that event
is if the state is going to take on all of the engineering data
- or the state and one or two producers is going to do that -
they would then go forward, but they could not go forward unless
they had a commitment from the withdrawing party to either sell
the gas or transport it on the system. This project was designed
to have all the gas from Point Thomson and Prudhoe Bay dedicated
to it. Otherwise it would go to a different project.
REPRESENTATIVE HAWKER said that was his point.
12:22:22 AM
SENATOR HUGGINS said in his 13 years of dealing with four
pipelines, this one has the greatest potential. He said: "This
is doable. We're kind of at the 49-yard line on a football field
and kind of headed downhill." He was convinced that elasticity
is was needed the negotiations. About the duty to produce and
the reserve taxes, he said, "We've been through all those
conversations and it never really had a fruition factor." He
said, "It doesn't take a genius to recognize that Alaska needs
this. Let's not screw it up....Let's get across the 50-yard
line."
He said that a lot of people don't like ExxonMobil, but in this
case they appear to be by far the most committed and it doesn't
take a rocket scientist to figure out Point Thomson is a "pretty
crown jewel factor" in their repertoire. He exhorted Mr. Boykin
and Mr. Fauske: "Don't let us screw this thing up." To Ms.
Rutherford: "Let's learn from our experiences in the past,
because this things is doable."
12:26:28 AM
MR. FAUSKE responded that he worked on the finance team for
AGIA, as well, and he appreciated Senator Huggins words. But
this is a tough one for the state, because it's an equity
partner not a regulator. It has to start thinking like a
partner. It's hard sometimes when they are moving forward,
because they want to protect the state's interest, too, but at
the end of the day they are trying to become partners. So, there
is always going to be some give and take.
CHAIR GIESSEL said the last two questions, 10 and 11, were for
Ms. Rutherford: What is the status of gas balancing and when it
will be resolved?
12:28:19 AM
MS. RUTHERFORD responded that gas balancing discussions are
primarily occurring between the three producers. It is a
difficult discussion, because uniquely to this project, there
are two different units with two different equity participation
groups. They are not equally balanced. They are currently
working very aggressively on it. Luckily the State of Alaska is
balanced between both units.
12:29:40 AM
CHAIR GIESSEL asked when the state will make the royalty
election.
12:29:46 AM
MS. RUTHERFORD answered that the HOA references the state's
royalty election is subject to the prior execution of project
enabling contracts. That includes satisfactory arrangements for
disposition of the state's share of LNG. The DNR commissioner
will, therefore, make a royalty election decision and issue the
finding once he has access to adequately termed project enabling
agreements to review and use as a basis for that analysis. AS
38.05.180 also authorizes the DNR commissioner to modify state
leases to lock in either RIK or RIV for the duration of the
initial project term (20-25 years).
SB 138 provides that for making a written determination based on
a clear and convincing showing by the lessees that:
1. The lease modifications are in the state's best interest.
2. The lease modification will improve the likelihood of a
project's success.
3. The project has sufficient financial commitments.
4. There are acceptable upstream gas supply commitments that
have been made.
5. Lessees have offered to purchase or dispose or market the
state's royalty gas on substantially similar terms to their own
gas.
Additionally, she said, a decision to not switch between RIK and
RIV has substantial value implications for the state, both for
the general and Permanent Funds, and for instate gas provisions.
Accordingly, the no-switching - current leases provide for
switching between RIK and RIV mostly on a 90-day basis - must be
made coincident with the determination over gas disposition,
whether RIK or RIV. As a general matter, value deductions and an
overall marketing risk are low for RIV. The risk and rewards of
the state's goal of taking RIK are highly dependent on the
specific nature of the upstream project enabling commercial
agreements. These include gas supply and balancing provisions
for gas from both the Prudhoe Bay unit and the Point Thomson
unit.
Whether and how the state joint venture markets its gas with one
or more producers, the cost responsibility for disposal of CO
2
and other impurities, the field cost deductions particularly for
the Point Thomson unit leases, for any empty project capacity
owing to the state's inability to actually drill for a new gas
resource (it is not a producer) are significant value issues.
How the State of Alaska will secure replacement LNG cargoes for
its buyers in the event of any unexpected supply interruptions -
the SOA only has one gas project opportunity whereas its
partners in AKLNG have alternative supply options or the net
back becomes negative are issues that are under negotiation
currently. Until these have been adequately resolved, the value
proposition of taking RIK and thus the public interest impacts
of a no-switching decision cannot be assessed.
MS. RUTHERFORD noted that AS 38.05 mandates that the royalty
election best interest finding has broad scope with many
associated elements that must be addressed in the determination.
These include all the foregoing issues and how instate gas needs
will be addressed, project governance structure to the degree
the SOA will have both insight into the project and how to
exercise its 25 percent control, dispute resolution elements and
withdrawal provisions, which will impact the SOA value and/or
risk.
She said Commissioner Myers is very anxious to make the best
interest decision before the end of the calendar year. They have
already hired and had a contractor on staff to pull together the
structure and elements that need to be analyzed and embedded
within the finding using some of the work that has been
developed by Black & Veatch and other contractors. They are
working towards being able to turn that out very quickly once
some of the commercial agreements begin to be locked down - they
don't have to be finalized to begin the analysis. They recognize
that it is critical for the SOA and its partners to have a sense
of whether an RIK preference is moving forward and that is their
goal.
CHAIR GIESSEL found no further comments and thanked the
participants.
12:37:37 AM
ADJOURNMENT
CHAIR GIESSEL adjourned the Senate Resources Committee meeting
at 12:37 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| AGDC Fauke State Gas Line Team Responses Sept 9 2015.pdf |
HRES 9/9/2015 6:30:00 PM |
AKLNG |
| AKLNG HRES SRES Fiscal Team Project update Sept 9 2015.pdf |
HRES 9/9/2015 6:30:00 PM |
AKLNG |
| AKLNG Leg Project Update Sept 9 2015.pdf |
HRES 9/9/2015 6:30:00 PM |
AKLNG |
| SRES letter to AKLNG Project External Affairs Group Sept 9 2015.pdf |
HRES 9/9/2015 6:30:00 PM |
AKLNG |
| TC Reimbursable cost Sept 9 2015.pdf |
HRES 9/9/2015 6:30:00 PM |
AKLNG |
| TransCanada Vincent Lee Opening Remarks Sept 9 2015.pdf |
HRES 9/9/2015 6:30:00 PM |
AKLNG |