Legislature(2015 - 2016)ANCH LIO AUDITORIUM
08/24/2016 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Update: Alaska Liquefied Natural Gas (aklng) Project | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
JOINT MEETING
HOUSE RESOURCES STANDING COMMITTEE
SENATE RESOURCES STANDING COMMITTEE
Anchorage Legislative Information Office (LIO)
716 West Fourth Avenue, Anchorage, Alaska
August 24, 2016
1:00 p.m.
MEMBERS PRESENT
HOUSE RESOURCES
Representative Benjamin Nageak, Co-Chair
Representative David Talerico, Co-Chair
Representative Mike Hawker, Vice Chair
Representative Bob Herron
Representative Paul Seaton
Representative Andy Josephson
Representative Geran Tarr
SENATE RESOURCES
Senator Cathy Giessel, Chair
Senator Mia Costello, Vice Chair
Senator Peter Micciche
Senator Bill Stoltze
Senator Bill Wielechowski
MEMBERS ABSENT
HOUSE RESOURCES
Representative Craig Johnson
Representative Kurt Olson
Representative Mike Chenault
SENATE RESOURCES
Senator John Coghill
Senator Bert Stedman
OTHER LEGISLATORS PRESENT
Representative Dan Saddler
Representative Shelley Hughes
Representative Liz Vazquez
Senator Mike Dunleavy
Senator Lesil McGuire
Senator Anna MacKinnon
COMMITTEE CALENDAR
UPDATE: ALASKA LIQUEFIED NATURAL GAS PROJECT
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
STEVE BUTT, Senior Project Manager
Alaska Liquefied Natural Gas Project
ExxonMobil Development Company
Houston, Texas
POSITION STATEMENT: Provided a PowerPoint presentation titled,
"Alaska LNG, Fueling Alaska's Future, AKLNG - Legislative
Update."
DAVID BARROWMAN, Vice President Upstream Consulting
Wood Mackenzie
Edinburgh, Scotland, United Kingdom
POSITION STATEMENT: Provided a PowerPoint presentation titled,
"Alaska LNG Competitiveness Study."
KEITH MEYER, President
Alaska Gasline Development Corporation (AGDC)
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation titled,
"JOINT RESOURCES COMMITTEE HEARING."
HUGH SHORT, Vice Chairman
Board of Directors
Alaska Gasline Development Corporation (AGDC)
Girdwood, Alaska
POSITION STATEMENT: Provided opening remarks during the AGDC
PowerPoint presentation, "JOINT RESOURCES COMMITTEE HEARING."
ACTION NARRATIVE
1:00:10 PM
CHAIR CATHY GIESSEL called the joint meeting of the House and
Senate Resources Standing Committees to order at 1:00 p.m.
Representatives Tarr, Josephson, Hawker (via teleconference),
Nageak, and Talerico, and Senators Wielechowski, Micciche (via
teleconference), Costello, and Giessel were present at the call
to order. Representatives Seaton and Herron and Senator Stoltze
arrived as the meeting was in progress. Also present were
Representatives Saddler, Vazquez, and Hughes, and Senators
Dunleavy, MacKinnon, and McGuire.
^UPDATE: Alaska Liquefied Natural Gas (AKLNG) Project
UPDATE: Alaska Liquefied Natural Gas (AKLNG) Project
1:00:26 PM
CHAIR GIESSEL announced that the only order of business is an
update on the Alaska Liquefied Natural Gas Project ("Alaska LNG
Project"/"AK LNG Project") as delineated in Senate Bill 138
[passed in 2014, Twenty-Eighth Alaska State Legislature], as
well as an update on the Alaska Gasline Development
Corporation's (AGDC) new concept plan.
1:02:40 PM
CHAIR GIESSEL recounted that the Alaska LNG Project was approved
by the legislature in 2014 through Senate Bill 138, passed by a
vote of 52-8. It has progressed further than any previous gas
pipeline project in Alaska's history. She explained that the
reason for today's hearing is the recognition of some things
since the last project update on 6/29/16. The project, as
currently formulated, is unlikely to proceed into Front-End
Engineering Design (FEED) at the close of Pre-Front-End
Engineering Design (Pre-FEED) under the current timeline. The
governor has considered two options. Option 1 would be for the
state to take over the project and proceed to FEED as soon as
possible. Option 2 would be to stay in Pre-FEED, continue to
work with the project's three producer parties to work to reduce
cost of supply and to complete the permitting and regulatory
processes. The governor has chosen Option 1, so AGDC has been
moving forward to take over the Alaska LNG Project after
completion of Pre-FEED, which is expected sometime in mid-
September. [Members] are told that BP, ConocoPhillips, and
ExxonMobil are cooperating and collaborating with the state on
this transition. The project would also be moving into a new
design, a new concept, for going forward than was outlined in
Senate Bill 138. This hearing is not meant to revisit how this
point was arrived at, but to focus on the next steps. In that
vein, [members] are looking at specific information from today's
presentations.
CHAIR GIESSEL welcomed the first presenter, Mr. Steve Butt. She
said Mr. Butt will provide an update on the technical and
regulatory pieces, the technical timeline for the transition,
and significant issues or milestones that [members] should be
aware of.
1:04:58 PM
STEVE BUTT, Senior Project Manager, Alaska Liquefied Natural Gas
Project, ExxonMobil Development Company, provided an update on
the Alaska LNG Project via a PowerPoint presentation titled,
"Alaska LNG, Fueling Alaska's Future, AKLNG - Legislative
Update," dated 8/24/16. He said he will review the work the
project team has completed since the last discussion in June
2016 and is before the committees on behalf of the broader
project team and is representing the work of many other people.
MR. BUTT drew attention to the cover page of his presentation
and reported that hundreds of people over the last four years
have done the field work that underpins project's progress on
technical and regulatory work. He noted that the pictures are
of some of the crews who have done this work, such as waterway
work, test pits north of Healy, and an archeology crew in Windy
Pass north of Cantwell. He expressed his appreciation to all
the people on the work crews, the regulators, and all the
landowners, particularly the Native corporations.
1:06:34 PM
MR. BUTT displayed slide 2, "Overview," and summarized the work
that has been done for Pre-FEED under the joint venture
agreement (JVA) since the last update in June 2016. He said the
project has continued to work free of any safety incidents.
Since June the project has spent about $35 million and as of the
end of July the Pre-FEED spend has reached about $487 million.
As of today the spend has exceeded about $500 million on Pre-
FEED since June of 2014. About $107 million has been spent on
scope work that preceded Pre-FEED. In total, the project is
well past $600 million and the engineering work is almost
complete. All additional studies and alternatives that were
brought into the original scope have all been done. Everything
the project has been able to do to drive down costs to the lower
end of the range has all been done. All of the summer field
work that supports the Resource Reports has been finished. The
Resource Reports, 12 in total, are the documents that progress
the federal permitting process. Referring to the top right
photograph on slide 2, he pointed out that Resource Reports 1-10
include about 33,000 pages, a stack of paper six feet high.
These reports represent the millions of hours of work and
hundreds of millions of dollars that were spent to get the
permits necessary to execute the project. The reports are
public and have been summarized, making it unnecessary to have
to read all 33,000 pages.
1:08:18 PM
MR. BUTT noted that the 77 JVA deliverables are expected to be
complete in August. Bringing attention to the schematic on
slide 2 labeled, "AKLNG Pre-FEED JVA Project Work Process," he
pointed out that about 130 people make up the JVA project team.
The team has been successful because it has relied on the
extensive experience from hundreds of people who are functional
support, experts who have specific skills, as well as thousands
of contractors and hundreds of subject matter experts.
Additionally, through community engagement, the project has
heard from thousands of community members about what they think
about the project and the project design. All of that
information from all those people is brought together to create
two important sets of deliverables. First is what is kept in
the public domain: the export authorizations that include the
free trade country and non-free trade country authorizations,
the Federal Energy Regulatory Commission (FERC) docket, and
community interaction. All of that information is provided to
federal and state regulators to get the licenses to permit the
project. Second is the competitively sensitive information that
has been created and that is not in the public domain. This
information is kept proprietary within the project so that the
project can be as competitive as possible. The competitiveness
of the project is what is really important and is what
determines how to move forward. Some of those deliverables are
Pre-FEED deliverables, such as how to build the project, what
does it look like, how many trains, where are the trains, where
is the pipe, how to make the gas cold, and how to put it all
together in a way that it is reliable. That is provided to the
JVA participants - the Alaska Gasline development Corporation
(AGDC), BP [BP Alaska LNG LLC], ConocoPhillips [ConocoPhillips
Alaska LNG Company], and ExxonMobil [ExxonMobil Alaska LNG LLC].
MR. BUTT related that over 5,000 reports were done behind these
deliverables and there has been thousands of years of experience
in these meetings. Almost 200 workshops on design were held
over the last two years. Through that process the project has
been able to tap into this very deep base of knowledge on how to
design this work. All of the best practices for how to design a
project of this nature have been brought into these work
products. The ability to complete this work reflects the
knowledge of having done this type of work before. The ability
to tap into experts who have done this type of work many times
has provided a lot of long foresight. The project's success is
a reflection of the quality of that work team.
1:12:24 PM
MR. BUTT turned to slide 3, "Pre-FEED Deliverables," and said it
is a summary of what the work team has accomplished. He noted
the state has paid about 25 percent, $150 million, of the $600
million and said slide 3 is a summary of what has been delivered
as a result of that spend. First, he explained, the project
team has progressed the environmental impact statement (EIS) and
has completed all the Resource Reports with FERC to complete the
pre-filing process with the two sets of different drafts. This
is incredibly important because it helps define how to execute
the project in an environmentally responsible manner and for a
project this size one wants to demonstrate the least
environmentally damaging method possible. The project has filed
Resource Reports 11 and 13 with the participants that are
currently finishing up filing and they will be filed this month.
These reports are safety plans and detailed technical plans and
will not become part of the public domain because they are very
detailed competitively sensitive information. For example, a
certain piece of equipment obtained in a certain manner would
have certain impacts and that defines how it would be
sourced/how it would be bid. This type of information does not
go into the public domain and FERC treats it differently. The
work is done, the project team is working with FERC, and FERC is
currently in Alaska. All the data from the 2016 summer field
season will be put in. The project team will keep building that
repository of knowledge. Many comments are expected back from
FERC and those will have to be catalogued.
1:14:19 PM
MR. BUTT drew attention to the upper right graph on slide 3
labeled, "Deliverables Issued For Review." He explained that
these deliverables define how the project would be done; talk
about project scope and safety, regulatory, technology, and
execution plans; how and from where everything would be
purchased; how to manage labor; and most importantly how much it
would cost and how to manage the schedule estimates. Through
the team's work, the cost estimate has been driven to the bottom
of the $45-$65 billion range that has always been talked about.
MR. BUTT discussed the lower right graph labeled, "AKLNG - Total
Project Team - Total FTEs [full-time equivalents]." Over time,
he said, the project team was built up from about 50-60 people,
differentiating between full dedicated project support people
and functional support people from the companies who provide
help. This graph is based on the hours that people have billed
for the project and based on those hours the project built up to
about 150 people through 2015 to deliver the 77 deliverables
demonstrated in the top right graph. Since starting to complete
that work in March [2016], alternative ideas and ways to move
forward have been looked at. As work gets completed, people are
demobilized to keep the costs down. This graph also provides an
outlook on what is expected to happen from August [2016] through
year's end, during which time demobilization will continue and
costs will be kept down. The people represented in the graph
are spread out all over: all of the regulatory team is in
Anchorage, the team that designed the gas treatment plant is in
Denver, the pipeline work was done in Calgary, and the LNG plant
design was done by a small group of people in Houston. Those
locations were picked because that was where the majority of the
contractors were and it allowed for keeping costs down. The
expertise and skill of the people reflected by the bars in the
graph has allowed for getting all this work done in a relatively
short amount of time and will allow the management of costs
going forward.
1:16:50 PM
MR. BUTT moved to slide 4, "Summary," and discussed the stage
gate process depicted in graphic form at the top of the slide.
He said the Pre-FEED phase has been largely completed, so the
JVA parties are now testing the requirements to move through the
FEED decision gate. To frame the issue, he brought attention to
the status summary of the three key factors depicted at the
bottom of slide 4: alignment, risks, and cost. In regard to
alignment, he noted it can safely be said that the project team
has successfully built alignment on the design basis regarding
what would be built, where, and how. However, he continued, as
has been discussed before, there is not alignment on the
commercial and fiscal terms. In regard to risks, the project
team has progressed all the regulatory work required to reduce
permitting risks, but a large change has been seen in the LNG
market. In regard to cost, that market change has impacted the
project's cost competitiveness. The project team has driven the
capital cost estimate down by 15-20 percent, bringing it to the
lower end of the [$45-$65 billion] range, but at the same time
the LNG market has reduced the product prices 67 percent. So,
the project's cost competitiveness is still at issue.
MR. BUTT pointed out that honoring this stage gate process is an
industry best practice. Successful project management is about
reducing risks while increasing certainty, so that as the
project makes resource commitments the project has confidence
that it can manage risks and manage costs. In the concept stage
the project spent about $30 million a year to do the early
design work and in the Pre-FEED stage the project spent about
$30 million a month. Once in FEED a project of this size would
spend $30 million a week and in construction a project of this
size would spend $30 million a day. Those stages and that spend
pattern are what drives [the team's] thinking about why these
gates are important, because as the team works through the
uncertainties, it wants to do it at lower spend levels. Having
misalignment at a spend rate of $30 million a day is much more
expensive than $30 million a year, so it is that thinking that
shapes this process.
MR. BUTT concluded by noting that the stage gates and completing
the right work are key to managing cost control and managing
cost control is key to having a successful project. Project
team members having those right skills and leveraging those
through this right process is what has been helping the project
team to be successful. It has been a privilege to advance the
Alaska LNG Project, he said, and to get to know the legislative
members. He offered his hope and trust that the work has met
legislators' expectations. The project team feels that it has
been able to deliver on the commitments that were within the
Pre-FEED agreements, do the work it agreed to do, and make sure
that it advanced the deliverables that were critical. He
thanked the committees for their interest, questions, and
passion, and noted that the project team members have felt they
were part of something that really mattered to Alaska.
1:20:39 PM
SENATOR DUNLEAVY inquired whether industry views the market
changes as just being a cyclical issue of supply and demand like
it has over the past 10-50 years, or as being a technology issue
that has changed the paradigm of the system.
MR. BUTT replied that every time he has talked to members about
market windows and how the supply and demand works in the LNG
business, he has made the point that it comes down to cost of
supply - if the project has a low enough cost of supply to
manage the risks it can be competitive. Regarding whether there
has been a structural change in the market, he said he does not
consider himself an expert in that and he therefore suggests
that this question be asked of the forthcoming witnesses who are
well versed in that. However, he reiterated, the key is always
about competitiveness.
1:22:13 PM
REPRESENTATIVE SEATON asked whether there has been any progress
on the unresolved commercial issues in balancing agreements or
whether things are essentially at the same stage as they were at
the last update.
MR. BUTT recommended that the producer parties and the state
representative be asked directly how they feel about the
commercial project.
1:22:50 PM
REPRESENTATIVE HAWKER requested Mr. Butt to reiterate the spend
rate for the Pre-FEED, FEED, and construction periods. He
further inquired how large of a team would need to be either
continued or assembled to move into FEED.
MR. BUTT responded that the spend profile has been studied in
many ways. In the concept stage, the project spent $30 million
a year to say how this would be put together. In the Pre-FEED
stage, $30 million a month was spent to get the permits and do
the design work necessary to say how it would all be executed
and fit together. The spend for FEED would be $30 million a
week and for the construction phase it would be $30 million a
day. This is known based on the work done in the Pre-FEED stage
since one of the Pre-FEED deliverables is the design of an
organization to execute FEED as well as the engineering,
procurement, and construction (EPC). The project team has
looked at and talked about the number of different skill sets in
construction. In regard to labor, it is 9,000-12,000 people
over a 4-7 year period depending on how the tops of the peaks
are measured. From a team perspective, about 30 people were
involved during concept and about 150 people are involved in
Pre-FEED, so an increase by a factor of 5. A similar increase
by a factor of 4-5 would be expected going from Pre-FEED to
FEED, a team of owner representatives of 600-700 people would be
needed. Thousands of contractors would then be needed to help
get the really detailed design work done. But, with that said,
he continued, it is always important to differentiate paradigms.
He is a representative of the project team working on behalf of
the State of Alaska and the other parties, which is called an
owners paradigm. "There is no benefit in me to work the issue,"
he said, "the party's only benefit when the work delivers some
revenue." Other parties have a different paradigm; they get
paid as they do work, they do not have that same owner paradigm,
they do not benefit until the project is online and revenue.
Those structures and those teams are important. Needing to be
thought about are the spend, the size, the number of people, and
also the alignment.
1:26:00 PM
REPRESENTATIVE SADDLER observed on slide 4 that most of the
stoplights under alignment, risks, and cost are colored yellow
rather than red or green. He asked whether the yellow
stoplights indicate that those are in progression. He further
asked whether all of the yellow stoplights must be turned to
green in order to make the FEED decision.
MR. BUTT answered it is really best to try to move them to
green. He explained it is a decision for each party that would
be committing the resources for FEED to say at what juncture the
party is comfortable to move through that gate. There are
shades of green and shades of yellow, but red is usually a
pretty scary color for folks. Moving them all towards green
would be wanted, and then it is up to each party to say what it
needs as an individual party to make that decision.
1:26:57 PM
SENATOR WIELECHOWSKI inquired whether Mr. Butt still thinks the
project is viable commercially such that it should go forward to
the next stage.
MR. BUTT replied that as an individual he believes the project
has the opportunity to be commercially viable. It is a low risk
known resource of gas; it has some structural advantages as well
as some structural disadvantages. At the point at which the
project costs get to be competitive, the project can be moved
forward. Whether that is right now, he continued, he does not
know. Sometimes things need to be worked a little bit harder to
get to that place, but it is known what that place looks like in
its commercially viable, technically feasible form, with all the
right regulatory permits in place, and the project does not have
all those boxes right now, but the project can get to them.
1:28:07 PM
CHAIR GIESSEL noted that 146 people are listening online to the
meeting. She said the next witness, David Barrowman of Wood
Mackenzie, will be presenting a report that was commissioned by
BP, ExxonMobil, and AGDC regarding the economic feasibility of
the Alaska LNG Project under various scenarios and in today's
market condition.
DAVID BARROWMAN, Vice President Upstream Consulting, Wood
Mackenzie, stated that his company is a global energy, metals,
and mining research consulting firm of over 1,300 people in
offices around the world. Wood Mackenzie started covering the
North Sea in 1973 and since then has grown its coverage from
that. He noted he is a chartered accountant, has been with Wood
Mackenzie for over 30 years, has worked across the globe for a
variety of companies and governments, and has been involved in
valuation and fiscal work.
MR. BARROWMAN displayed slide 3, "Agenda," and noted it provides
an outline of the areas he will be discussing in his report to
the committees. Moving to slide 4, "Scope of Project," he
explained that Wood Mackenzie was asked by BP, ExxonMobil, and
AGDC to undertake an analysis of the competitiveness of the
Alaska LNG Project. The work carried out relied upon Wood
Mackenzie's own internal databases and publicly available
information. Wood Mackenzie was not provided with any
information by any of the companies. The areas looked at in the
report are: 1) establish a base cost of supply (CoS) and define
the competitiveness of the CoS for Alaska LNG; 2) identify what
viable options there might be, excluding cost savings, to reduce
the project's CoS; and 3) consider the way forward to allow for
a globally competitive LNG project in Alaska.
1:31:40 PM
REPRESENTATIVE HAWKER complimented Wood Mackenzie for its
upfront willingness to describe the basis upon which it is
rendering its opinions. Regarding the notation that Wood
Mackenzie was not been provided with any proprietary information
and used its own internal databases and publicly available
information, he asked how confident Mr. Barrowman is that the
conclusions reached in this report actually are applicable to
the unique specifics of the Alaska LNG Project.
MR. BARROWMAN replied that Wood Mackenzie feels very confident
on it. He said Wood Mackenzie's own databases are recognized
internationally as being a fairly accurate starting point for
undertaking a review of analysis. Wood Mackenzie markets its
databases to many subscribers within industry and government
across the globe and Wood Mackenzie builds the databases up from
discussions that it has with companies. These discussions give
Wood Mackenzie confidence in the reliability of the information
that it uses. He said Wood Mackenzie also crosschecks the
information against publically available sources to give itself
an additional level of comfort.
1:33:19 PM
REPRESENTATIVE HAWKER surmised that according to the
international standards used by Wood Mackenzie to compare this
project, the Alaska LNG Project is not so unique that it
deviates much from the international standards and experiences.
MR. BARROWMAN responded that in its research databases, Wood
Mackenzie has modeled a large number of LNG projects
internationally and has modeled for Alaska as well. The basis
of putting those models together is standard and aligns with
what Wood Mackenzie does elsewhere. So, he confirmed, it is not
really different.
1:34:40 PM
MR. BARROWMAN returned to his presentation and reviewed slide 5,
"Executive Summary." He advised that the competitiveness of the
Alaska LNG Project does not rank well when compared to other
peer jurisdictions or peer projects that could supply North
Asia. The ranking means that under current pricing assumptions
the project would certainly struggle and even if oil prices rose
to around about $70 a barrel it would be difficult to make
acceptable returns. However, he continued, there are certain
levers that could be used and this presentation and the report
look further at the available levers.
MR. BARROWMAN moved to the world map shown on slide 7, "Several
projects targeting 2016 FID have already pushed their timetable
back," to address the topic of cost of supply competitiveness.
He explained that a global look was taken to give a flavor of
what is happening around the world. A plot was done of the
projects that Wood Mackenzie believed at the start of the year
were likely to receive final investment decision (FID) during
2016. The blue circles on the map are those where Wood
Mackenzie expected FID and those highlighted with yellow are
what Wood Mackenzie called a wild card, meaning a project that
was a bit more tentative but could still possibly move ahead.
The takeaway from slide 7 is that there are a lot of challenges
to LNG projects worldwide. Some of the developments have been
pushed back and some have been canceled for a variety of
reasons, including market concerns, market conditions, and
issues of regulation and permitting. The Alaska LNG Project is
not alone in having problems in moving the project through to
FID. For example, so far this year only one project, the
Tangguh Train 3 in Indonesia, has taken FID.
1:37:19 PM
MR. BARROWMAN quickly noted that slide 8, "Alaska LNG - Project
Overview," is a highlight of some of the publicly available
information that was used by Wood Mackenzie.
MR. BARROWMAN showed slide 9, "Approach to Analysis - Breakeven
Cost of Supply," and noted that the analysis done by Wood
Mackenzie is a breakeven cost of supply. He explained what Wood
Mackenzie goes through in doing this. In the analysis in this
report, Wood Mackenzie has not looked at standard economics of
net present values (NPVs) or internal rates of return (IRRs).
When people are looking at LNG projects, they tend more often to
look at cost of supply and comparisons typically are done on a
cost of supply basis. The cost of supply is trying to determine
what the price would be for a project to break even and the
definition of breakeven is making a hurdle-based return. Wood
Mackenzie has used a return here of 12 percent, so this an
internal rate of return within the project of 12 percent.
Twelve percent is the typical rate used by upstream oil and gas
companies when making go/no-go decisions. Wood Mackenzie has
seen this rate come down; when prices were higher, the hurdle
rates were higher as well. For an LNG project at the present
time, 12 percent is reasonable and is what Wood Mackenzie uses
in its standard research databases.
1:39:29 PM
MR. BARROWMAN displayed slide 10, "Assumptions - Costs and
Volumes," and outlined the assumptions used by Wood Mackenzie.
For the transmission lines, gas treatment plant, pipeline, and
LNG liquefaction plant costs, Wood Mackenzie ran two cases - one
of $45 billion and one of $65 billion. For upstream costs, Wood
Mackenzie used the assumption of $10 billion, and this amount
covers both Point Thomson and Prudhoe Bay. Future capital
expenditure ("capex") on those two projects is split about
50/50. For Point Thomson it is the costs that are required in
the development of the gas. For Prudhoe Bay it is more in terms
of cost to maintain the facilities. Prudhoe Bay by the mid-
2020s will have been producing for 50 years, so it has aging
infrastructure. Wood Mackenzie took the view that over the
period of several years up to the end of the 2020s there will
need to be a material amount of spend. For shipping costs, Wood
Mackenzie used the assumption that the shipping costs will be 60
cents per million British thermal units (MMBtu) to transfer the
gas from Alaska to North Asia. The markets being targeted are
in Japan, South Korea, China, and Taiwan. To provide context,
he noted that shipping costs from LNG projects located in the
U.S. Gulf Coast are closer to about $2 [per MMBtu].
MR. BARROWMAN continued outlining the assumptions provided on
slide 10. For upstream production, Wood Mackenzie used the
assumption of 3 billion cubic feet a day (Bcf/d). For losses
through the system, Wood Mackenzie used the assumption of 11
percent. "Losses" means loss of molecules, use of the gas in
power generation for the pipeline, and use for the liquefaction
plant. For the domestic market allocation, Wood Mackenzie used
the assumption of 300 million cubic feet a day (MMcf/d), about
the same number as by AGDC. About 200 MMcf/d of that allocation
will be for industrial uses and the rest for household uses.
1:42:34 PM
MR. BARROWMAN addressed the graph on slide 11, "Comparison of
Breakeven cost of supply for delivery into North Asia." To come
up with the graph, he said, Wood Mackenzie looked at six
projects, as well as the Alaska LNG Project, that are Pre-FID
and then built up the cost of supply for each of those project
groups. He explained that within each bar on the graph the
light blue is the cost of gas, which is the upstream cost. He
further explained that the bar depicting the U.S. Gulf Coast
(labeled "Other USGC") is a Henry Hub derived number; it is not
what the Henry Hub price is today, but rather Wood Mackenzie's
forecast that the Henry Hub is going to rise over the next few
years. The average Henry Hub price from 2019-2030 is forecast
to be, in real terms, about $3.41. That price was then grossed
up to account for losses, coming to a gas cost of about $4.
That $4 compares with Alaska LNG which is just over $2.
MR. BARROWMAN noted that standing out on this chart is that the
gas cost for Alaska LNG is much lower than that for other areas.
This is because the gas production is pretty much dominated by
Prudhoe Bay where the gas is getting produced each day in any
event, so it is not as though a lot of new wells, if any, need
to be drilled. That really drives the comparatively low
upstream gas costs for Alaska LNG.
MR. BARROWMAN pointed out, however, that the difference is in
the cost of the gas treatment plant, pipelines, and anything
else downstream of the field, which is represented by the dark
blue color within each bar on the graph. Alaska LNG has a cost
of supply significantly higher than that for other jurisdictions
because it has the liquefaction and gas treatment plants, as
well as an 800-mile-long gas pipeline. All of these things push
up the cost of supply.
MR. BARROWMAN said the shipping cost for Alaska LNG is about 60
cents per MMBtu, which is represented by the grey color within
each bar. He explained that the [dashed lines] on top of each
of the bars represent a range. The ranges for the different
projects are on the basis of a number of different projects,
such as for Asian brownfields or for niche floating LNG (FLNG)
where the liquefaction facility is located on a vessel. The
range is plotted by the lowest cost of supply and the highest
cost of supply project for each of the different areas. The
range for Alaska LNG is between $45 billion and $65 billion.
1:46:35 PM
MR. BARROWMAN reiterated that the breakeven costs are calculated
on the basis of a 12 percent internal rate of return. He
explained that the two horizontal bars across the graph are the
illustrative prices. Wood Mackenzie calculated what the price
in Asia might be on the basis of today's oil price of $45 a
barrel and a long-term oil price of $70 a barrel, because Wood
Mackenzie is also expecting by the end of the decade that the
price of crude oil will have risen to about $70 a barrel. So,
Wood Mackenzie applied the formula, 12-14 percent of the oil
price, plus 80 cents per MMBtu as being a delivered price in
Asia. The horizontal price bars are not just a line, he said,
because of the range of 12-14 percent. At the moment, it is
probably closer to 12 percent and possibly even the "high
elevens." He noted that a lot of deals have been signed on a
Henry Hub basis. This was the case, he explained, because as
the oil price was over $100 a barrel, then these price-linked
cases were becoming quite expensive for producers. However, the
reverse is now true - with falling prices it is probably
potentially a bit more attractive for buyers to start using the
oil price-linked contracts. There is still the Henry Hub, but
more of the oil price-linked contracts are being seen coming to
the fore.
MR. BARROWMAN showed slide 12 and said he will skip it because
it is mostly what he has just explained.
1:49:16 PM
MR. BARROWMAN returned to the graph on slide 11 and reiterated
that Alaska LNG has the highest cost of supply (depicted in far
right bar). He clarified the chart is not saying that buyers
will always work from left to right of the chart, such that the
Asian brownfields would be signed up first, then the niche FLNG
projects, and so on. Instead, there are many other drivers that
gas purchasers will take into account, three of which are listed
on the left side of slide 13.
MR. BARROWMAN then moved to slide 13, "North Asia has a
significant requirement for additional LNG, but price is not the
only factor that buyers take into consideration." He said one
important driver to buyers is to maintain a geographically
diverse portfolio, so buyers will tend to buy from different
producing countries. For example, many purchases of Australian
LNG have recently been made. An increasingly important driver
is contractual flexibility, he advised. For example, some
contracts are Henry Hub prices and some are linked to crude
prices. It is important for buyers to have a balance between
Henry Hub and oil-price-linked contracts. Buyers also probably
want to have contracts of different lengths, he continued.
Buyers can underpin their purchases by having 20-year or 25-year
contracts as well as some shorter contracts of 5-10 years.
Another important driver, he said, is reliability and longevity
of supply. A buyer wants to sign a contract with someone the
buyer knows is going to give stable production over the period
of the contract. A buyer does not want to buy with someone in a
country that may turn into a conflict zone pretty quickly. So,
he summarized, there are issues that will be taken into account
and the challenge is trying to quantify the value that is placed
on those.
1:51:37 PM
MR. BARROWMAN continued addressing slide 13, explaining that the
chart puts into context what is available for Alaska LNG in
these competing projects. The total North Asian demand for LNG
is depicted by the red line moving across the chart, he
explained. This demand has been rising quite significantly over
the last few years. While it has started to flatten out, it is
still rising over the next few years. Contracted demand, a
signed sale and purchase agreement (SPA), is represented in
light blue. Contracted demand, a Heads of Agreement (HOA)
(shown in dark blue), is not a firm contract, but something that
Wood Mackenzie believes will move through to being a firm
contract. Competing areas are represented in yellow; the
competing projects included on slide 11 are plotted in yellow
according to when Wood Mackenzie expects them to start producing
LNG. Alaska LNG was put on top in red; that is not to say that
Alaska LNG will be the last one people go to, but to highlight
what the comparative volumes could be from Alaska LNG. An
additional consideration not plotted on this chart is that some
of the wedge located between the blue area and the red line may
be uncontracted areas, so that is the size of the prize that is
being looked at. There will be some existing LNG projects where
contracts run out and they will be looking to re-sign contracts.
Maybe somewhere between 25 and 33 percent of that area
potentially could go to rollover projects, but Wood Mackenzie's
view is that new projects are attractive for buyers because they
will give a long-term stream of production. The challenge for
existing LNG projects is that they may have been producing for
20 years and so there may be a limited supply from some of these
projects.
1:54:40 PM
MR. BARROWMAN turned to slide 14, "Agenda," and slide 15,
"Approach," and said Wood Mackenzie looked at non-capital
expenditure ("non-capex") and non-operating expenditure ("non-
opex") options to reduce the cost of Alaska LNG supply. He
clarified it is not really cost issues being looked at here, but
rather to drive home that costs will be fundamental to the
success of this project, which is highlighted by the showing of
a range between the cases of $45 billion and $65 billion. He
said three options were looked at that could reduce the cost of
supply: 1) a conventional non-recourse debt structure in a
tolling plant; 2) a restructure of the project to increase the
State of Alaska's share; and 3) relief from federal or state
taxes on a stand-alone basis.
1:56:17 PM
MR. BARROWMAN discussed the first non-capex/opex option to
reduce the cost of supply, a third-party-owned tolling utility.
Moving to slide 17, "The introduction of a debt funded third-
party tolling structure will reduce the cost of supply," he
noted the left vertical bar on the graph represents the current
project, so is the same bar seen on slide 11. Wood Mackenzie
did two things in its analysis, the first being to add in the
element of debt. The debt structure assumed is a debt:equity
ratio of 70:30 - 70 percent debt and 30 percent equity, with
equity meaning that the companies involved will need to fund 30
percent of the project themselves. The 70:30 ratio is common
within the industry. Also assumed is a repayment term of 15
years, so that is the life of the period over which repayment of
the loan plus interest will take place. The assumed interest
rate is the London Interbank Offered Rate (LIBOR) plus 3.5
percent. The LIBOR rate for long-term U.S. dollars is about 1.5
percent, giving an interest rate of about 5 percent for the
debt. The way to think about this is like a mortgage on one's
house - borrowing up front, putting some equity into the house,
and then repaying the loan over a number of years at a fixed
amount each year. In the early years it will be a lot of debt
and over the years that debt portion will be reduced. This
reduces the cost of supply, he explained, because it takes out a
large chunk of the upfront capex. For example, if the debt is
roughly $30 billion and $15 billion is equity, the owners will
not incur the $30 billion in cost until production starts and at
which point the loan will then be repaid plus interest. In Wood
Mackenzie's breakeven calculation using the IRR hurdle, only $15
billion is put in upfront by the owners, rather than $45
billion; the effect is that that will reduce the cost of supply.
1:59:18 PM
MR. BARROWMAN continued on slide 17, explaining that the second
element added into the analysis is a third-party tolling
company. Tolling means that someone else comes in and owns all
the facilities that are downstream of the fields. This would be
the gas treatment plant, the pipeline, and the liquefaction
facility. The companies would put the gas down the pipeline and
through the plant and be charged a toll in the same way that a
toll road works. This could reduce the cost of supply because
someone who owns these facilities and pipeline is likely to
accept a utility rate of return, which is a lower return than
the 12 percent that is required on the upstream. A third-party-
owned tolling utility usually will accept a lower rate of return
because the cash flows are typically much more stable - it is
known what the toll rate is going to be, although it might
fluctuate slightly. There should be fairly stable production
and the toller is not at the mercy of, say, the oil price going
up or a lot of the other risks that face the upstream. So, in
the analysis, Wood Mackenzie ran the breakeven cost of supply at
8 percent rather than 12 percent. Some context for comparison
is Gassled in Norway. On one hand it is not a good comparison
because it is an already built pipeline system, but on the other
it is a good comparison because it has a managed return.
Gassled is really all the offshore gas pipelines that exist in
Norway. Originally the pipelines were all owned by different
companies, but about 15 years ago they were all merged into this
Gassled entity. Originally the ownership was in line with the
upstream company. The upstream companies would own shares in
gaslines. The returns they make are only a real return of 7
percent pre-tax, and pre-tax and post-tax in Norway are quite
different. The marginal rate of tax is 78 percent, so the
returns post-tax of Gassled are not that high, they are
significantly below 8 percent. Over time the upstream companies
have sold out their interest and the owners of the Gassled
system tend to be investment funds or pension funds, including a
couple of Canadian pension funds which have indirect interest in
the Gassled system. What is being seen is likely to happen here
- Wood Mackenzie is assuming a situation where a known upstream
player comes along that may be a pipeline owner or may be a
utility or other investor like a pension fund, someone who is
willing to accept a lower return.
2:03:24 PM
MR. BARROWMAN continued addressing the graph on slide 17, noting
the right vertical bar represents a third-party-owned tolling
utility, a scenario where there is a significant reduction in
the breakeven cost of supply. He said all of the projects that
Wood Mackenzie looked at will do debt financing, so that is not
going to be unique. Most, he advised, will not go through a
third-party tolling; some do have third-party tolling and for
some the ownership of the plant is the same as the ownership in
the upstream. That may be an area where the Alaska LNG Project
could be made more competitive. When talking about third party,
the state also may have a role in here. He pointed out that
even when comparing Alaska LNG with a project that does third-
party tolling elsewhere, the absolute benefit to Alaska LNG is
probably going to be greater. This is due to the project's huge
amount of [liquefaction and other infrastructure], represented
in dark blue on slide 11. Basically, this area is cut in about
half, so although proportionately these other projects will
reduce, the Alaska LNG Project is really able to reduce this
quite significantly. Because the Alaska LNG Project has quite a
low gas cost compared to the other jurisdictions, moving to a
tolling system could be proportionately beneficial towards the
project. In absolute terms, even at the $65 billion case, what
has happened is getting below the $70 long-term price case. It
may be possible to have a profitable project if the price rises,
he advised, but it is still going to struggle at today's price
of $45 a barrel, although in the low-cost case it is starting to
look a lot better than it was on the existing-project case that
Wood Mackenzie originally showed committee members.
2:06:20 PM
MR. BARROWMAN displayed slide 19, "The introduction of State
ownership," and addressed the second non-capex/opex option, a
state-owned tolling utility, that could reduce the cost of
Alaska LNG supply. He explained that the left and center
vertical bars on the graph are the same as in slide 17, while
the right vertical bar represents the adding in of a State of
Alaska-owned tolling utility. In this assumption, he said, the
State of Alaska owns 100 percent of the pipe and the plants.
Also assumed is that the State of Alaska may be able to reduce
tax, a unique additional point over a third-party. In this
scenario Wood Mackenzie has assumed a no-tax case, meaning no
tax in the pipe and plant. There would still be the royalties
and profit taxes in the upstream. It is just in the downstream
that federal and state taxes are removed, including state
corporate income tax and state ad valorem property taxes.
Clearly, the decision of what happens is up to the legislature,
he continued, but what Wood Mackenzie has done is to show a
situation where that happens and what the economics would look
like. In this situation there would be a reduction of a little
under $1 an MMBtu and the $45 million case would start to break
even at today's prices. It is certainly something that is
worthy of consideration, he advised.
2:09:00 PM
MR. BARROWMAN moved to slide 21, "Changes to the Fiscal Regime,"
and addressed the third non-capex/opex option that could reduce
the cost of Alaska LNG supply. He pointed out the concept that
if governments want projects to move ahead and the tax or
royalty system is preventing it from happening, then the
government would be willing to change the fiscal regime because
it is better to have a bit of something than a lot of nothing.
Typically, relief is granted for assets that are high cost found
in unhospitable locations or for projects that have low
profitability under existing terms. For example, the Snohvit
LNG Project in Norway received accelerated capital allowance
relief as well as relief against the upstream taxes. The Yamal
LNG Project in Russia received exemption to certain taxes to
allow the project to move ahead. He noted that more detail and
more examples of relief are provided in the presentation's
appendix for those members wishing to look at it.
2:10:48 PM
MR. BARROWMAN displayed slide 22, "Impact of Federal and State
fiscal change on integrated structure," and continued his
discussion of the third option. The graph illustrates [the cost
of supply impact of changes to the fiscal regime on the
integrated 100 percent equity project] for three different
cases, he explained. The left vertical bar represents the
current project and excludes the tolling and any state equity;
it is a comparison to look at the current project, equity
funded, and see what happens if federal and state tax are taken
out. The analysis did not made any changes to the upstream, but
the analysis includes the 25 percent royalty in-kind (RIK) and
tax as gas (TAG). Addressing the case of no federal take
represented by the middle vertical bar, he noted that the
breakeven point is reduced by about $1 an MMBtu. Referring to
the case of pre-take represented by the right vertical bar, Mr.
Barrowman explained that pre-take excludes federal and state
tax. The incremental element between no federal take and the
pre-take, he said, is the removal of the state corporate income
tax and the state ad valorem tax, which reduces the breakeven by
the order of about $1 an MMBtu. In the $45 billion case it is
tending towards being in the market for the $70 long-term oil
price assumption, he reported, but still nowhere near the
current price of today. He said the takeaway from this is:
changes to the fiscal regime certainly can make a difference;
changes to the fiscal regime on their own will not be sufficient
and need to be part of a package of other changes.
2:13:22 PM
MR. BARROWMAN closed his presentation with slide 24,
"Conclusions." In terms of global competitiveness, he said,
Alaska LNG is currently quite challenged. However, there are
levers that can be used, he said, such as state support for a
tolling utility-like return, a debt financed project, or an
increase of the state share with potential for resultant
reduction in tax. He noted that a number of elements were
outside the scope of this analysis; for example, Wood Mackenzie
did not attempt to quantify monetization of the state's gas
share. The state has a 25 percent interest and is able to
market that share of gas and potentially make a profit from that
gas. Wood Mackenzie also did not quantify the in-state gas
supply, which is about 300 million cubic feet a day and another
area of potential benefit. Other things not quantified were job
creation, enabling new exploration, and third-party access. If
companies see that there is an export route for gas, then it may
make exploration for gas more attractive. If more gas was to be
discovered, it could be exported. If it is the short-term,
there may need to be additional cost on plant and pipeline, but
it certainly gives companies more options and it makes it more
attractive in terms of exploration.
2:15:39 PM
SENATOR WIELECHOWSKI thanked Mr. Barrowman for the presentation,
saying he was expecting doom and gloom, but is now feeling a
little optimistic. He asked what sort of pushback could be
expected from the producers, and what downsides could be
expected to the state and to producers, by going to a third-
party-owned tolling utility.
MR. BARROWMAN replied it is difficult for him to comment on what
the producers themselves may say. But, he said, if he were a
producer and if it was a reliable owner he was confident in,
then he may well feel confident that it would be giving him the
opportunity to monetize his gas; so he would see more upside
than downside. Clearly, there is a challenge in finding someone
to take on the role of third-party ownership, he allowed, and he
is not suggesting that it is going to be an easy task because a
lot of cash will need to be found. [His] presentation did not
address who is actually going to build it, he noted. Is it
necessarily going to be the same as the owners? There are a lot
of questions that this study raises, he said.
SENATOR WIELECHOWSKI surmised from slide 17 that the breakeven
point is roughly at [an oil price] of $45 per barrel for the
scenario of a third-party-owned tolling utility and 12 percent
rate of return.
MR. BARROWMAN clarified that there are a number of elements to
it. He explained that for the upstream portion [depicted in
light blue], the breakeven is still at 12 percent because the
assumption is that these upstream producers will require a
return that is normal for upstream producers, which is on the
order of 12 percent. However, the pipe and plant portion,
depicted in dark blue, assumes a return of 8 percent, which is
the third-party toller coming in and accepting a lower return
and therefore the producers do not need to pay as much in a toll
for the third party to make an 8 percent return.
2:19:24 PM
SENATOR DUNLEAVY surmised that if the state reduced its exposure
or risk by putting less into the project, then the state would
get less out of the project.
MR. BARROWMAN understood Senator Dunleavy to mean the state
would have less in because there would be an independent third-
party toller.
SENATOR DUNLEAVY replied yes, the state would have less in.
MR. BARROWMAN answered that someone else coming in would be
making a profit - an 8 percent return on the pipe and plant.
However, what it would do is enable the project to move ahead.
Potentially these may be revenues that were not otherwise
available, because on the current project basis the economics do
not stand up.
SENATOR DUNLEAVY asked whether contracting is changing along
with the perceived supply of gas in that for years it has been
heard that contract [lengths] are for 20-25 years. He further
asked whether contract durations are now becoming shorter
because the folks who are buying the gas are playing suppliers
off of each other, something that has always been done.
MR. BARROWMAN confirmed there is much more flexibility now in
the LNG market than there was 10-15 years ago. Historically, he
said, Senator Dunleavy is correct, but beware of the long-term
contracts. More short-term contracts and more spot supplies are
starting to be seen. Some major players are buying supplies for
their own portfolio, so purchases will be made that will not
immediately be allocated specifically to an end user.
2:21:42 PM
REPRESENTATIVE SADDLER inquired why, if third-party tolling or
state ownership provides the potential for such significant cost
savings, other competing projects elsewhere in the globe would
not be using the same thing. He further inquired whether there
are special circumstances in Alaska that make it possible or
advantageous for the Alaska LNG Project but not for the others.
MR. BARROWMAN turned to slide 11 and replied that the issue is
Alaska has this huge cost for liquefaction and plant and many
other projects around the world are able to move ahead at 12
percent, so therefore the companies will be involved in both the
upstream and the LNG plant. For some of the other projects it
may be attractive to get in third-party tollers who may be
willing to accept a lower rate of return. It may be appropriate
for some, but it is not going to be appropriate for everyone.
So, yes, it may well happen elsewhere. Certainly the debt part
is not unique. In absolute terms there is going to be a bigger
benefit for Alaska than elsewhere, because Alaska is starting
off with a bigger number.
2:23:37 PM
REPRESENTATIVE TARR addressed the gas treatment plant (GTP) and
liquefaction facility [represented in dark blue within the bars]
on slide 11. She said she would like to better understand how
Wood Mackenzie is using that cost over time, because the first
molecule of gas is going to be the most expensive. For example,
when looking at the infrastructure costs relative to the 30 or
40 year life of the project, the early part is where those costs
are the most significant. In regard to showing that cost as
being oversized relative to other projects, she asked whether
Wood Mackenzie is averaging that over the life of the project or
is saying on day one because those costs are so significant that
is what disadvantages Alaska LNG to other projects.
MR. BARROWMAN explained that Wood Mackenzie builds into its
models the upstream gas costs, and the downstream liquefaction
and pipe costs, and then runs those models. The data built into
the model for Alaska downstream is the pipeline costs and plant
costs, and these costs are year by year from the early to mid-
2020s, with production starting about 2026. There are the
upfront capital costs to build the plant and pipeline
infrastructure. Then there are the operating costs throughout
the lifetime that are required each year to operate the
facilities and have these running through the productive life of
the downstream facilities. Then the throughput is plugged into
the model. The throughput starts off at 3 Bcf per day and then
there are losses before getting on to the LNG tankers. The
model does an iterative calculation to work out what the
revenues need to be in dollars per unit, a unit being an MMBtu,
for the project to break even at a 12 percent discount rate, so
giving the project a 12 percent return. The model will
calculate a net present value calculation, meaning that each
year the cash flow for each year is discounted by 12 percent
more than the cash flow for the prior year. The model
calculates a cash flow, which is the revenues less the costs,
and the breakeven point is when it gets to a net present value
of zero at a 12 percent discount rate. So, the model calculates
the breakeven and looks at the life of the project. Things that
happen earlier in the project have more effect on the breakeven
cost of supply than things later, because five years down the
line those things have been discounted by five lots of 12
percent, and 30 years down the line they have been discounted by
30 years of 12 percent.
2:28:05 PM
REPRESENTATIVE TARR related that when thinking about a potential
third-party tolling structure, two questions come to mind. One
is access, which was not mentioned. She requested Mr. Barrowman
to comment about access for in-state use; for example, for local
utilities and how that would work. Second, under the potential
for state ownership, she noted that once property or other taxes
were removed there would not be a source for the impact aid or
the payments in lieu of taxes. Because this project would be
pretty impactful on local communities, she inquired whether
those costs were factored into overall costs in the modeling.
MR. BARROWMAN replied that access for in-state use would need to
be negotiated, but it is something that the state can build into
the approval process to allow the required access structure.
Regarding the impact aid, he said Wood Mackenzie removed the
state corporate income tax and the ad valorem property taxes,
but nothing else. He understood there may be concerns about a
number of things, such as municipal benefits from taxes. If a
project moves ahead, one would hope there would be significant
other sources of income for the state itself, which would be on
the upstream, such as upstream taxes from gas production. As
well, there will be the state's share of gas production. He
clarified he is not saying these other sources would make up for
sources lost, but making the point that it is not necessarily
all downside and there will be other upsides as well.
2:30:56 PM
SENATOR COSTELLO requested some examples of what third-party
tolling entities might be.
MR. BARROWMAN responded it could be a range of different
investors, including financial investors such as equity funds or
pension funds. It could be pipeline companies or other utility
companies, or possibly some Asian investors. For example, a
number of Asian companies have been willing to invest, such as
the Japanese, and maybe at slightly lower rates than other ones
are willing to accept. It is difficult to say exactly what they
are, he continued, but there are examples. It certainly will
not be the upstream companies, but there could be other
companies involved in energy and other companies that are
involved in ownership of pipelines, and companies that are
willing to accept returns based on long term, stable income
streams. The state also has a role to play here, he advised.
It may be that the state takes part of additional equity as well
and it may be that the state seeks funding from some of these
other entities.
SENATOR COSTELLO asked whether Mr. Barrowman is currently aware
of any entities that are interested in investing as third-party
tolling entities.
MR. BARROWMAN answered he is not specifically aware of any that
are interested in specifically investing in Alaska. There are a
number of entities that have invested worldwide, he said, and he
is willing to provide the committee chair with details of
companies that have done this type of investment elsewhere.
2:33:58 PM
SENATOR MACKINNON noted she wants to understand the intersection
of slides 7 and 11. She asked whether she is correct in her
assumption that the East Africa project is delayed, Canada Large
Scale and Australia have been placed on hold, and Alaska is the
last man standing.
MR. BARROWMAN replied that slide 7 just highlights examples of
some of the projects where there have been delays. He clarified
that "LNG Canada" is the name of one particular project, it is
not all the LNG projects in Canada; for example, there is the
Pacific NorthWest LNG Project and Douglas Channel LNG Project.
Slide 7 says that the FID for the LNG Canada Project has been
postponed beyond the end of 2016. On slide 11, the bar labeled
"Canada Large Scale" is a couple of projects that Wood Mackenzie
thinks might move ahead. The boundaries in that bar include LNG
Canada and Pacific NorthWest LNG Project, so it shows the range
between the breakeven costs for supplying the two projects. So,
not all the projects highlighted [in slide 7] feature in slide
11.
2:36:27 PM
SENATOR MACKINNON referred to slide 11 in regard to comparing
the local market with East Africa and different portions of the
world, which are included on the slide as benchmarks that Alaska
should compare itself to. She inquired whether a majority of
these projects are still going forward or have already been
paused because of the current energy price and other variables.
MR. BARROWMAN responded that some of these are going forward.
The East African ones are very large projects where significant
volumes of LNG will be produced, he said, and the expectations
are that these will be moving forward to FID. Wood Mackenzie
highlighted that there are a number of other projects that have
been delayed and some that have been canceled. So, it is a
fairly broad spectrum from projects that Wood Mackenzie expects
to go ahead to ones that are being canceled and delayed.
2:37:39 PM
SENATOR MACKINNON asked whether Mr. Barrowman has any working
knowledge of the liquidity that is on the market from the side
of producers or investors. For example, looking at ExxonMobil's
balance sheets and what cash is available to the company for
investing in different opportunities around the globe and what
those rates of return might look like. She further asked
whether there is a lot of cash liquidity sitting on the balance
sheets waiting for investment opportunities and whether the
companies that typically invest in these kinds of projects are
out looking and diversifying their portfolios.
MR. BARROWMAN answered he could not quote what the liquidities
of the companies are, but he knows some are quite stressed and
others have significant amounts. Many may well debt fund some
portion of their investment as well, he continued. The issue is
that even if a company has money sitting there, the project will
need to achieve a return, and the hurdle of 12 percent will need
to be achieved. The reason for that is that companies have a
long portfolio of different projects that they are comparing, so
that is really going to be the main driver on whether projects
proceed or not.
2:39:25 PM
REPRESENTATIVE HAWKER drew attention to the bar labeled "Current
Project" on slide 17 and recalled that elsewhere in the report
Wood Mackenzie has called it a 100 percent equity model. On
slide 17, he observed, it is being compared to a partial
debt:equity structure. He inquired whether "100 percent equity
model" means 100 percent equity funding or also includes some
element of debt financing.
MR. BARROWMAN replied it is totally equity funded by companies
and does not include any debt funding. The debt funding first
appears on slide 17.
2:40:24 PM
REPRESENTATIVE HAWKER posed a scenario in which a project is
pursued under what is being called the current equity model. He
asked what the likelihood is that the state and all its partners
would "totally cash upfront equity fund" the project without
debt. He said it has been his understanding over many years
that these partners would also likely pursue some level of
debt:equity structuring, which would have a correspondent
reduction in the breakeven costs in the bar depicting the
current project.
MR. BARROWMAN responded that Representative Hawker is correct.
The point he made, he explained, was that when looking at the
debt funding, all the other projects that Alaska compares with
would debt fund as well. It is unrealistic to assume that a
project of this nature would be equity funded. The purpose in
showing it is a start point for comparison. The challenge that
even Wood Mackenzie has is not knowing the exact details of all
the debt funding arrangements that may be used. So, to start
with a comparable basis, Wood Mackenzie looks at a 100 percent
funded basis and then moves through.
2:42:01 PM
REPRESENTATIVE HAWKER asked how much the breakeven costs would
be reduced on the current project model by applying a similar
70:30 debt to equity structure.
MR. BARROWMAN answered it would be reasonable to assume that
about half of that reduction may be as a result of debt. The
problem, he said, is that when starting to layer on these
things, it is very much a case of what order the things are put
in. If just debt funding and just third-party tolling was
looked at, a total reduction would be seen that is more than the
combined reduction. As a rule of thumb, it is reasonable to
think about 50:50 between the debt to equity and the third-party
tolling structure.
REPRESENTATIVE HAWKER surmised Mr. Barrowman is saying "sort of
split the difference."
MR. BARROWMAN agreed that that is probably reasonable.
2:43:15 PM
REPRESENTATIVE HAWKER recalled Mr. Barrowman pointing out the
second element in the tolling structure presuming a utility rate
of return typically about 8 percent. He recalled Mr. Barrowman
describing the investors involved as being "long term stable
stream" investors. He inquired whether, as indicated on slide
15, a project like Alaska LNG could expect that sort of investor
to step in with an 8 percent non-recourse debt at the beginning
stages where the maximum construction, market, and project risks
are being faced. That would seem to be contrary to those
investors' willingness to offer such a low rate in exchange for
the security of a very low or no-risk project, he remarked. He
therefore questioned whether that 8 percent really would apply
at the inception of the project or whether much more expensive
mezzanine financing would have to be put up to get the Alaska
project going, stabilized, and proved to be a stable investment.
MR. BARROWMAN clarified that the 8 percent being talked about is
not an interest rate; it is the rate of return that a third-
party toller would need to receive. The issue of debt is a
separate point. The non-recourse debt that is being talked
about is related to the debt structure. Wood Mackenzie has
spoken to a number of people about what they believe lenders
would require for a project of this nature. Wood Mackenzie
believes somewhere between 3 and 4 percent above LIBOR is
probably realistic at this stage. So, two separate things are
being talked about: one is the interest rate that would apply
for a lender that is lending, say, 70 percent, and Wood
Mackenzie is saying that that would be about 5 percent; and then
separately is the third-party toller that would require a return
of 8 percent on its equity.
2:45:59 PM
REPRESENTATIVE HAWKER clarified that going to that 8 percent
required return was the point of his question.
MR. BARROWMAN said he thinks that the 8 percent is realistic.
There are potential risks, he continued, but these are taken
account of within the 8 percent. He agreed with Representative
Hawker that there certainly are execution risks, but said there
is not a lot of the other risks that are involved in, say,
upstream development, such as oil price risk and exploration
risk. Therefore, Wood Mackenzie still feels comfortable with an
8 percent utility rate of return being a reasonable target.
REPRESENTATIVE HAWKER expressed appreciation for Mr. Barrowman's
opinion.
2:47:10 PM
SENATOR GIESSEL, in regard to the 8 percent rate of return
talked about by Representative Hawker, noted there are projects
that have had significant cost overruns and posited that that
has to represent risk for people who are entering into these
projects. For example, she continued, today's news has an
article about a construction contractor suing Chevron on the
Gorgon Project [in Western Australia], a billion dollar lawsuit.
And yet a person taking this on would only expect an 8 percent
rate of return? She asked whether this is seen commonly and
requested an example.
MR. BARROWMAN answered he is slightly struggling to give an
example at this stage. But, he advised, any cost overruns would
effectively increase the toll charge. The 8 percent rate of
return will be based upon the initial investment. If the
initial investment rises, then the risk is being placed back on
the other project participants if the company needs to make an 8
percent return. Having said that, he continued, in terms of
contracts the contracts may well be agreed. Potentially there
could be movement around that 8 percent as this is not an exact
science. Recalling his earlier example of the built project in
Norway, he reiterated that the pre-tax 7 percent return gives
post-tax significantly less, but he said that that is something
that companies are willing to accept within the North Sea.
2:49:23 PM
REPRESENTATIVE TARR referenced the concept of take-or-pay
contracts, and inquired whether the contracts with utility
investors are the same kind such that if the project fails in
another way the State of Alaska would be obligated to provide
gas to that utility or to pay.
MR. BARROWMAN understood Representative Tarr to be saying that
if [the state] signed a sales contract to a Japanese utility and
then the pipeline was not built, what are the risks on [the
state]?
REPRESENTATIVE TARR noted it could also be an earthquake, given
the Alaska landscape.
MR. BARROWMAN replied he is not sure on the details of what
would typically go into the contracts on that. He said his gut
reaction is that there would need to be clearly some condition
that if there was a force majeure event. Other than that, he
said he is not sure on the details of what the support would be,
but is pretty confident that [the state] would not be forced to
supply, that [the state] would have recourse to the owner or
builder of the pipeline or tolling structure.
2:51:16 PM
REPRESENTATIVE JOSEPHSON recalled Mr. Barrowman talking about
how a third party playing the role of title owner and operator
of the entire kit was atypical and not the norm, but that third-
party financing without that ownership was much more what is
seen. He posed a scenario under the original model conceived by
Senate Bill 138 in which the original parties borrowed money to
finance $15 billion of a $50 billion project. He asked how that
is different than a third-party financing that has been
described under this alternative approach.
MR. BARROWMAN responded that if he understands the question
correctly, it is similar to the question asked by Representative
Hawker about, "If we go from the current project and just debt
fund, where do we end up?"
REPRESENTATIVE JOSEPHSON replied yes, except that he thinks it
was understood that there would be some component of equity
portion to each party's share.
MR. BARROWMAN answered that it will reduce the cost of supply if
there is debt funding. Clearly, he continued, one would not be
benefitting from, say, a utility rate of return on that and so
it would still have about 12 percent rate of return. It would
certainly reduce the cost of supply, probably by about halfway
down between the current project and the third-party or tolling
utility; but, it is not going to take it all the way that a
third-party toller would.
REPRESENTATIVE JOSEPHSON understood Mr. Barrowman to be saying
that if the original four parties simply accepted a lower
utility rate of return for the toll that they charged themselves
or others, then suddenly the costs are much more manageable. It
is just this difference between this 8 and 12 percent that they
would demand be paid that makes it not feasible.
MR. BARROWMAN replied that what is being shown here is that if
someone is willing to come in and accept an 8 percent utility
rate of return, then it does start to push the project through
to being more positive on the economic side.
2:55:42 PM
CHAIR GIESSEL drew attention to the graphic on slide 13 which
shows the supplies that are available now and the opportunity in
the gold color. She related it is often heard that there is a
very tiny window for [Alaska LNG] to enter into the market and
that this window will be missed if [the parties] do not act
expeditiously. Observing the pie-shaped portion of yellow under
the red line, she interpreted this to be a fairly large area of
opportunity for new projects coming online. She asked whether
Mr. Barrowman sees a narrow or wider window of opportunity.
MR. BARROWMAN responded that on the chart there certainly is a
fairly long period for which supplies need to be provided for.
While he would not necessarily say it is very short term, one
could envision a situation where deals being signed over the
next few years start to fill in that gap. It could be a
situation that if things are delayed a number of years then
there might not be quite the same levels of opportunity. Having
said that, he continued, as one moves through time into 2030
there will be more opportunities arising there. So, while he
does not quite agree that it is just a short term problem, he
would say that these things will start to get filled up as other
projects get signed. Also, as he mentioned earlier, there is a
variety - some are long term and some may be short term.
CHAIR GIESSEL thanked Mr. Barrowman for providing his report in
person and stated that he provided very helpful and meaningful
information.
2:58:11 PM
CHAIR GIESSEL said Keith Meyer, President of AGDC, will next
provide an update on AGDC's efforts to stand up a team to take
over the Alaska LNG Project, including timeline, schedule, and
milestones. Also included in the update will be information
about Front-End Engineering Design (FEED), the scheduling of
FEED, the Federal Energy Regulatory Commission (FERC) filings,
commercial standpoint in terms of acquiring the Alaska LNG
assets, such as land, and the U.S. Department of Energy (DOE)
permit, and budget issues. Chair Giessel further stated:
We are, as you might think of us, as the loan officer
in a credit union, and so we are entertaining a
project that wishes to have some loans put forward and
we are evaluating those, doing our due diligence on
the economics of those. It is our mandate to maximize
the resource for the people of Alaska, so that's what
we will be discussing today with ... AGDC.
2:59:36 PM
KEITH MEYER, President, Alaska Gasline Development Corporation
(AGDC), provided a PowerPoint presentation entitled, "JOINT
RESOURCES COMMITTEE HEARING," dated 8/24/16. Before beginning
his presentation, Mr. Meyer invited Mr. Hugh short to give an
opening remark.
3:00:32 PM
HUGH SHORT, Vice Chairman, Board of Directors, Alaska Gasline
Development Corporation (AGDC), stated that this project has
gone through a number of iterations during his year and a half
tenure as a board member. It was after the conversation with
the producers in late winter and early spring that a decision
was faced by the AGDC board. That decision was really focused
on to stop the project, or pause depending on how that is
characterized and it ends up, or to pursue other avenues to
potentially move the project forward under a different
structure. At its last meeting [8/18/16], the AGDC board made
the statement that the State of Alaska, through the Alaska Stand
Alone Pipeline (ASAP) and Alaska LNG, has allocated about $330
million towards this effort over the last few years. It is the
obligation of the AGDC board to be able to look at all the
options with the stakeholders and the AGDC president to ensure
there is no other path forward on this project and look at the
feasibility of other options. That is where the board is at
today. The board has directed the AGDC president to put
together some alternatives. The alternative that will be seen
today, and that the previous speakers have discussed, is
something the board has just begun considering and having
conversations around. The AGDC board is in the process of
learning, understanding, and trying to make decisions based on
good public policy and based on ensuring that at the end of the
day this project is not putting excess risk on the State of
Alaska or the residents of Alaska. Mr. Short said he is
encouraged that AGDC is having very good conversations with its
producer parties with regard to a potential new structure of
moving this project forward. There has been an earnest effort
amongst all of the producer parties in Alaska LNG to discuss and
move this project forward because of the significant prize to
move 65 trillion cubic feet of gas and get it to market.
3:04:31 PM
CHAIR GIESSEL related that she heard the discussion at AGDC's
8/18/16 board meeting about the investment made thus far. As
the appropriating body, she continued, the legislature also is
doing its due diligence and will take the approach that the
major producers take - if a project becomes uneconomic, they
stop regardless of what has been invested thus far, rather than
continue to pursue an uneconomic project. Thus, the legislature
is with AGDC in that process.
3:05:22 PM
MR. MEYER stated that things are going very well with the joint
venture parties. He began his PowerPoint presentation with
slide 3, "Key Messages, Where are we with the project?" He
explained that these are recent joint key messages that were
developed together by AGDC and the producer parties, and, as
well, he will also be providing some AGDC corporate statements.
He advised that the Alaska LNG Project continues to make good
technical progress. The Pre-FEED work is over 90 percent
complete and Pre-FEED deliverables are anticipated by mid-
September. Planning for the transition to an AGDC-led Alaska
LNG Project is underway, with the target for commencement by the
end of October and completion by the end of the year.
MR. MEYER moved to slide 4, "Key Messages, What is happening
with the transition?" He reported the parties are working
together to consider commercial options to improve the project's
ability to compete in the global LNG market. Once transitioned,
AGDC will be responsible for managing the project going forward,
including applying for regulatory approval, securing the
commercial commitments from gas sellers, shippers, and buyers
necessary to acquire the equity and debt financing that will be
required to complete the project and preparing to start FEED.
He noted that neither a full FEED, nor a full construction
project, is being pushed forward at this point; that will come
much later.
3:07:47 PM
MR. MEYER addressed slide 5, "Key Messages, Are the parties
working collaboratively?" As part of the effort to improve the
project's competitiveness, he advised, the parties are working
collaboratively to transition the project to state leadership.
The parties are also pursuing alternative commercial structure
options and concepts that have been successfully used in global
LNG projects to reduce the cost of supply of the project. The
goal is to have a seamless continuation of the project and
maintain project momentum. He said AGDC, BP, ConocoPhillips,
and ExxonMobil are currently holding transition meetings with a
goal to enable a seamless continuation of the Alaska LNG
Project. These discussions have the goal of timely transfer of
information, data, and work product, as well as access to assets
necessary for a successful FERC filing.
MR. MEYER turned to slide 6, "Additional AGDC Messages," and
said AGDC has approved funding through fiscal year (FY) 2017.
As part of the state's budgetary process, he continued, AGDC
will prepare a budget request to the Alaska State Legislature
for FY 2018. He said AGDC will augment its current technical,
commercial, and project management expertise as necessary,
consistent with project progress and funding. Further, AGDC
plans to ensure the Alaska LNG Project builds upon the
tremendous expertise and accomplishments already invested into
the project. He expressed AGDC's appreciation for the
professional and cooperative way the parties have advanced the
project to this stage and said he looks forward to continuing to
the next stage of the project.
3:09:39 PM
MR. MEYER displayed slide 7, "Refining the 'Stage Gates,'" and
drew attention to the stage gate diagram across the top. He
explained that the project is currently wrapping up the Pre-FEED
process, and next is the decision [for whether to enter FEED],
which is represented by the diamond-shaped box on the diagram.
To date in the diagram, all of the documentation has been on the
left side of the diamond. There is no governance to deal with
under this next phase and so everything right now is focused on
this diamond, which is the decision to enter FEED. That
decision has two outcomes - either go to FEED or stop. It is
very clear now that the project is not ready to go to a full
FEED, so there is not the go decision. "But, at the same time,"
he continued, "we can't stop, just yet." He posited that [AGDC]
owes to itself, the state, and all the stakeholders involved to
consider what the other alternatives are other than just saying
stop, and that is where the project is right now.
MR. MEYER continued on slide 7 and looked at new elements in the
decision to enter FEED, explaining that this is the discussion
of the modified structure that is more of a third-party tolling
structure that brings in infrastructure investors that do accept
a lower rate of return. He reviewed the list of five questions
on slide 7 that now need to be addressed relative to these new
elements. Regarding the first question, "Have we structured the
project for tax and other financial efficiencies?" he explained
that this is the lowering of the blue bars in the Wood Mackenzie
presentation. Regarding the second question, "Have we secured
customers sufficient for financing?" he advised that unless the
project gets customers it will not get financing. Regarding the
third question, "Have we identified and secured parties
interested in equity investment in the infrastructure project?"
he stressed that equity investors are needed and they need to be
attracted to the project, to Alaska, and to the underpinning of
the customer contracts. Regarding the fourth question, "Have we
identified and secured lenders for non-recourse project debt
finance?" he elaborated on the meaning of non-course. It is
non-recourse to Alaska, he explained. Non-recourse debt just
looks at the sanctity of the contracts underneath that project,
the commercial agreements. Regarding the fifth question, "Have
we secured large EPC companies competent to manage the
construction of the project and shoulder a significant part of
the construction related risks?" he noted that this is where the
risk is pushed off to those parties best able to handle it.
Those parties do have to be paid to handle some risk, he said,
but that significant overrun risk is taken away. For AGDC, or
potentially the other investors, it is worth paying a little
more to get rid of that overrun risk, since [AGDC] does not have
the balance sheet to absorb the overrun risk.
3:12:57 PM
MR. MEYER concluded by reading from slide 8, "Summary." He said
AGDC has accepted the challenge to lead the Alaska LNG Project;
AGDC recognizes the project will need customers, adequate
financing, construction contractors, and legislative approval to
move forward; AGDC believes the Alaska LNG Project can be made
commercially viable and can compete in the global LNG arena; and
the project offers enormous benefits to Alaska and deserves the
opportunity to capture Alaska's share of the global LNG market.
3:13:43 PM
SENATOR MACKINNON inquired as to when AGDC might be coming to
the legislature with either a financial request or a request to
change the structure of current Alaska state statute regarding
this project.
MR. MEYER replied that right now AGDC is looking at the normal
budget process, not a special session. He said AGDC has some
existing funding and the next phase is moving from the FERC pre-
filing process into the formal FERC filing. The FERC filing
itself probably will not happen until January [2017]. He
related that he has asked the [engineering and program
management] team to prepare a number of different scenarios.
One scenario is to live within the existing funds through FY
2017 and another is a more austere program that stretches out
through calendar year 2017. Also to be looked at are some
increased spending scenarios for more activity, more engineering
work, but AGDC is not going to recommend that until it gets
better clarity on who else may be funding. It is hoped that the
existing producer parties will be funding some of this or maybe
the third party would be funding some of this, but that is not
known today.
3:15:25 PM
SENATOR MACKINNON, in regard to transitions, noted that some of
the pieces that would be needed for a stand-alone project are in
the ownership of other entities. She asked how AGDC is entering
negotiations without the authority, or at least the financial
backing, to transition those assets to a state-led project.
MR. MEYER responded as follows:
When you talk about the assets that are in third
parties, a block of those are in the LLC, if you are
talking about that. So, we have access to a lot of
the joint venture information. The LLC, which is the
landowner and which has some significant status in
this project, the state is not a party to. You're
correct, it has three parties. We are in discussions
with those parties about the use of ... those assets
in that LLC. So, we're in discussions, those are
confidential, but they're also not complete. From a
principal point of view, I'm hoping that it doesn't
require a purchase of those. You know the parties
have spent some money in that purchase of those right
up front is what I'm talking about. At some point in
time it will. I think that AGDC is being expected and
asked and is willing to take on a lot of the heavy
pulling of this project with respect to moving it
through the FERC arena. I don't expect us to be
cashing out existing parties at the front end of this.
At some point in time we'll want to acquire the
assets, or at least certainly the right to use. So,
what FERC requires of an LNG applicant is that we have
either ownership or control of the land. So we do not
need to own, but we do absolutely need to control.
The control can be through lease, the control could be
through contracts. So, we will need to negotiate a
control ... of those LLC assets.
3:17:52 PM
SENATOR MACKINNON inquired whether the legislature will hear
more about the transition of either control or purchase at a
later time in greater detail. She further inquired whether the
legislature will see some kind of legislation to start a state-
owned project in the coming session.
MR. MEYER, in regard to the first question, answered that AGDC
would expect to see that in the future in terms of the funding
if funding is needed for that kind of an activity. He
reiterated his hope that AGDC can initially do that largely
through contract. In regard to the second question, he stated,
"It's my understanding that we do not need any kind of
legislative change under 138 to go into the kind of structure
that we're talking about."
SENATOR MACKINNON commented that that will be interesting and
said she looks forward to that.
MR. SHORT offered his belief that AGDC is at a stage right now
in this project where it would be premature to forecast or
understand what legislative changes, if necessary, would be
required. He said the AGDC board has not spent enough time to
understand what that would look like and so he would withhold
any statement that AGDC would not need any legislative changes
until AGDC has more information.
3:19:43 PM
SENATOR MACKINNON stated, "We all want to monetize Alaska's
natural gas." Speaking for herself, she said she absolutely
wants a project that is economically viable for the state.
Regarding Mr. Short's opening comment about an economic analysis
on what AGDC is proposing, she asked whether AGDC has anyone
under contract to bring an actual study to the table to see what
AGDC is proposing as investment by the state or through a debt
acquisition or a third party. She further asked whether
legislators are going to see some hard numbers that have actual
analysis by an outside contractor.
MR. SHORT replied that the answer is yes. He said that a lot of
financial analysis is required to move this project to the next
stage. Adequate information is not had at this time to be able
to present that, given the early nature of where AGDC is at in
this process. The AGDC board will present that to the
legislature when it is appropriate; AGDC is working to bring
those resources to the table and ensure there is that process.
3:21:31 PM
MR. MEYER clarified that AGDC has not done a detailed analysis
as it is too early in the process. What is being talked about
is a structure, he continued. Wood Mackenzie has laid out what
the implications and the benefits of that could be. He
applauded Wood Mackenzie for its work and said he is glad to see
that it is directionally where AGDC is talking about. He noted
Wood Mackenzie did that without any input from AGDC. It was
good to see that a project-financed, third-party tolling kind of
structure is actually in the zone of competitiveness, he said,
and that is what AGDC is sort of shooting for. Right now,
however, it is still too early to say what will be the exact
structure, what parties are going to be involved. He expressed
his hope that the producer parties will play a very active role.
He further explained that AGDC is looking at the state ownership
structure and at how to get a third-party, quasi-equity investor
into a state-owned structure and get the tax benefits, and so
through a securitization of the cash flows out of this project.
But AGDC is not there yet and has some legal work to do. Also,
AGDC has some work to do with customers to determine if it is in
the hunt. Some of AGDC's producer parties ideally will be [the
state's] best customers. Today AGDC and the producer parties
are joint venture parties, but regardless he looks at them from
a pipeline standpoint as [the state's] customers and they can
buy the services through the pipe and through the LNG facility
and take their LNG at Nikiski and they can they go serve their
customers. Another alternative is AGDC actively finds customers
and has them subscribe for services, or a combination of those.
He reiterated that AGDC has not done a detailed analysis on
"here is the structure we propose, here is the amount of equity
that we're looking at from the state, here are the third parties
involved." He added that third parties have expressed interest
to him and there is enough excitement out there that people are
interested, but at the same time what is being heard universally
on this project by all of the project's participants is that
something must be done with the cost of supply. The project
team has beaten the capital costs down and, while there is
apparently still more room to go, the team has done good work.
However, it is still a little too high if all of them are
required to fund the thing. So, AGDC has to look at this other
structure, like Wood Mackenzie has illustrated, which is not so
much new, but new to this project; most of the pipelines in the
Lower 48 have been built this way and a number of the LNG
facilities. Now it is being said that this looks like it works
and he is happy that the Wood Mackenzie folks came up unaided
with the conclusion that this puts it in the zone. Now it is up
to AGDC to do a lot of work - the stage gate has been expanded
to say there must be the financial efficiency, the tax
efficiency, that equity must be found, customers must be found,
debt must be found, and a large EPC contractor must be found
that is willing to shoulder some of this risk as well. That is
the work that AGDC faces as it looks into 2017 and throughout
2017, in addition to the FERC filing.
3:25:25 PM
SENATOR MACKINNON said it has been known for a long time that
the project partners could change over time and the structure
might change, and that [legislators] needed to be fluid and
ready for those changes. She said things seem to have been
going forward two steps and then a step back, such as the pipe
size and other things that create uncertainty around this
project. She inquired whether Mr. Meyer can assure her that
there is still a termination point in Nikiski or whether that
termination point is starting to come into question. She said
she is asking because she was purview to a letter [dated 8/1/16
from Mr. Meyer] that was talking about challenges with the Kenai
Spur [Highway].
MR. MEYER assured Senator MacKinnon that he is, and AGDC is, and
nothing that AGDC is looking at deviates from that. All of the
resource reports done today are for that site, he said. He
believed the letter being talked about went to a landowner that
is on the affected route of road, the highway relocation, and
because that activity has slowed down a bit there are questions
out in Kenai. The fellow hand delivered a letter to him and to
a board member, and when he gets a hand-delivered letter he
wants to respond to the party. Also, he reported, [Mr. Fritz
Krusen, Vice President Alaska LNG], met with the fellow. It was
a person wanting to know what is happening, it was no suggestion
that AGDC is going to deviate from that. As long as all parties
are cooperating together on the site there is absolutely no
reason to deviate. It would be a significant delay and
detriment if a different site had to be picked.
3:28:03 PM
CHAIR GIESSEL summarized answers provided to Senator MacKinnon.
In regard to financial analysis, the answer was that it is too
early and that AGDC will be beginning work on this. The answers
also talked about legal questions, detailed analysis, and cost
of supply work. She drew attention to slide 7 depicting the
stage-gated process, and observed that no dates are provided.
She noted that [legislators] had a course on the subject of
megaprojects and are therefore quite familiar with this. In
regard to the list of missing information that AGDC is working
on providing, she asked what the timeline is for reaching
conclusion of all of that investigation.
MR. MEYER responded that AGDC does have some timelines not shown
on the slide. He offered his belief that there is a window that
AGDC must be prepared to hit and that is in the mid-2020s
timeframe. He said he would like there to be a sense of urgency
to try to hit that and try to get in that window. Working
backwards from that, he would ideally like to be in a position
to reach a "preliminary" final investment decision (FID), which
then kicks off the FEED, in a timeframe of third quarter 2018.
A lot of the technical folks say that is aggressive, he allowed,
and he agrees. If this is done, it would be looking at a 2023
in-service date. While there could be some sliding on that, he
would ideally like to get the five elements listed on slide 7
addressed between now and third quarter 2018. That is the
timeline he is pushing his personnel and the AGDC team to meet.
So, structure, debt, and equity must be looked at, although debt
comes later. The equity folks must be identified and there
needs to be customers. He reiterated his hope that the producer
parties are the best customers, and they may be the only
customers, but [AGDC] must be prepared that they are not and
therefore [AGDC] must do some marketing to get to the buyers.
This project, and to some extent Alaska's efforts in getting an
LNG project, have somewhat suffered because of a lack of market
awareness of the project itself, the timing, and the cost. So
part of AGDC's challenge as a state project is to raise the
awareness in the minds of the market that this project is real,
is going to happen, and is going to be cost competitive. But, a
lot of work must be done to be able to do that.
3:31:40 PM
CHAIR GIESSEL commented that something learned from those
megaproject courses is that "urgency often equals higher cost."
She then addressed marketing, noting that Senate Bill 138 is
very specific that the Department of Natural Resources (DNR) is
responsible for the marketing of the gas, DNR is charged to get
the highest return for the people of Alaska. She asked what the
coordination is between DNR and AGDC in terms of marketing.
MR. MEYER answered that DNR is responsible for the royalty gas
and royalty decision of the marketing of that. He said AGDC is
doing two things. One is marketing the project so that the
pipeline, the liquefaction, the access to the gas. The other is
providing a commercialization service to parties like DNR and to
parties that might be the producers that want to sell wellhead
sales. When he is talking about marketing, AGDC is going to be
talking to large buyers about purchasing LNG at Nikiski all the
way to purchasing natural gas up at the north and subscribing to
pipeline and liquefaction service on the system and they would
be tolling customers. So, this project can be looked at as the
tolling model described in the earlier presentation. The
customers hold capacity, and the customers may be the producers
or buyers or a marketing entity created to provide a bundled
service. In regard to how AGDC is coordinating with DNR, right
now AGDC has made it clear that it is not trying to take the
royalty decision. He said the way he has characterized it to
DNR is that AGDC will find a customer, will bring the customer
back to Alaska, and there will be a netback for a reasonable
tolling. Then DNR will be provided with the price of the gas
and DNR can either take it or say no this or that must be done,
and then between the two the parties eventually come together.
CHAIR GIESSEL remarked that it raises questions in her mind
about how AGDC can be marketing gas that AGDC does not have at
the moment.
3:34:35 PM
SENATOR COSTELLO asked how Mr. Meyer thinks that not reaching a
FEED decision is going to help [the state] let the world know
that this project is real.
MR. MEYER replied that "it's sort of a fact that we're not going
to go into a FEED decision." He recalled one of the Wood
Mackenzie slides indicating that there are a number of projects
facing that. He said he would love to see this project go to
FEED, but AGDC is not going to push and say this project must go
to FEED. It is not going to - the parties do not support it now
and he would not recommend it now. There is work to do under
this other structure. He related that AGDC has said to its
producer parties that if everybody votes to go to FEED, then
AGDC will be there with them, so he is not saying that AGDC
would be negative if everybody wanted to go. But for right now
that is not being looked at. Is that a negative to the project?
Yes. There is no question that going to FEED is a much stronger
vote of confidence. Would it make AGDC's marketing easier if
the project were going to FEED? Absolutely. The FEED addresses
some risks. However, he pointed out, the amount of work done on
this project in Pre-FEED far surpasses most of the other
projects. So, even though it is called Pre-FEED, the amount of
work lets the project provide a pretty good cost estimate, which
then lets the project develop some competitive tariffs and
pricing for the customers. But, all of that has to be validated
finally in the FEED stage.
3:36:54 PM
SENATOR COSTELLO asked what happens to Senate Bill 138 as far as
the road map now.
MR. MEYER responded that to him Senate Bill 138 is alive and
well and that is what AGDC is living under. The charge in the
bill was to build a project for the benefit of Alaska, he said,
and to maximize the upstream resource base and to do that
through the construction of a pipeline and an LNG facility, and
also address the gas treating and some lines up north and also
put a burden on AGDC, which AGDC welcomes, to address the in-
state gas needs. He posited that AGDC is very squarely in the
fairway of Senate Bill 138 and he does not see AGDC deviating.
He offered his appreciation for the comments of Mr. Short. His
own comments, he continued, were prefaced with "I don't see
that," as opposed to a statement of fact. Senate Bill 138 does
not say "you can't do this unless you get these three parties on
board." The bill certainly contemplated a joint venture. While
he was not with AGDC when the parties got into Senate Bill 138,
he said he thinks the contemplation was, "hey if we get in this
joint venture this is going to go all the way to construction."
However, none of the documentation said that, none of the
documentation said it was even going to go beyond Pre-FEED. The
documentation said everything prior to "the diamond" [FID] is
all that is being agreed to. The project is now at the diamond,
so the parties have to decide whether to go to FEED. The market
has changed, he continued, "there is less revenue in the front
door for some of them and there is more opportunities out in the
world for others, so this project gets hurt a bit." He posited
that talking about this sort of different financial structure is
not at all deviating from the major goal of what he considers
Senate Bill 138 to have.
3:39:19 PM
SENATOR COSTELLO inquired whether, if staying within the fairway
of Senate Bill 138, Mr. Meyer's intention is to allow DNR to do
the marketing.
MR. MEYER answered that DNR is responsible for marketing its gas
and so AGDC is not taking that. In terms of doing marketing
activities to assist that, AGDC is going to do that. Because
AGDC is going to be marketing the project and marketing other
people's gas, he said he views AGDC's role as going out there
finding customers. When he talks about marketing he is thinking
of finding customers that he brings back to the Alaska beach and
shares with the village. That marketing activity helps all
producers and the project. Some producers do not want AGDC to
do their marketing, which is perfectly fine, he said, but he
recognizes that as a company and as a state "we've got to get
out there and sort of help that marketing activity along ... so
that's really what we're talking about doing."
3:40:48 PM
SENATOR STOLTZE stated that one of the premises of the FEED
process, although the out of bounds have been changed on that,
is that it does not get customers or investors. He asked how
the salaries and expenses of the people at AGDC and the
contracting work will be paid, absent the next step. He opined
that it is unclear which field is being played on, but it is
known that the out of bounds and the goal lines are changing.
He said he has sat through hours and years of these things and
there was a definite drilling in of the importance of the FEED
process, but now he does not know if it is out of bounds. If
the FEED process is not important there is not going to be
investors and customers will not commit, according to all the
hundreds of hours of testimony that has been heard. Noting he
voted against AGDC's last appropriation, he asked where AGDC's
continued funding will come from.
MR. MEYER replied that AGDC has funding through fiscal year 2017
to carry it through these coming activities. He said he has
asked folks for both a more austere budget as well as an
elevated level of expenditure assuming there is outside funding.
The outside funding could come from the joint venture parties,
but at this point that is unknown. At this current time, AGDC
is not expecting to go into a $2 billion FEED program, more work
has to be done.
3:44:13 PM
REPRESENTATIVE TARR referred to an AGDC PowerPoint presentation
provided to members prior to the hearing [entitled, "President's
Report, Board of Directors Meeting," dated 8/18/16]. Referring
to slide 5 in that presentation, "Major Activity Timeline," she
observed that the transition to AGDC as the lead is scheduled
for [fourth quarter] 2016. She recalled that the funding
approved during last year's special session was for the 2016
work plan and budget. She asked how the funding given at that
time, which she thought would have carried through the last
calendar year and into this full calendar year, has been
extended to cover fiscal year 2017 in its entirety. Continuing,
Representative Tarr recounted that Wood Mackenzie's presentation
contemplates third-party tolling or state ownership. However,
she said, Mr. Meyer's comments make it sound like AGDC has
already moved to state ownership. Noting that the gas being
talked about is not owned by the state, she posited that the
only way AGDC can reasonably seek customers for a pipeline and
tolling structure is if it is the actual owner of the pipeline.
She asked whether Mr. Meyer thinks AGDC has made that decision
and is moving forward in that direction more than was presented
in the [Wood Mackenzie] presentation and further asked how those
options are being contemplated.
MR. MEYER responded that the aforementioned timeline was in the
AGDC board presentation that was posted on the legislature's and
AGDC's websites. That presentation talked about a transition
commencing in October 2016 and continuing to the end of 2016.
Regarding funding, he said AGDC has funding approved for FY
2017; AGDC is living under that today and intends for that to
carry it through at least fiscal year 2017 and potentially a bit
beyond, so a special request is not needed. Regarding state
ownership and the tolling, he said no decisions have been made
on any of this yet, either on paper, by the board, or in his
mind; AGDC is still open. The state ownership option gives [the
state] some particular tax advantages and that is where the
additional steps come from. A big part of the advantage comes
from the third-party tolling with the use of infrastructure
investors. What is unknown today is whether those two things
can live together. He said he has been consistent all along in
what he has told members - do not equate ownership with
investment. Even though [the state] may be 100 percent owner
that does not mean it is going to be 100 percent investor. If
[the state] had to be 100 percent investor that would kill the
deal. So, AGDC is definitely looking at third-party equity and
absolutely third-party debt. While it will take some
significant work, he continued, AGDC is trying to figure out
whether those two things can live together - "Can we have a
state ownership but yet not reach ... that ownership so much
that it ruins our tax position?" It is what he calls
"securitization of the cash flow." The state may be an owner
but there may be a cash stream coming out that becomes put into
a product like a security that the equity folks can invest into.
It is unknown today whether both of those things can be done.
It is certainly worth going for. There is a big benefit just by
moving to the tolling structure, but an absolute much better
benefit would be received if the tax can be avoided. He
reiterated that the Wood Mackenzie study was done completely
without any input from AGDC and offered his belief that there
was no help from the others as well. He added that AGDC is not
suggesting this project pay zero local tax; it is his plan that
parties on the route need to be compensated, maybe through the
payment in lieu of taxes (PILT) mechanism. He clarified he is
not suggesting that [AGDC] is going for zero state and federal
tax - it is the federal tax that the benefit of that ownership
is received.
3:49:37 PM
REPRESENTATIVE TARR stated it still seems that AGDC would not be
able to seek other customers until a decision has been made
about who actually owns the pipeline. Until then, it seems that
doing so is inappropriate and maybe even illegal, she posited.
Someone has to have the responsibility of building the
infrastructure that the customers would need, she continued, and
until it is figured out who is going to build and own the
infrastructure it seems like there is a mismatch. Something
stressed throughout this process is the alignment of the current
arrangement and made clear to her is that these potential other
opportunities are aligned much differently. Therefore, she
said, she is trying to match up which decision gets made first
so that the next piece can happen, and it seems that the
ownership piece would have to happen first because before there
is an owner how can customers be secured? Customers have to
have somebody they would pay and how would financing be gotten
without an owner? The alignment, she continued, is not clear of
how these pieces would work together under one of the other
arrangements.
MR. MEYER agreed that at some point in time the ownership must
be decided. The ownership, he explained, would most likely be
held by a project company that would be a special purpose
vehicle and it would probably be more than one - probably one
for the pipe, one for the LNG, and one for the gas treatment
plant (GTP). That structure is the structure that actually gets
the debt and does the contracts. That entity is not [yet]
formed, so what can be done right now is the "marketing and
business development," the identification of customers. He
reiterated his hope that the customers will be the producer
parties that have the most to gain just by monetizing their gas,
not ownership in a low-return pipe. While his hope is that AGDC
does not have to leave the state for customers, he knows it is
going to have to. To get the customers there must be a good
idea of how the costs are lining up, so there must be some
thought about the structure and the kind of debt equity that
might be obtained. Then it just becomes a simultaneous process
of starting to get a customer, the customer may say it wants a
certain quantity. If it is a big quantity the customer might
get certain advantages and so the advantages have to be taken
into account against other potential customers. Some of the
customers may take some construction risk, but most will not
because they do not have to today, unlike a couple decades ago.
What AGDC is doing now is business development, marketing,
finding customers, talking to lenders, talking to structuring
entities, talking to potential equity investors, and most
certainly talking to the upstream folks that he hopes to be the
big customers. Then, that all has to come together, and that is
a lot of work to do in the next 18-24 months.
3:53:43 PM
CHAIR GIESSEL stated she would take questions from two more
members and requested that members submit any other questions in
writing for her to give to AGDC.
3:54:15 PM
REPRESENTATIVE HAWKER turned to slide 7 and recalled Mr. Meyer's
response to Senator Giessel's question in which he called it a
"preliminary" FID decision in third quarter 2018. He inquired
whether Mr. Meyer is merging the FID decision and the FEED
decision itself into the same concept.
MR. MEYER answered that when he talks about a "preliminary" FID,
it is sort of giving the green light to do the FEED work, which
can be expensive, but it is short of the real final.
REPRESENTATIVE HAWKER concluded, then, that in Mr. Meyer's
words, "pre-FID" is equivalent to the FEED decision, which is
something he has never heard before.
MR. MEYER replied that he called it "preliminary" FID. He said
that, to him, before making a final investment decision, the
FEED work must be done or enough FEED work done to where a large
EPC contractor says it will take the risk sufficient enough to
give comfort to the lenders and equity investors. The FEED work
is a level of expenditure that can be significant and therefore
it is short of FID, but it is everybody committing to go ahead
and fund the bigger FEED.
3:55:56 PM
REPRESENTATIVE HAWKER referred to the first element on slide 7,
"Have we structured the project for tax and other financial
efficiencies?" He recalled that "at the last meeting we had, we
talked at length about how you were going to set up a tax exempt
non-recourse SP, special purpose, entity." He further recalled
that a few moments ago Mr. Meyer said in response to a question
that the great reduction in cost of service is really becoming a
tax exempt organization. That is a 25-30 percent reduction
potentially, Representative Hawker continued. He recounted that
at the last meeting there was talk about the need to get a
private letter ruling or provide some certainty to members that
this tax exempt goal can be accomplished. He asked what the
plan and timeframe are for pursuing that surety. He further
asked whether all the other things about customers, selling
people's gas, securing lenders, and contract managers, all hinge
upon finally actually defining a project, which is normally what
would be done in FEED.
MR. MEYER clarified he did not say the major benefit was the tax
efficiency, it is one of the benefits. As seen in the Wood
Mackenzie report, he continued, the third party, lower hurdle
rate return equity gives the biggest bang for the buck. The
taxes are important. This project needs everything it can, but
the extent to which it can be structured for both tax efficiency
and the third party is not known. The letter ruling is really
to help in addressing that, but counsel has been received to not
seek the letter ruling until structure is well defined. A well-
defined structure for the third-party-funded entity is not had
today, so a letter ruling would be sought afterwards. The
letter ruling really addresses the tax issue more so, though,
than the structuring.
3:58:18 PM
REPRESENTATIVE HAWKER remarked that members and AGDC need to get
back together on the record and have a long conversation about
what AGDC is truly planning to do, and if AGDC's original
concept document is still the operative document, and what
AGDC's sequence of events is. He inquired whether Mr. Meyer has
read [Industrial Megaprojects: Concepts, Strategies, and
Practices for Success], by Edward W. Merrow, a textbook the
legislature has studied.
MR. MEYER replied he has the book and has read parts of it, if
it is the same book he thinks is being talked about.
3:58:58 PM
SENATOR MACKINNON, in reference to Representative Hawker's
questions, said members are trying to understand whether it is a
refining of the stage gates or a redefining of what stage gates
mean. She recalled Mr. Meyer stating that DNR is in charge of
marketing its gas. She said Mr. Meyer can answer this later,
but she would like to know if there is other gas available
besides DNR's that could be marketed or if that was just the
choice of words that Mr. Meyer used. More pressing, she
continued, is that in answer to a question by Senator Stoltz,
Mr. Meyer stated that AGDC could accept outside funding. Given
the legislative process that AGDC would go through to accept
funding or trade off risk for the state giving up something, she
asked what Mr. Meyer was referring to.
MR. MEYER offered his understanding that for AGDC to accept
outside funding, AGDC must receive legislative approval for
that. It is also his understanding that if AGDC wants more
funding it must get legislative approval. He said he
anticipates seeking that, but things are not at that point yet.
SENATOR MACKINNON said Mr. Meyer can answer the following
question later. During the TransCanada buyout process, members
became aware of several subsidiaries that were starting to be
put together. She inquired as to how many subsidiaries there
are under AGDC's management and what the intended use is for
each of those.
4:01:07 PM
CHAIR GIESSEL reiterated her request that members submit further
questions in writing to her office so she can provide them to
AGDC.
4:01:34 PM
ADJOURNMENT
There being no further business before the committees, the joint
meeting of the House Resources Standing Committee and Senate
Resources Standing Committee was adjourned at 4:02 p.m.